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View as HTML version PSI Journal 5/2016 tum could dwindle away. The Internet sector was mentioned as an example: on the one hand Internet economy should play a more important role in the future, and many industries such as banking, insurance and health care should be even more digitised. On the other hand, China has actually completely closed this sector for foreign companies. RESTRUCTURING OF STATE ENTER­ PRISES AND THE FINANCIAL SECTOR Rebuilding the state-owned enterprises is seen as a significant challenge. They are considered inefficient and prone to corruption and should operate according to standard practice in a market economy in order to become attractive for private capital. However, there will be no privatisation to suit our requirements; the state will continue to have great influence on economic regulation. As the rapid growth in recent years has been bought with creditfinanced investments, many state-subsidised companies are now suffering. The banking system is largely dominated by THE MAIN ECONOMIC PROBLEMS OF CHINA Overcapacity Almost all major industries produce too much. State­owned enterprises are often kept alive through loans. In order to reduce overcapacity, five to six million workers in such factories are to be sacked. Mining and steel plants are also to be closed on a large scale. Mass redundancies lead to increased social problems and could also threaten stability. This is why the local governments are warning against excessively drastic steps. Stock market Between summer 2014 and 2015, the leading index of the Shanghai Stock Exchange rose by more than 150 per cent. The bubble burst and since mid­2015 the share prices have almost halved. The government was overwhelmed by the crisis and relied on the wrong measures, resulting in personnel consequences. Investor confidence has been squandered, even though the situation has now calmed down. Currency Within one year, the Chinese yuan has depreciated around five per cent against the US dollar. The fear of a prolonged downward trend is enormous. The central bank supported the yuan with sales of foreign currencies and is likely to continue to stick to this strategy, although the foreign exchange reserves are sharply declining. At the G20 conference in Shanghai in late February, Zhou Xiaouchan, the head of the Chinese central bank, said there is still some latitude in the monetary policy and the appropriate tools are available to offset the downward trend. He rejected the idea of a depreciation of the yuan. Indebtedness China‘s debt burden is rising at a considerable pace and has more than doubled since 2007. Especially state­owned enterprises and provincial governments are amassing debt to support the economy. Nevertheless economists still rate the national debt as being relatively low. They still have enormous faith in the economic policy.

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