The most serious long-term obstacle to Chinese growth is its state capitalist system. In the last decade, Beijing has largely reversed pro-market reforms and embarked on a decidedly statist developmental path. Consequently, state-owned enterprises have gained enormous clout in the economy and enjoy monopolistic privileges. The financial system favors such firms at the expense of private entrepreneurs. Household income, at 43 percent of GDP, is too low to support a higher level of consumption, a critical factor in rebalancing the Chinese economy and providing a source of future growth. Without systemic reforms, according to an influential World Bank study, growth in the coming two decades will fall well below 7 percent per annum. But reforming state capitalism is almost impossible politically because that will undermine the very foundations of the Communist Party's rule.
On the political front, the coming decade will likely be one of rising opposition against the party's political monopoly. Chinese citizens have become far more outspoken and willing to contest the party's authority. Despite the regime's huge investments in censorship, it now even concedes that the Internet has given ordinary Chinese people a powerful collective voice in shaping public opinion. Government policies across a wide range of issues, such as the one-child policy, budget transparency, education and healthcare policies, are being challenged for their reasonableness and legitimacy. Behind these developments is a fundamental crisis of legitimacy of the current regime.
As for the ruling elites, their unity can no longer be taken for granted. The Bo Xilai Affair has revealed the rift at the very top of the regime. Worse still, a sense of political malaise and loss of direction today pervades the party. Many of the party's best and brightest now realize that the regime's best days are probably behind it and, without fundamental political reforms, it will not be able to hold on much longer.
Externally, China's benign external environment is beginning to deteriorate. Its relations with many of its neighbors have become far more contentious due to territorial disputes. China's major trading partners have lost patience with its mercantilist policies. The all-important Sino-American relationship is growing more competitive. The fundamental fissures in this relationship have widened because of ideological conflict, geopolitical rivalry, and strategic distrust. As countries around the world, for their own reasons, raise their vigilance against Chinese influence and start to push back, Beijing no longer enjoys a free hand in expanding its economic foothold and securing access to markets and resources.
What this analysis reveals is that the growth of Chinese power under one-party rule has peaked. The seductive authoritarian state-capitalist development model may have delivered an economic miracle in the post-Tiananmen era, but for all practical purposes this model has lost its magic, if it has not gone totally bankrupt. However, China's future does not have to be a dismal one. The obverse of this analysis is that, with the right reforms, particularly a return to a pro-market growth strategy and a transition to democratic rule, China can comfortably confront these domestic and external challenges. A more liberal market-based economic system will utilize resources more efficiently and equitably than state-capitalism. Democratic reforms will give the regime a fundamental source of political legitimacy at home and also help reduce animosity and distrust of China abroad. China will have an excellent chance to lay the economic and political foundations for a 21st-century superpower. If this were to occur, China's best days would still be ahead, not behind.