Source: Financial Times

China in 2012, Economy, TransitionHistory will look back on 2012 as the year when China anointed its “fifth generation” of leaders and shifted to a slower growth trajectory. This transition will take place against a backdrop of daunting internal challenges -increasing social unrest, widening income disparities and both ecological and man-made disasters - and of escalating external tensions stemming from America’s “pivot” to Asia and simmering regional worries about China’s economic rise. While the political system will be fixated on preserving stability as new leaders take the helm, reduced economic flexibility could thwart Beijing’s intentions to do so.

In truth, slower growth of around 8 per cent could be better for China and the world. More environmentally sustainable and equitable outcomes would ease popular concerns and higher consumption would improve global trade tensions.

But many foresee an economic collapse, arguing that a prolonged eurozone crisis coupled with a property bubble could render vast swaths of industry unprofitable. This would reveal hidden financial vulnerabilities and feed  a downward spiral. Others believe that Beijing has ample resources to avoid a crisis, but argue that with a growth model based on infrastructure and land sales, and with exchange and interest rates rigidly controlled, it may not have all the necessary tools at its disposal.

Domestically, an increasingly active middle class is generating pressure for more accountable governance. Mounting inequalities have nurtured a sense of injustice, 200m migrant workers remain second class citizens and corruption is worsening. Tackling these problems is urgent, but China’s economic successes have fostered an unwarranted self-confidence. Instead, motivated by the Arab Spring, the system has moved aggressively to contain any social discontent that might spark more politically sensitive movements.

China’s economic prowess is also seen by outsiders as having stimulated nationalism in a generation removed from the Cultural Revolution. Beijing’s belligerent responses to overlapping maritime claims have heightened worries about its security objectives in a region already wary of its economic clout. This is one factor in Japan’s decision to relax its ban on weapons exports; to China’s dismay, it has also driven its neighbours to support a stronger US presence in Asia and complicated regional trade integration initiatives.

The potential for conflict will force China and the US to redefine their respective roles in a shifting environment that neither is comfortable with. Tensions will be further aggravated by anti-China trade sentiments during the American elections. Asian countries are in a position to delineate the boundaries of influence for these two powers but, given their varied interests, alliances will shift depending on individual concerns.

China must walk a very narrow line at a time when its outgoing leadership is reluctant to take any far-sighted decisions.

This article originally appeared in the Financial Times.