China's New Leaders Face Economic Challenges

William Ide
November 01, 2012

China's modern cities are built on a massive scale, with architecture in places such as Beijing that ranges from avant-garde to out of this world. But, just above Beijing's busy street corners are signs of the threats China's economy is facing.

Beijing based-economist Patrick Chovanec says "I think that the empty buildings that you see cut to the core of how China has been driving growth over the past few years," says . It's been an investment boom and so China has been driving growth by creating capacity, capacity in housing, in infrastructure, in production. And, in order for that growth to be real, there has to be an end user and that's the challenge, where does the end user come from.

When the global financial crisis hit in 2008, China insulated itself from the slowdown by launching a nearly $590 billion stimulus. But now, as the country's annual growth is expected to slow to below eight percent this year, economists caution that same strategy will not work.

"That investment boom that has kept the Chinese economy growing in the face of the global economic slowdown, that investment boom is breaking down, it is buckling under its own weight," says Chovanec. "The bad debt and to some extent, the inflation that has been created by pumping the economy full of money has created an unsustainable situation.

Economists say about 80 percent of China's massive 2008 stimulus package went to state-owned enterprises, which still dominate the economy. Weakening their influence is a key challenge for China's new leaders, says economics professor Hu Xingdou. Hu says that state enterprises account for about a third of the Chinese economy.

"But, even with that proportion, they lead the Chinese economy," said Hu. "Even though they constitute only 30-40 percent of the Chinese economy, they control China's economy and all of those sectors where money is made.

Breaking the monopoly that state-run enterprises have over the economy will not be easy, especially because of the political power and influence they wield.

"Because there are two main problems with the Chinese economy," Hu added. "One is that power interferes too much in economic issues, the second issue is monopolies, and the impact they have on the structure of the economy.

It remains unclear what plans China's new leaders have for the state-owned enterprises, but the stakes are high. Maintaining a stable economy is a key reason why Chinese remain willing to accept the party's continued monopoly on political power.