As Chinese people raise their glasses today, they toast not only the 53rd National Day but also the dawn of a new era. The ruling Chinese Communist Party will have its most important and sweeping leadership changes for more than a decade at its landmark 16th Party Congress next month. This will be followed by an extensive government reshuffle when the 10th National People's Congress is convened in March. In December, China will also mark its first year as a member of the World Trade Organisation. According to official estimates, China's utilised foreign investment will reach US$50 billion (HK$390 billion) this year for the first time, overtaking the United States as the most favourite destination for foreign direct investment (FDI). In the first eight months of this year, utilised foreign investment rose 25.5 per cent year-on-year to US$34.4 billion. Fuelled by an influx of FDI and massive state spending, the mainland economy is moving along at a brisk pace - one of the few bright spots in a gloomy global economy that has been dragged down by weak demand and prospects of a war on Iraq. Economists predict that the mainland's economy will grow 7.5 per cent this year, up from 7.3 per cent last year. In the short term, however, the transition of power will dominate China's policy agenda in the months to come, and set the stage for a new era of political, economic and social transformation. As political jockeying intensifies, stability has become the watchword. Speculation is already heating up over the new leadership line-up, with the focus on the future of President Jiang Zemin. More people believe that Mr Jiang is likely to stay in the front line, contrary to earlier reports that he would step down fully and make way for the so-called fourth generation leadership headed by Vice-President Hu Jintao and Vice-Premier Wen Jiabao. While it looks certain Mr Jiang will relinquish the title of state president to Mr Hu, it remains unclear whether he will retain the other two more important titles - Party general secretary and chairman of the Central Military Commission. Party sources say it does not matter what titles he will hold, Mr Jiang will remain the core of the party leadership in the next few years. By and large, the transition is expected to be smooth, but there are signs of a slowdown of reforms, because of the great aversion of policymakers to risks. Economists have pointed to a slower pace in closing inefficient state companies and laying off redundant workers, and to delays in such controversial reforms as stock market liberalisation and crucial banking reforms. The present government is expected to defer major policy decisions until March, when the new State Council is formed. Once the new leadership fully takes over, they will have to consider how to accelerate economic restructuring and deregulation. The government has a strong political incentive to continue its proactive fiscal spending in the near future, but officials have warned that this will not go on much longer. Mainland fiscal conditions have deteriorated sharply this year, prompting Premier Zhu Rongji to order a nationwide crackdown on tax evasion, especially among the new rich. The latest reports show that since the campaign began in the second quarter, Beijing has collected more than 15 billion yuan (about HK$14.6 billion) in taxes due. In the first seven months, fiscal revenues grew 10.7 per cent but expenditure was up 18.7 per cent. Investment bank SalomonSmithBarney predicts that fiscal deficits for the whole year could rise to 4.3 per cent of gross domestic product, instead of the planned 3 per cent, if current trends continue. While the Chinese economy continues its strong performance, future growth is likely to be constrained by a probable delay in the recovery of the United States economy. The new leaders will have to grapple with issues such as soaring unemployment, a money-bleeding state sector, one of the world's most vulnerable banking sectors, a casino-like stock market, and widespread corruption. But many economists say they should make development of the private economy the top priority, as it should become one of the main driving forces to economic growth. The probable revision of the party constitution to include President Jiang's 'Theory of Three Representatives' at the 16th party congress should give a strong boost to the private economy. As the party prepares to admit entrepreneurs and the rich as members, the new leadership is expected to abolish the barriers to levelling the playing field between the state and private sectors. The private sector accounts for more than one-third of the mainland's GDP, and has become a major absorber of millions of surplus rural labour and redundant workers laid off from the state sector, in addition to soaking up foreign direct investment. On the international front, President Jiang's meeting later this month with US President George W. Bush is an important event to watch, as it comes just ahead of the 16th party congress. The two men are expected to discuss anti-terrorism, trade, and, most importantly, the Taiwan issue. Analysts speculate that Beijing is likely to pressure Washington to cool warm relations with Taiwan in exchange for China's support in fighting terrorism. In this area, Mr Jiang is expected to continue to wield a great deal of influence over China's foreign policy and the volatile ties between the mainland and Taiwan, as both Mr Hu and Mr Wen lack experience in foreign policy issues. Wang Xiangwei is the Post's China Editor