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

2. 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

3. 1) Election season

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. …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. 2) Challenges ahead

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. 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. A few glaring examples
• About 30%of China’s wind farms isn’t
connected to the electricity grid

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

13. 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…

14. … 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

16. Macro versus micro contradiction
• At the macro level:
- Positive for GDP growth
• At the micro level:
- Overcapacity, overproduction and debt at the
company level

17. 3) Reforms are necessary

18. 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

19. 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

20. 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

21. 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

22. 4) Conclusion

23. 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