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3 mysteries looming over China's economy

October 29, 2013: 10:48 PM ET

China's economy is humming along at 7.5%, thanks in part to new construction.

It now seems very likely that China's economy will meet or exceed Beijing's 7.5% growth target for 2013. For President Xi Jinping, still in his first year of office, this is very good news.

At the same time, heading into a pivotal meeting of the Communist Party, the country's policy landscape is unusually unsettled. Clarity on three key items -- local debt, economic reform plans and the Shanghai Free Trade Zone -- would go a long way toward reducing economic uncertainty in the Middle Kingdom.

Can China get its local debt under control?

China's credit boom, launched to support the economy after the 2008 financial crisis, has saddled unworthy businesses with large loans, fueled the country's shadow banking system and put local governments on the hook for billions.

Here's the problem: Nobody knows exactly how much debt China's local governments have soaked up. Not even Beijing.

Economists surveyed by CNNMoney earlier this month estimated debt levels reached 14.1 trillion yuan to 19.7 trillion yuan by the end of last year, or roughly one-third of the country's gross domestic product. Those estimates put local debt at nearly double what it was three years ago, when China last conducted a nationwide debt audit.

Economists are awaiting the most recent results from another debt audit launched in July, expected to be announced sometime in November. The audit should provide a sense of just how big the problem is -- and just how hard of a credit crackdown is needed.

Will November be a turning point for economic reform?

The general consensus among China analysts is that President Xi could prove to be a leader in the mold of Deng Xiaoping -- a reformer who emphasized economic improvements over ideology.

That theory will be put to the test in November, when the Communist Party holds its third party plenum. The meeting is widely expected to produce a framework for reform.

"For many China observers and market participants, this is the 'make or break' moment," said UBS economist Tao Wang. "If the new government does not launch sweeping reforms now, many people believe, China's economy is heading for the ruins."

The list of issues that demand attention is staggering: Local debt, shadow banking, credit growth, property prices, urbanization policy, private sector innovation, the internationalization of the yuan and income inequality.

What will the party address in November? How detailed will the reform plans be? How quickly will changes be made? Analysts will be watching closely.

Just what is the Shanghai Free Trade Zone?

China cut the ribbon in September on its new free trade zone in Shanghai, an effort to expand foreign investment access and liberalize the financial sector. The 29 square kilometer zone is meant to be something of an economic laboratory, and successful projects could eventually be rolled out across the country.

But a few months into the experiment, details remain thin. Foreign firms are not exactly flooding into the area, and several reported reforms -- including an uncensored Internet -- have failed to materialize.

It's possible that China's bureaucrats will loosen their grip -- but there have so far been precious few hints about China's long-term plans for the Shanghai zone.

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