Courage is needed for financial change
Beijing can prove its determination for reform by letting enterprises fail and products default
Over the past 30 years, as China's economy has grown by leaps and bounds on its way to becoming the world's second-largest, the leadership has wasted no opportunity to take credit and remind everyone of its foresight and determination to enhance the legitimacy of the Communist Party's dictatorial rule.
But the reality is different. Recent history has shown that China's significant development has been driven by crisis, with the leaders forced to sacrifice their own vested interests and unite to push for painful restructuring and reform.
Now China's new leaders, including Xi Jinping and Li Keqiang, are at a similar, if not more critical, juncture. They must display the political courage to overcome resistance from vested interest groups and to accelerate the reform movement.
Xi and Li came to power on pledges of reform, raising hopes of mainlanders and overseas investors who were dismayed by the lack of reform during the 10-year rein under Hu Jintao and Wen Jiabao.
Xi has wasted no time in establishing his reformist credentials by tracing Deng's steps and visiting Guangdong, vowing to curb rampant official corruption and urging mainlanders to revitalise the country in pursuit of the so-called China Dream. As a sign of his mettle, he took on the powerful but corrupt generals of the People's Liberation Army by banning their friends and family members from using military plates on their luxury cars, forcing them to train as ordinary soldiers and undertaking an extensive audit of military-owned land - a key source of corruption.
The fact that he could manage to shake up the military so early on came as a sharp contrast to his predecessors such as Jiang Zemin and Hu, who usually wooed the generals with promotions during early stages of leadership.
Xi also launched a year-long campaign among the party's 85 million members to weed out the corrupt and force others to swear loyalty to the new leadership, as part of his efforts to consolidate his power.
On Saturday, Xi told a meeting of party officials responsible for personnel that the party would stop assessing the performance of an official simply based on his record of boosting the economy, as the new leadership is trying to shake off an obsession with growth in terms of gross domestic product.
"It should consider a local official's work in various aspects, including people's livelihood, the development of local society and the quality of the environment," Xinhua quoted Xi as saying. While mainland leaders have made similar comments, Xi's comments were the most direct and detailed.
But recent developments have suggested that Xi is faced with tough challenges. Xinhua reported last week that the 25 members of the Politburo held a special four-day meeting, from June 22-25, to undertake "criticism and self-criticism" and to improve their work styles.
The uncharacteristically long meeting, and the fact that all of the Politburo members had to take part in the sessions, prompted some overseas analysts to speculate that Xi may not have full support for his policies from all the Politburo members. So the meeting was aimed at ensuring he does.
Raging debate over the party's future has been illustrated by a report of a fist fight between two princelings - children of former party and government leaders - after they disagreed on how to deal with the crisis of faith in the party. On the economic front, the recent credit crunch, the worst in at least a decade, has highlighted the need for more financial reform.
Many analysts have seen the mini-banking crisis as a public tussle between the leaders pushing for reform and the vested interest groups.
After acting tough by refusing to inject liquidity and sending inter-bank rates to a record high on June 20, the central bank relented.
But the regulators have succeeded in teaching commercial banks a lesson by seeking to curb the banks' increasing use of inter-bank borrowing and short-term deposits in the form of wealth-management products to finance long-term loans.
But whether the commercial banks have learned the lesson remains to be seen.
Wu Xiaoling, a former deputy central bank governor and now a Standing Committee member of the National People's Congress, said over the weekend that the credit crunch highlighted the immediate need for necessary financial reform.
She said the government must bite the bullet and allow certain enterprises to go bankrupt, and allow certain financial products to default, instead of always succumbing to pressure and opening the floodgates of liquidity at the last minute. Otherwise, the lesson will never be learned.
Let's hope the new leaders heed Wu's advice.