The downfall of Bo Xilai has been the closest thing the Chinese get to a proper public scandal. Here was the attention-seeking boss of the mega-municipality of Chongqing, a colourful rock star in the country’s monochrome politics, sacked in mysterious circumstances that gripped a gossip-hungry nation. China’s authorities this week even felt compelled to ban the word ‘coup’ from microblogging sites, amid wild speculation that an overthrow was in the offing.

The choice of Bo’s successor, a trusted establishment figure, suggests that the authorities who ousted him have had enough of big personalities in politics — but the truth is more complex. For all its pride in its growth, the People’s Republic is wracked with uncertainty about its future. Its leaders know that their country has reached a crossroads. But they don’t know where to go next.

The imbroglio surrounding Bo marks a new stage in the breakdown of the unity the Communist party has sought to impose. Now factionalism has come into the open.

The Bo drama was set off when Wang Lijun, the former Chongqing police chief, whom Bo had demoted, sped off to a US consulate in western China, apparently to seek asylum, which was refused. He was then spirited to Beijing by public security officials. Wang and Bo’s falling out is said to stem from a government investigation of alleged corruption by Bo’s family. Wang was part of this and told his boss, who then sidelined him into a municipal job responsible for education and the environment. The intense, bespectacled Wang knows a lot of his ex-boss’s secrets, which are just what Bo’s enemies in Beijing want to use to block his ascension to China’s supreme decision-making body, the Standing Committee of the Politburo, whose membership will be decided later this year.

Bo was one of the ‘princelings’ expected to move to the top under the next party leader, Xi Jinping. Their fathers were leaders of the first generation of China’s Communist leaders — Bo’s father was Mao’s finance minister, while Xi’s was a Mao-era vice-premier who was removed in the Cultural Revolution and then brought back by Deng Xiaoping.

The princelings are associated with China’s new rich — Bo wears smart suits and his Ferrari-driving son attended Harrow and Balliol before moving on to the Kennedy School at Harvard. The stockily built Xi, who made his way up the ranks after his father was rehabilitated, is married to one of ­China’s favourite singers.

The mixture of populism and blatant ambition made Bo a vulnerable figure in the end, a tall poppy ripe for decapitation by the party establishment. Beyond that, his fall and replacement by a trusted apparatchik from the central government means that his old-style statist approach to economic development with appeals to traditional patriotism has been sidelined.

Mainstream reformers greeted Bo’s demise with delight. They see the need to change the system. The model that has transformed the country from basket case to the world’s second biggest economic power is increasingly unsustainable. China’s political straitjacket is under strain as society evolves on a scale and at a speed that escapes the system.

But the power of entrenched interests in the last major country ruled by a Communist party is enormous, stretching from party bureaucrats through huge state-owned enterprises to billionaires who are doing very nicely indeed out of the present system as they sip fine claret in their luxury homes. Though Mao’s face stares out over Tiananmen Square and from all banknotes, the once revolutionary regime has become a status quo state.

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Admirers laud the ‘China model’. Fans of the way the People’s Republic (PRC) gets things done stretch from George Soros and Francis Fukuyama to ex-Marxists who, having been let down by the Soviet Union, see it as a new champion rising unstoppably in the East. An opposing school waits for China to collapse under its weaknesses: its fragile property market and over-extended banking system. But the bulls generally carry the day amid headlines trumpeting the country’s latest achievement. It seems all we can do is lie down and wait for the juggernaut from the East to roll over us.

But China cannot be understood by looking through a simple economic lens. The fundamental equation forged by the paramount leader, Deng Xiaoping, after Mao’s death at the end of the 1970s was a political one. As a nationalist, Deng saw economic expansion as a means of restoring the country’s greatness. As a Communist since his teens, he understood how that growth could be used to buttress party power. Those two calculations have been perpetuated by his successors.

The PRC has become the world’s largest manufacturer and exporter, the biggest maker of steel and user of energy; its cheap goods flood global markets. Its demand is the key factor in worldwide commodity prices. If they were states on their own, six of its provinces and mega-municipalities would rank among the world’s 32 largest nations in terms of purchasing power.

But if we step back we see that the Deng-era model based on cheap labour, cheap capital and welcoming export markets is running out of steam. Wages are going up. Capital is tighter. Demand from the West is soggy. As it prepares for a change in leadership personnel, China needs to alter course.

It can turn left in the direction of even more party control and state power. That was Bo Xilai’s route, which now seems to be blocked. Or it can veer right by helping private companies which have been squeezed by privileged state enterprises and embarking on a major programme of reform. This is sorely needed. Deng’s revolution remains incomplete and, in many ways, has been scaled back by the expansion of the state since the 1990s.

All land still belongs to the state, the movement of labour is regulated by the hukou registration system that ties people to their home place, the financial system and the currency are tightly controlled. The rule of law is weak — judges have been told that their prime duty is to strengthen the Communist party. For all the admiration which foreign observers express for China’s bureaucracy, inefficiencies abound. The stimulus package launched at the end of 2008 led to major misallocations of capital and an out-of-control credit boom. Pricing of water and energy, two things China is short of, is so low that there is huge wastage.

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Changing the way China works requires political courage of a kind not on display over the past ten years by Hu Jintao, party leader and State President since 2002 and head of the Youth League faction, which backs social policies to promote a ‘harmonious society’ (if with limited effect). But the fall of Bo Xilai is a clear warning to anybody who adopts too high a profile. Xi Jinping may surprise everybody by shedding his consensus cloak and coming out as an advocate of change once he is in the top job, but there is no sign of that to date.

The probability is that China will take the middle road, continuing on a course with which its leaders are familiar. There will be change — the new Five-Year Plan provides for rebalancing the economy towards consumption and for a move up the technology chain. But progress will be slow. An official from the Party School remarked to me that the move away from dependence on exports and investment in property and infrastructure would take ten years. Muddling through, albeit at 7 to 8 per cent annual growth, will be the order of the day.

The snag is that China may be running out of time. Vice-premier Li Keqiang, a leading member of Hu’s faction, who is likely to become prime minister next spring, has stressed the need for urgency. Wang Yang, who runs Guangdong and will p
robably be elevated to the Politburo Standing Committee later this year, has been talking about a new growth model freed from ‘vested interests’ to take account of escalating social tension (particularly given the province’s millions of migrant workers) and the environmental crisis spawned by growth. I found myself drawn into the debate this month. After seeing an advance copy of my new book on China, China Daily, the state-owned English-language newspaper, commissioned an article from me on economic reform and ran the piece unchanged. It was strange to see a state organ publishing an op-ed piece calling for less state power.

The way China is changing sharpens the need for action. There are more than 100,000 popular protests a year. Individual urban Chinese have grown used to far freer lifestyles than they enjoyed under Mao. The explosive growth of social media makes it more and more difficult for the authorities to exercise censorship, as seen in microblog exchanges about Bo and the rumoured coup.

As ideology dies, materialism is rampant, epitomised by the young woman who said on a television dating show she would ‘rather cry in the back of a BMW than laugh on the back of a bicycle’.

The rush to do everything faster and bigger than anywhere else is less appealing after the crash of a high-speed train last year that killed 39 people. There is a yawning distrust of officialdom — ‘Only believe something when the government denies it,’ the saying goes. After a string of scandals over tainted food, people are worried about what they eat. Corruption is a constant sore. The main government think-tank estimates that officials have illegally moved the equivalent of £80 million abroad in the last 15 years. After he was sacked (before the crash) it emerged that the minister who championed the high-speed train programme sat on top of a £100 million bribery network and had 18 mistresses. This week Xinhua, the state news agency, reported that £49 million had been embezzled from the Beijing-Shanghai rail link.

When it comes to dealing with the rest of the world, China lacks a coherent policy. Its relations are acquisitive — buy up raw materials from Africa, Australia, the Middle East and Latin America while trying to obtain technology from the West and Japan — and defensive — keep foreign powers from challenging its system and repel criticism of its policies in the territory of Xinjiang and, above all, in Tibet, where dozens of Buddhist monks and nuns have set fire to themselves in protest at Beijing’s rule.

It is easy for government figures to wish all this away on the grounds of Chinese exceptionalism. The regime insists that the thousands of years of its civilisation and the pursuit of Confucian harmony set it apart from other nations. The reality is that today’s China fits awkwardly into the civilisational discourse and that Confucianism was always accompanied by the harsher doctrine of Legalism, which uses the force of the law and the state to terrify citizens into obedience — think of Liu Xiaobo, the Nobel Peace Prize winner jailed for 11 years for organising a petition in favour of democracy; or the savage treatment of human rights lawyers.

What motivates China’s leaders is the retention of power in keeping with Deng’s precepts. Their problem is that their control ethos is increasingly ineffective and looks out of tune with the times. China will not collapse. Neither will it rule the world. Rather, it risks being stuck in the middle of the road ahead.

The PRC certainly does not need a new Chairman Mao. But it could do with forceful, innovative leadership to set it on a new course. Yet the political system and its many interest groups stand in the way. The more successful China is in the short term at dodging the much-predicted hard landing and political collapse, the greater the problems it piles up for the medium term. A contradiction the Great Helmsman might have relished.

Jonathan Fenby’s new book on China, Tiger Head, Snake Tails, is published next week.

This article first appeared in the print edition of The Spectator magazine, dated