China's Uncertain Economic Future

"Whether they make headway or meet resistance remains to be seen," says Magnus. "That's a 64 trillion-yuan question."

Why so uncertain? In China, reformists don't always get their way. They sit at the top of the central government, but no matter what phase of Chinese history you look at, central leaders seldom have the support of every old-school mayor, provincial governor and People's Liberation Army general. The country is too big for Beijing to monitor every pupil in the massive reform school.

Local officials have been told over the past 20 years to find ways to make money for their enterprises without handouts from Beijing. As China remains a state-run, planned economy, government agencies often own not just infrastructure or factories but also hotels, hotpot restaurants and even racy nightclubs. Those compete ever more with the private sector as the economy liberalizes.

So local governments and even the army, with its non-military enterprises, hope they can keep turning to the ever-reliable money-making machine of new projects. Factories that spit out high-value stuff make money on output, while Chinese citizens widely suspect that new construction such as high-rise housing and freeway flyovers puts money in officials' own pockets as they usually take cuts from contractors who are happy to have the jobs.

(Yes, this would be graft, and no, you usually won't get caught for it.)

Naturally these satellite governments would oppose any new rules to push China toward a rebalanced economy. Rebalancing may call for higher interest rates, stronger rule of law (a customer could sue a state enterprise and win) and tougher corporate governance. Business would cost more but be cleaner.

But if the local fiefdoms get their way over the kingdom, that's good for a different sort of China investor. Regions of China, the western city of Chongqing for example, that prioritize factories and infrastructure tend to welcome foreign investment in priority industries.

This old-school, still-prevalent growth formula would continue to benefit the types of foreign firms that have gained now for easily a decade. They're the automakers from Detroit to Germany, computer makers from Taipei to Silicon Valley and food packagers whose names might appear in your own kitchen cupboard.

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