China must reform or risk crisis, experts warn new leader By Chris Buckley BEIJING (Reuters) - China risks economic malaise, deepening unrest and ultimately even a crisis that could shake the Communist Party's grip on power unless its next leader, Xi Jinping, pushes through stalled reforms, experts close to the government have warned. The warnings, striking for their openly urgent tone, have been aired both inside the party and publicly, and reflect an internal debate about the direction of the new leadership that takes power next month. "There is a potential crisis in China's model of economic growth," said a paper from Strategy and Reform, one of several think tanks and groups that throughout this year have plied officials with blueprints for Xi's coming decade in power. "The next decade might be the last opportunity for actively pursuing reform, and we should treasure this last chance," said the paper released on the group's website (www.reform.org.cn). "China is confronting a perilous jump, one that it can neither hide from nor avoid no matter what," said the paper from the group, which includes academics, company executives, government policy-advisers and some officials. China heads into next month's party congress - where Xi is set to take over from Hu Jintao as top leader - with the economy heading for its slowest annual growth rate in at least 13 years, while social stresses, such as ire over corruption, land grabs and unmet welfare demands have stirred protests. "China's economic and social contradictions seem to be nearing a threshold," prominent Chinese economist Wu Jinglian said in a recent interview with Caijing business magazine. Advocates of reform are pressing Xi to cut back the privileges of state-owned firms, make it easier for rural migrants to settle permanently in cities, fix a fiscal system that encourages local governments to live off land expropriations and, above all, tether the powers of a state that they say risks suffocating growth and fanning discontent. Most party-linked proponents said in interviews with Reuters that political reform must start at the grassroots and be incremental; they called outright democracy a distant or unrealistic idea. "You can't solve all of these problems in a decade, but you can address the reforms urgently needed by ordinary people and show that you're heading in the right direction," said Deng Yuwen, an editor at the Study Times, a newspaper published by the Central Party School which trains rising officials. He recently shot to prominence after publishing an essay lamenting the lost chances for reform under President Hu and Premier Wen Jiabao. He said their successors must move faster. "The next two or three years, and at most the next political cycle, will be a crucial period for China's development," Deng wrote in a new Chinese-language book on the theme. Although China's economy remains relatively robust -- it grew 7.6 percent in the second quarter -- advocates of reform say their worries are about longer-term prospects. The party's recent unity behind a decision to punish disgraced politician Bo Xilai has kindled hopes among some that Xi (pronounced "Shee") can build similar accord for bolder reforms. Xi is aware of the calls, said experts and party insiders. But heeding them will require him to take on economic and political blocs with a powerful hold over policy. Does the new leadership recognize that they're reaching a key inflection point in their economic and political path? I think the answer is yes. But the other question is: Do they have the courage to act boldly on those problems," said Christopher Johnson, a specialist on China at the Center for Strategic and International Studies in Washington D.C. "The question is whether the system has become so sclerotic that they won't be able to get anything done," said Johnson, who once worked as a China analyst for the Central Intelligence Agency. Past leadership transitions in China have also kindled hopes for big change, including some political liberalization. Before President Hu Jintao came to power in late 2002, he faced calls for ambitious change, and some analysts and reporters saw in him the makings of a bold innovator. Those hopes foundered as Hu proved to be a cautious conformist, and some are now wary of investing such expectations in Xi. Yet the expectations for reform are louder and more urgent than when Hu took power, said several experts. If it is wrong to pile high hopes upon Xi, it is also wrong to regard him as a replica of his predecessors, some said. "Before each congress, there's always a debate, but it feels sharper this time," said Zhang Jianjing, editor of "China Reform" magazine, which has advocated pro-market policies and using the law to curb state power. There's a deeper sense of anxiety now that goes beyond specific issues. There is a widespread sense of foreboding," said Zhang, a journalist who has followed four party congresses. Many economists believe that without transformation, China's growth by the end of this decade will be nearer 5 percent a year than the roughly 10 percent annual expansion achieved in the decades after Deng Xiaoping launched reforms in 1978. China can achieve another two decades of annual growth of about 8 percent if it implements the right policies, according to Peking University professor Justin Lin, who was the World Bank's chief economist until earlier this year. Xi's "princeling" pedigree - as the son of a party leader who served alongside Mao Zedong - could make him more comfortable in wielding power than Hu and Premier Wen Jiabao, with their more humble backgrounds and ways. Xi's extensive experience as an official in wealthy coastal provinces powered by private business also might make him more open to pro-market change, the pro-reform advocates added. China's present leaders have "lacked political imagination and seen themselves as operating a machine," said Yao Zhongqiu, president of the Unirule Institute of Economics, a privately run think tank in Beijing that advocates free market policies. But the next generation has a quite different temperament. Since Xi, 59, was anointed Hu's presumptive successor in 2007, he has mostly refused to spell out his ideas - necessary for survival in Chinese politics where deference to the incumbent leader is expected. But recently, Xi hinted that he understands the calls for him to take a bolder path, even if he wants to also put to rest any expectations he will seek a radical change. In a talk with Hu Deping, son of the late reformist leader Hu Yaobang, Xi said he favored steady reform. Signs the party leadership wants to trim the Politburo Standing Committee - the core of party power - from nine to seven members also appear to reflect a desire for more agile policy-setting. The list of those new Standing Committee members will not be announced until the end of the party congress, when Xi is likely to be named party general secretary. He will be named state president at a parliament session likely to convene in March. Yet even if Xi wins a leadership lineup sympathetic to a bolder agenda, he faces the obstacle of pushing changes past powerful state sectors and state-owned conglomerates that have enjoyed privileged access to credit and opportunities. He might also have to accommodate two retired leaders, Hu and his predecessor Jiang Zemin, who are likely to demand a say in big policy changes. That could make for unwieldy compromises bogging down change, said some advocates of reform. "There's never been a situation like this with three bosses," said Yao, the president of the Unirule institute, referring to Xi, Hu and Jiang. There will be a mismatch between social expectations and the political structure. But if expectations (for reform) are disappointed again, the ramifications will be more serious than before, and it will be very difficult for Xi. Reporting by Chris Buckley; Editing by Mark Bendeich and Raju Gopalakrishnan