Turkeys don't vote for Christmas, and the Chinese Communist Party is not exactly itching to release its iron grip over society and the economy.

But that's exactly what the party needs to do to prolong the fast economic growth that underpins its political legitimacy: cutting state-owned firms down to size and opening up to private enterprise hold the key to sustaining productivity gains and redistributing income more equitably.

Coming from Western economists, such a prescription for reform is standard stuff. What is striking is the urgency with which some prominent Chinese academics are making the same case.

In the financial crisis China seems to have performed quite well. But the problem is that government involvement in the economy has increased significantly, said Yang Yao, director of the China Center for Economic Research at Peking University.

Ultimately this trend should be stopped, and the government should retreat from the economy -- not just from monopolistic areas but also from competitive sectors, he said in an interview.

The success of Beijing's overwhelming fiscal and monetary response to the global credit crunch has bolstered the confidence of state planners and put advocates of freer markets on the defensive.

The phrase guojin mintui -- the state advances as the private sector retreats -- has become common currency in the debate over China's economy.

Yang said the phenomenon was real, especially in the financial sector, where he fears reforms could be postponed indefinitely.

LOOMING CRISIS

Yang was elaborating on a recent hard-hitting article in the journal Foreign Affairs in which he argued that there is no alternative to greater democratization if the Communist Party wants to encourage economic growth and maintain social stability.

Attacking local governments for simply pursuing economic gain instead of improving the average citizen's welfare, Yang said popular discontent over infringements of economic and political rights would inevitably lead to periodic unrest.

As such, a way would have to be found soon to let ordinary people take part in the political process.

The reforms carried out over the last 30 years have mostly been responses to imminent crises. Popular resistance and economic imbalances are now moving China toward another major crisis, he wrote.

Strong and privileged interest groups and commercialized local governments are blocking equal distribution of the benefits of economic growth throughout society, thereby rendering futile the CCP's strategy of trading economic growth for people's consent to its absolute rule, he added.

Premier Wen Jiabao pledged on Saturday to redouble efforts to increase the share of national income going to households, rather than enterprises, but his government has shown no sign of wanting to rein in rich and powerful state-owned firms.

Indeed, China Mobile intends to spend nearly $6 billion of its $37.5 billion cash mountain to buy 20 percent of Shanghai Pudong Development Bank <600000.SS>, according to two Chinese brokerages. The stakes of Citigroup Inc and private investors would be diluted in the process.

HISTORY LESSONS

Zhang Lifan, a liberal scholar and historian, goes so far as to argue that the retreat of the private sector was an underlying factor behind the collapse of Qing Dynasty in 1911 and the 1966-1976 Cultural Revolution.

History has proved that 'guojin mintui' is not sustainable, Zhang wrote in a recent article. If we can't curb the advance of the state sector, it will definitely have an impact on China's future industrial structure and economic development.

This is not to deny the ruling party credit for some important initiatives.

Spending on social services has soared, which should eventually reduce precautionary savings and boost consumption, according to Andy Rothman, an economist with CLSA in Shanghai.

Outlays on healthcare rose 163 percent between 2005 and 2008; on education by 125 percent; and on social security by 83 percent, Rothman said in a report.

He said the trend continued in 2009, with central government spending on education and healthcare estimated to have increased 25 percent and 48 percent, respectively.

And Yang, the Peking University professor, described unfolding reforms to make it easier for migrant workers to settle in smaller cities with their families as a historic breakthrough.

EYES ON WEN

It is the very success of such policies that make economists wish the Party were bolder.

Fan Gang, an economist who sits on the central bank's monetary policy committee, said China still had immense potential for reforms that would galvanize growth.

For all its achievements, he said, China could be a wealthier, fairer society if it did more to curtail the power of the state over the economy. This was hampering efficiency and feeding corruption -- one of the biggest complaints of ordinary Chinese.

To truly address this problem we must press ahead with market reforms and privatize state-owned enterprises, as well as reducing government controls and the various powers of government departments, so that market mechanisms play a bigger role, Fan wrote in the Chinese-language magazine Green Leaf.

Against this background, investors will comb Premier Wen's annual policy speech on Friday to the National People's Congress, China's parliament, for signs that the Party is ready to re-emphasize reform now the economy is back on solid ground.

Minggao Shen and fellow economists at Citigroup Global Markets said China's current growth model cannot last for more than a few years; structural adjustments long identified by the Party to rebalance the economy were inevitable, they said in a report.

In an echo of Yang's argument that only crisis spurs change, they said: The only difference is whether this is a planned reform or a forced reform. China's experiences in the past three decades suggest it's very likely to be the latter.

(Additional reporting by Chris Buckley and Zhou Xin)

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