Challenges China faces for its future

China's political, economic and foreign policy over the next decade is not only fundamental to the country itself, but also to the wider Asia-Pacific region and – increasingly -- the world beyond.

China already represents 16 percent of global gross domestic product (GDP), rising to 28 percent by 2030. China is also by far the world's largest emitter of greenhouse gases. Furthermore, continued maritime boundary disputes in both the East and South China seas are a significant continuing factor in the region's underlining strategic instability. How China deals with each of these challenges is therefore of significance to us all.

Since he came to power last year, President Xi Jinxing -- has become the most powerful Chinese political leader since Deng Xiaoping. President Xi has outlined an ambitious all-encompassing national project which he has entitled the "China Dream". He has set two deadlines for the realization of this "dream": the centenary of the Chinese Communist Party in 2021, and the centenary of the founding of the People's Republic of China in 2049. The essence of the "China dream" is to raise income levels to those of middle-income countries, and then to the same level as the advanced economies, while at the same time restoring China's historical greatness.

In achieving this objective, President Xi has stated that the Chinese Communist Party would be central to the realization of the "China dream". He has also said that for the Party to remain in power, it must deal with the fundamental challenge of corruption and has therefore launched the biggest anti-corruption campaign in the Party's history, affecting every unit of the party and all 86 million of its members. The success or otherwise of this campaign will have a fundamental bearing on the future of both the party itself, and the economic reform program China has embarked up-on.

This leads to the content of the reform program itself, and whether China will succeed in transforming the economic model that has served it well for the last 35 years, but no longer meets China's needs.

Back in November, the Party adopted a blueprint for the future at its Plenum. But the task of its implementation is formidable. The Party has accepted the market as the decisive factor in determining the future shape of the economy. It has also embraced the need to provide new economic growth generators beyond state investment and labor-intensive manufacturing for export. It has also realized it must lift domestic private consumption and grow new jobs in the service sector, especially in China's exploding second-tier cities.

The new model also recognizes the imperative of state-owned enterprise reform, competitive neutrality and proper access to capital markets for the private sector. Finally, the new model also requires deep reform of China's capital markets, both public and private, to drive the efficient allocation of resources in the economy.

If China fails in this major reform task, it will significantly weaken economic growth, employment, and average incomes growth. This in turn would reduce the contribution of the Chinese economy to global growth, where for the last 5 years it has made up more than half the global growth rate.

This would result in weakened global trade, investment and capital market flows. At a time when the European and Japanese economies remain weak, and where US growth is not strong, a failure of this critical Chinese economic reform program would have severe consequences for the world.

Finally, on regional security, there are deep conflicting trends at work across East Asia between the forces of ethno-nationalism on the one hand, and the forces of economic globalization on the other. The former acts to pull nations further apart. The latter, by contrast, seeks to connect regional states and bring them closer together through the forces of economic integration. The underlying territorial disputes of the region can be located within this wider framework.

The principal problem we face is the possibility of conflict by accident or poor incident management followed by political, diplomatic and military escalation. The sheer concentration of military assets in the East and South China seas at present gives rise for real concern on this front. For this reason, there is likely to be some reduction of tensions between China and Japan as both states calculate that the risk of accidental conflict is too great and should it occur, would be in neither side's interests. It is less certain what will unfold in the South China Sea. Conflict, large or small, in either of these theaters, would radically undermine regional economic confidence.

These three major risk factors leave to one side the continuing challenge of irreversible environmental damage and climate change. China has begun to act. It remains to be seen what effect these actions will have. Again, failure to act will have profound implications for the planet itself.