This week China’s ruling elite appoints new leaders for the next decade. The incoming president, Xi Jinping, and his colleagues face such fearsome challenges that, in their moment of victory, one almost sympathizes. Understanding their difficulties and calibrating U.S. policy accordingly will be among the biggest tests for the new Obama administration. For everybody’s sake, Beijing and Washington both need to do some rethinking.

China’s leaders have grasped the scale of their problem, even if not the means to solve it. In his outgoing address as president, Hu Jintao referred directly to the scandals roiling the Communist Party. “Combating corruption and promoting political integrity, which is a major political issue of great concern to the people, is a clear-cut and long-term political commitment of the party. If we fail to handle this issue well, it could prove fatal to the party, and even cause the collapse of the party and the fall of the state.”

Whether or not Hu actually believes it, he might be right. The seemingly endless pliability of the Chinese populace may be approaching its limit.

Tainted Loyalties

According to the Pew Global Attitudes Project, 50 percent of Chinese now regard corrupt officials as a “very big problem,” up from 39 percent four years ago. If you take concerns about food safety as a measure of distrust in government, the picture is worse. Four years ago, 12 percent said tainted food was a very big problem; now it’s 41 percent.

The people of China understand they’re much better off than they used to be: 70 percent say their living standards are higher than five years ago, and a remarkable 92 percent say they’re more prosperous than their parents. But, as you might expect of good communists, they’re increasingly preoccupied with inequality: 81 percent agree (either “mostly” or “completely”) with the view that “Today, it’s really true that the rich just get richer while the poor get poorer.”

What the Chinese call “mass incidents” -- strikes and protests of one kind or another -- are on the rise. Sun Liping, a sociologist at Beijing’s Tsinghua University (and one of Xi’s former university tutors, according to some reports) keeps track: The number doubled between 2006 and 2010 to 180,000 a year. China is a big country. Even so, that’s a lot.

Socialism with Chinese characteristics is beginning to meet consumer resistance.

Responding effectively to these discontents will be fiendishly difficult. The government must fear -- and if it doesn’t, it should -- that starting to unpick the fabric of the state will cause the whole garment to unravel. State-owned enterprises are the crux of the matter. That’s where many of the well-connected have enriched themselves. The SOEs are also a main channel of implicit taxation, via monopoly profits, helping both to finance the state and to fuel China’s development model of overinvestment and underconsumption.

This, too, is understood by China’s leadership. Hu again: “We should ... speed up the establishment of a long-term mechanism for increasing consumer demand, unleash the potential of individual consumption, increase investment at a proper pace, and expand the domestic market.” The question is, where to start? The network of power and privilege, with SOEs at the middle, may be unsustainable, but reforming it piecemeal, without disturbing the stability that China’s leaders have made their totem, looks close to impossible.

Dangerous Pride

The danger in all this for China’s neighbors and hence, directly or indirectly, for the U.S. is obvious. When domestic stresses mount, China’s leaders turn up the nationalist pride and draw fresh attention to what they see as the West’s centuries-long project to keep China in its place -- not that many Chinese need reminding of that plan. Only 39 percent view their country’s relationship with the U.S. as one of cooperation -- down from 68 percent just two years ago.

Nothing matters more for the well-being of the world than peaceful and productive relations between China and the U.S. Both have a compelling interest in getting along well -- and both have governments apt to succumb to the political temptation of saber-rattling. Leading up to the U.S. election, the two candidates confined their discussion of China to competition over who intended the toughest reprisals. Talk like that is absurdly shortsighted.

Certainly America’s military strength shouldn’t be compromised. China’s and America’s largest interests, peace and commerce, may be well-aligned, but points of contention exist and conflict is possible. The worst-case possibility needs to be planned for. American diplomacy should nonetheless strive to make it less likely.

To avert catastrophe, Americans must pay closer attention to two points. First, they must keep in proportion America’s legitimate grievances with China over issues such as currency policy and theft of intellectual property. Such disputes shouldn’t be escalated for domestic political purposes. They’re best resolved calmly in the multilateral forums that exist for the purpose, notably the International Monetary Fund and the World Trade Organization, in which China submits to the rules like everybody else (i.e., when it has to) and is recognized as a full and equal partner.

True, China has an instinct for abrupt unilateral action when its pride is bruised. In that regard, it’s just like the U.S. A little self-restraint on both sides would go a long way.

Second, the U.S. needs to control its disgust for China’s intolerance of political dissent. China’s record on civil liberties is indeed lamentable (and in the end likely counterproductive, even from the regime’s own point of view). But lecturing China on the subject -- let alone folding this issue into broader strategic calculations -- won’t advance the cause. America could moderate its appetite for laying down the rules for everybody else by reflecting on the complexity, let’s call it, of its own approach to civil liberties when it sees vital national interests at stake.

Above all America and the West should keep in mind what China has achieved for its people in recent decades. What’s that? Merely the biggest and fastest rise out of poverty the world has ever seen. No, that doesn’t make it all right to put pro-democracy activists in prison. It’s nonetheless a stunning achievement, one to respect and admire.

(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)

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Today’s highlights: the editors on why the Keystone XL pipeline should be approved now and on why the IMF director is right on Greece; Margaret Carlson on adultery as a firing offense; Edward Glaeser on why diversity has built support for a welfare state; Vali Nasr on why drone strikes alone won’t defeat al-Qaeda; Peter Orszag on why China may face slower economic growth; Stephen Smith on why a politician shouldn’t be transportation secretary.

To contact the writer of this article: Clive Crook at clive.crook@gmail.com.

To contact the editor responsible for this article: James Gibney at jgibney5@bloomberg.net.