Can china’s new leader prevent an economic crisis

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Can china’s new leader prevent an economic crisis

  1. 1. Can China’s new leader prevent aneconomic crisis?A presentation by Detlef Mostaert
  2. 2. Content1. Introduction: Election season2. Challenges ahead: Is China’s future as bright as often claimed?3. Necessary reforms: a few suggestions4. Conclusion: A fragile hope
  3. 3. 1) Election season
  4. 4. Obama faces a difficult task…• Soaring unemployment rates• Growing budget deficit• Slacking Amercian competitiveness• Global warming• China’s lust for power• A hurricane now and then• ….
  5. 5. …while Xi has it easy• Growth in China is slowing down => But still rests firmly in the double digits• No Budget deficits• No alarming unemployment rates• Extremely competitive• United States are dependant on China• …
  6. 6. 2) Challenges ahead
  7. 7. China’s flawed economy• An investment-led growth model => Government pumps money in whatever it likes: - Funding grandiose schemes - Build more infrastructure - Host the Olympics -…
  8. 8. So what’s the problem?• Investment-led growth models inevitably lead to a debt crisis sooner or later => Money gets used inefficiently => Debt levels rise because of this => Excess capacity gets created => The system collapses
  9. 9. A few glaring examples• About 30%of China’s wind farms isn’t connected to the electricity grid
  10. 10. A few glaring examples• About 30%of China’s wind farms isn’t connected to the electricity grid• Shopping malls get build where no one shops
  11. 11. A few glaring examples• About 30%of China’s wind farms isn’t connected to the electricity grid• Shopping malls get build where no one shops• But particularly…
  12. 12. … the steel industry• Is piling up record losses and liabilities… => 445 billion in half a year• … but is still expanding by order of the government
  13. 13. Macro versus micro contradiction • At the macro level: - Positive for GDP growth • At the micro level: - Overcapacity, overproduction and debt at the company level
  14. 14. 3) Reforms are necessary
  15. 15. A few suggestions• Scale back state enterprises - Much of China’s growth story has been a private sector story - But state enterprises have gained influence in recent years => Receive subsidized land, energy, … => Receive a large share of the bank credit But: Without the subsidies their profits would evaporate
  16. 16. A few suggestions• Encourage the country’s consumers - The economy is far too dependent on investment => Needs more engines of growth - Encourage the consumers to play a bigger role => Liberalize interest rates to make investing more rational
  17. 17. A few suggestions• Change the financial sector - Liberalizing interest rates will put pressure on China’s banks => Right now: automatic profit => Ending the system forces banks to compete and thus be more commercially orientated
  18. 18. A few suggestions• Strenghten rule of law - China has lots of rules... but no rule of law: Decisions are inconsistent, rules are not applied fairly, many rules are left vague… => This creates uncertainty which hampers investment
  19. 19. 4) Conclusion
  20. 20. Will anything change?• Xi Jinping is an enigma - Nobody knows his true opinions on major economic issues - To rise to the top he had to appeal to both the conservative and the liberal side - Yet Xi will have to be a reformer to save China from disaster. => Which would be bad for Xi, China and the world

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