China's new leader will face new challenges

Xi Jinping is known for his deft touch. If, as expected, he becomes the leader of the Communist Party and president of China in 2012, he may have his hands full.
Mr Xi's promotion to a role where he is likely to succeed Hu Jintao came at the close of the Communist Party summit on Monday. At the annual meeting party leaders discussed ways to confront imbalances between the country's east and west and rich and poor and how to reform the country's bureaucracy. There are a number of reasons to believe these will pose challenges well before Mr Xi would take office.
While concerns about bubbles in the Chinese economy have been around since the country's rapid development began, China's pace of growth does appear to be slowing. Demand for Chinese exports began to decline late this summer. The $570 billion stimulus that the government initiated at the height of the global financial crisis is beginning to run out. Too much of that money, and of all investment in China, is tied up in fixed assets such as real estate projects. Property prices in China's cities, which doubled in the past decade and are on track to grow an additional 40 per cent this year, reflect this imbalance. Real estate bubbles have been the source of many financial contagions, which should concern the Chinese.
While the government raised interest rates yesterday and has introduced measures to cut speculation and re-orient the property market towards more affordable options, these efforts may be too little, too late. China's ratio of property prices to GDP is nearly the same as Japan's in the 1980s. When Japan's bubble burst, two decades of economic stagnation followed. Of course China is not Japan. But China's political stability has long depended on its rapid economic growth, adding an additional uncertainty.
Recent remarks from China's leaders reflect more than a tinge of anxiety about the future. The warning of China's premier Wen Jiabao that the country "faced disaster" if it allowed the value of the yuan to appreciate, weakening the competitiveness of its exports, was particularly revealing.
Whatever China does with its currency, it won't be enough to address the imbalances in its economy. It needs new tools. China also lacks the social programmes that helped to soften the blow of a recession in many western countries; it is a communist country in name but lacks a safety net. And while much has been made of a recent statement from 22 senior leaders advocating more political freedoms, China still lacks institutions that can serve to vent popular frustration.
Meanwhile, in China's booming cities on its eastern seaboard, residents continue to spend and borrow. The promotion of Mr Xi signifies a changing of the guard but also continuity. He has helped to modernise China's economy and make it what it is today. He delicately navigated the party apparatus, while avoiding confrontation or taking positions on political reforms. By 2012, China's leader may not have that luxury.