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By Ambrose Evans-Pritchard
President Xi Jinping vowed last month that country would break free of the "middle income trap", the fate of countless states in Latin America and around the world after their catch-up booms in the 1960s, all failing to make the switch in time to a grown-up growth model.
The Plenum will deliver a "profound revolution". It will rival the Third Plenum of Deng Xiaoping in 1978, the moment when China turned its back on Maoist autarky and unleashed the creative forces of the market, lifting 500m people out of poverty.
The reforms will, in theory, break China's destructive reliance on investment - a world record 49pc of GDP - and allow the hard-working Chinese people to enjoy a less miniscule sliver of what they produce. This will reduce China's excess manufacturing capacity over time, and therefore China's trade surplus. Everybody will be happier, except the Communist Nomenklatura. That, at least, is the story.
Yet at the same time Mr Xi is tightening the grip of the Party, reviving the Maoist "mass line" and rectification campaigns of the Cultural Revolution. "All his reflexes are Leninist," says Professor Minxin Pei from California's Claremont McKenna University. Mr Xi wants to have it both ways.
This hereditary princeling - toughened by an early-1970s stint in a Shaanxi cave - has relaunched Mao's "self-criticism sessions" to rein in the cadres. This is partly to purge corruption and fight ideological decay as the regime rots from within, already nearing the 70-year life-expectancy limit for one-party systems. It is also to destroy rivals in what amounts to Party gang warfare. The power base and patronage machine of rival Zhou Yongkang has been systematically dismantled under the cover of the anti-corruption drive. It were ever thus.
He has revived the Mao-era “Fengqiao experience", targeting "reactionary elements" with renewed talk of the class struggle. Qian Gang from the Hong Kong's China Media Project says it is an assault on China's fragile rule of law, warning that Mr Xi is "playing with fire".
What we see is a crackdown on the internet, the media, academia and even science. Mr Xi has studied what happened to the Bolsheviks when Mikhail Gorbachev began to open up the Soviet system, and seems to have drawn a grim conclusion. While I don't attach much importance to the six bomb attacks on Party offices in Taiyuan on Wednesday, or the Uighur attack days earlier in Tiananmen Square, this will strengthen the hand of the hardliners. A few cycnics even claim that is the purpose of such terrorism.
You can make too much of Mr Xi's Maoist rhetoric. There is a view among sophisticates that he is throwing bones to the dinosaur Left in order to protect his flank as he embarks on free-market reforms and prepares his strike on the Party's vested interests. Foreigners with a large amounts of money at stake in China love this hypothesis.
China experts are deeply divided. Minxin Pei says the reforms are skin deep and that the door is fast closing on a benign outcome. The rising risk is that the Party will try to retain power by repression, ultimately turning China into a "giant North Korea".
Cheng Li from the Brookings Institution says the mood of despair taking hold among China experts has gone too far, though even he acknowledges that arch-reformer Li Keqiang - the prime minister - is outnumbered 6:1 in the Standing Committee. Xi Jinping will confound the pessimists because he knows that his own credibility hangs on the economy, and knows that the Third Plenum is the last chance before the window snaps shut. Take your pick.
Arguments about the trade-off between freedom and growth are not new in China. There was much talk at the Third Plenum in 1993 that Jiang Zemin's plans for a social market economy and accession to the World Trade Organisation were incompatible with tight Party control.
The clash did not happen. But that was because China had not finished picking the low-hanging fruit of export-led growth, and because America and Europe were then willing to gorge on debt to consume Chinese goods. A global boom covers all sins.
It is another world now. The West is retrenching. China's competitiveness has been eroded by wage growth of 16pc a year over the past decade on the Eastern seabord. The workforce shrank by 3m last year, the start of a relentless slide as China mimics Japan's demographic decline, but earlier in its development cycle, before it is rich.
The International Monetary Fund says the "reserve army" of peasants looking for work peaked in 2010 near 150m. The surplus will disappear soon after 2020, the "Lewis Point" when labour costs shoot up. A decade after that China will face a labour shortage of almost 140m workers.
A joint report last year by the World Bank and China's Development Research Centre - brain trust of premier Li - warned that failure to ditch the old model would leave China languishing in the middle income trap, failing to join Japan, Korea, Taiwan and a rare vanguard of countries that have made it into the elite league and achieved vastly higher incomes per capita.
"The forces supporting China’s continued rapid progress are gradually fading. The government’s dominance in key sectors, while earlier an advantage, is in the future likely to act as a constraint on creativity.
"The role of the private sector is critical because innovation at the technology frontier is quite different in nature from catching up technologically. It is not something that can be achieved through government planning. If countries cannot increase productivity through innovation, they find themselves trapped. China does not have to endure this fate," it said.
The report said China’s growth rate will slow to 5pc by the late 2020s even if the country reforms. Stagnation lies in wait if it clings to a top-down dirigiste model. It is a plea for an open, pluralist society. That is what Xi Jinping refuses.
The IMF's Stephen Barnett says China can reach a per capita income of 40pc of US levels by 2030 and maintain a growth rate of 6pc if it grasps the nettle now. Otherwise it could "very well get stuck in the middle-income trap", peaking at just 25pc of the US. This would entirely change the long-term trajectory of China as a great power. China might not overtake America this century after all.
We already have a taste disappointment. The Shanghai Free Trade Zone launched in September is a damp squib. Some 25 pages of "NOs" tell companies what they may not do.
Early reports suggest that Mr Xi will duck reform of the giant state companies, the loss-making behemoths that gobble up most available credit. They are Party patronage machines, the bastions of vested interest. "It is off the reform agenda for the time being," said Mark Williams from Capital Economics.
The financial system will be liberalised, but very slowly. "We do not believe that full capital account or exchange rate liberalisation are likely in the next few years," he added.
Much talk of weaning China off excess credit and state-driven investment has so far come to little. The latest spurt of growth after last year's industrial recession is driven by recourse to the same old policies. Premier Li Keqiang rails against this, almost like an outsider. "Our outstanding M2 money supply has at the end of March exceeded 100 trillion yuan ($16.4 trillion), and that is already twice our gross domestic product," he said this week. Yet it goes on.
Whether China's over-investment crisis can be deferred for many more years is anybody's guess. Ordinary rules do not apply since the big banks are controlled by the state. But note that fresh IMF data show China's budget deficit is now 9.7pc of GDP, if regional spending is included and one-off land sales are stripped out. It has the fiscal pedal pushed to the floor.
It also has the credit pedal pushed to the floor, and beyond. Total credit including offshore vehicles has jumped from 125pc to 200pc of GDP since the Lehman crisis, a much faster rate of loan growth than in Japan during the half-decade before its Lost Decade, or in the US before the housing crash in 2008.
Fitch Ratings says the pace of loan growth is unprecedented in any major country in modern history. Credit has jumped from $9 trillion to $23 trillion since 2009. It is as if China has added the entire US commercial banking system in four years. Nor is it achieving much. The economic return on credit has collapsed from a ratio of 0.85 to 0.20. The loan bubble is exhausted.
The only way for China to break out of this impasse is with a blast of Sino-Thatcherism and a sledgehammer blow to the Party apparatus that lives off the deformed structure. That is not on offer at the Third Plenum. Xi Jinping wants affluent Leninism, on his own terms. No such thing exists.
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