(Repeats from late Monday)

By Alan Wheatley, China Economics Editor

BEIJING, Aug 30 (Reuters) - Three numbers should suffice to
give Chinese economic policymakers a sleepless night: 65.4
million, $28.7 billion and $2.45 trillion.

In order, they are the estimate by a government researcher
of how many apartments stand vacant in China, many of them
bought as speculative investments; the country's trade surplus
in July; and the international reserves the central bank has
accumulated by buying dollars to hold down the yuan.

Together, they encapsulate the distortions of an economy
that favours investment by suppressing the cost of capital and
other inputs at the expense of consumers, whose spending power
is held down by low wages and low deposit rates.

Unable to sell at home all that it produces, China exports
the rest.

This template has powered 30 years of headlong growth that
is catapulting China past Japan to become the world's largest
economy after the United States.

But it is a formula that Beijing readily agrees is
unsustainable: China needs to rely more on household spending,
especially as its export prospects are darkening now that the
West is tightening its belt to purge excess debt.

Many experts are confident that a pragmatic China will
succeed in making the transition in the coming decade to a new
growth model anchored by urban-based consumption, technological
upgrading and a greater role for market forces. [ID:nTOE678021]

Doubters, though, have two prime reservations. First, that
China has left it too late to wean itself off investment-heavy
exports. And second, that the ruling Communist Party will fail
to overcome the vested interests resisting reform.

"The imbalances cannot continue at this rate for another 10
years. That's simply not possible," said Michael Pettis, a
professor of finance at Peking University.

He said pressure to change could become overwhelming within
two to three years, or even sooner if trade conflicts flare up.

"They're embarking on change at a time when the rest of the
world may not give them much time to shift," Pettis said. "Over
the next decade we're going to see average growth rates of 5-6
percent, heavily frontloaded."

CAR CRASH

His scepticism is shared by some at the heart of the
Chinese establishment.

Zhou Tianyong, a professor at the Central Party School in
Beijing, which trains rising Communist Party officials, has
long argued that China needs steady but far-reaching political
reforms.

In a new book, "Where Is China Headed?", Zhou says China
could be heading for a political car-crash unless it reduces
bloated government, unshackles small business and ends
distortions in the housing market.

"Which way will we go down? If we choose the right route we
can avoid falling into a development trap; if we choose the
wrong one, we may fall into a 'China trap' of social and
political turmoil, slow economic growth, enduring lack of
prosperity, and weak and declining national competitiveness,"
Zhou writes.

The 'China trap' looms if policymakers continue to promote
a pattern of growth that "privileges industry, big
corporations, big capital and big projects", Zhou believes.

Shifting gears will be difficult, he reckons, because of
the habits China has formed and the entrenched interests that
have built up.

And there's the rub. Does the Communist Party have the will
to remove some of the power and wealth it has bestowed on its
favourites?

China's markets for the factors of production are riddled
with distortions that subsidise producers, exporters and
investors, according to Huang Yiping and Wang Bijun from the
China Centre for Economic Research at Peking University.

Labour, capital, land and energy are all cheap, they write
in "China: The Next Twenty Years of Reform and Development", a
joint Australian-Chinese collection of essays.

This is equivalent to taxing the owners of these inputs,
mainly consumers, which is why household income and consumption
have plummeted as a share of GDP, they argue.

"All these suggest that factor-cost distortions have been a
fundamental force behind China's structural imbalances, which
alongside other problems such as inefficient resource use and
pollution could seriously affect China's ability to sustain its
rapid growth in the future," they write.

VESTED INTERESTS

Seen in that light, the problem is not one of economic
policy but of political economy.

Yao Yang, also an economics professor at Peking University,
bemoans that the government itself, its cronies and state-owned
enterprises are forming powerful interest groups.

Writing in the same volume of essays, Yao says the Chinese
Communist Party should realise for its own sake that there is
no alternative to fuller democratisation if it wishes to
maintain both high economic growth and enhanced social
stability.

"The emergence of strong and privileged groups will block
equal distribution of the benefits of economic growth in
society, which will then render futile the CCP's strategy of
trading economic growth for people's consent to its absolute
rule," he says.

Diana Choyleva, who follows China from Hong Kong for
Lombard Street Research, a consultancy, says that because of
the new international environment it will become clear in the
next two years whether Beijing has the appetite to change.

"I want to believe that they'll move in the right
direction, but every time the going really gets tough you don't
seem to get that response," she said.

Financial journalist Richard McGregor says the Party should
not be counted out despite the political risks that the next
stage of economic reform entail.

"Does unravelling the state's economic interests
irreparably damage the party's political clout? There is no
easy way to chart a course through this thicket but the Party's
adaptive abilities should not be underestimated," McGregor
writes in a new book, "The Party".
(Additional reporting by Chris Buckley; Editing by Mathew
Veedon)