The path economic reform should take

All eyes are on the new leadership, headed by President Xi Jinping and Premier Li Keqiang, to see how it plans to change China into a consumption-led, bubble-free and clean economy.

After a soft patch last year, China's economy has now settled into an acceptable growth pace of about 8 percent, defying the critics who forecast a hard landing for the economy. Growth can continue at a slightly slower, but more sustainable pace given the momentum generated by rapid urbanization, industrialization in western China, and rising aspirations of a growing middle class. But we all know that the current investment-led growth model cannot continue to drive the economy in the long run. So, how does the new leadership begin to solve the looming problems and ensure that China stays on the right track? China's economy faces multiple imbalances: between the coastal areas and the western region, investment and consumption, cities and the countryside, and rich and poor. Over the past decade, policymakers have tried to rebalance the economy, building an urban social welfare system, incentivizing manufacturing investment in western China, cutting taxes and boosting subsidies in rural areas and encouraging rural-urban migration. There were some successes.

The challenges now facing the economy, though, are more complex. There are dynamics in play that are undermining the sustainability of growth. Rapid economic development generates pollution - a lot of it over time if regulation is weak. Loose monetary policy that saved the economy from a nasty recession in 2009 has pushed up land prices. It is time to re-engineer the system, instead of implementing one-off policy changes, so that positive outcomes are generated again.