Can China’s new leader prevent an economic crisis?A presentation by Detlef Mostaert

Content

1. Introduction: Election season

2. Challenges ahead: Is China’s future as bright as often claimed?

3. Necessary reforms: a few suggestions

4. Conclusion: A fragile hope

1) Election season

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• ….

…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• …

2) Challenges ahead

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

- …

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

A few glaring examples

• About 30%of China’s wind farms isn’t connected to the electricity grid

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

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…

… 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

Macro versus micro contradiction

• At the macro level:

- Positive for GDP growth

• At the micro level:

- Overcapacity, overproduction and debt at the company level

3) Reforms are necessary

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

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

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

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

4) Conclusion

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