Official statistics mask the true rate of unemployment as China grapples with a wider slowdownby George Magnus / February 21, 2019 / Leave a comment
Photo: Li Ran/Xinhua News Agency/PA Images Samsung Electronics shut down its Tianjin smartphone factory in north eastern China, employing over 2,500 people, last December. Foxconn, which assembles iPhones and Playstations among other things, recently announced a global programme of job cuts, including unspecified numbers in China, as well as cuts in overtime. These are just two of the best known of a flurry of companies that have been closing facilities or moving operations outside China over the last couple of years. The American Chamber of Commerce reported recently that a third of its members in China were planning to move some of their production away. A major investment bank also reported that in a survey of over 200 firms, a third had moved some operations outside China in the last year, and more than a third planned to do so in the coming year. Something in China is not quite right, and to the extent that this entails a weaker labour market and higher unemployment, it is going to become the centre of attention for policymakers and for global financial markets. After all, the authorities are fixated not so much on GDP growth itself, as what that means for job creation, unemployment, and therefore potential social unrest. We know that China’s economy is slowing down across the board, from manufacturing and investment to property, automobiles and retail sales. The government reported that GDP growth slowed to 6.4 per cent at the end of 2018, and hinted that it is likely to slip further during early 2019. Most China watchers, though, think the slowdown has gone much further, and the steady stream of money and credit, tax and regulatory measures designed to stabilise the economy bear witness to the government’s concern. Since last July, the Chinese Politburo, State Council and Central Economic Work Conference have all insisted that stabilising employment is the number one priority. Part of the problem here is that no one knows what China’s unemployment rate really is. The official unemployment rate in China was 3.8 per cent last December, but this is widely considered an incorrect statistic. It is based on people who are able to register as unemployed, but many are not. Others choose not to register because of the low level of unemployment benefits. Still others work irregular hours for companies where employment contracts are inadequate. In any event, this measure has never strayed far from around 4 per cent, through periods of both rapid expansion and deep cyclical slowdown. The announcement of a change in methodology in 2014, recording the unemployment rate at 5 per cent, was not followed up in terms of producing timely and reliable data on a regular basis. Meanwhile one major private study, looking at the Chinese labour market between 1988 and 2012, suggested that it rose during the period from 3 per cent to 10 per cent in 2002, in the wake of the restructuring and privatisation of state enterprises, and then slipped to 8 per cent before the financial crisis. Subsequently it rose to 9 per cent again, but more recent estimates have not been published. Given the nature of the up and down cycles since 2012, it seems likely that the unemployment rate has fluctuated between 8-10 per cent, but with this slowdown it may have reached—or even exceeded—the upper end of this range. There is plenty of anecdotal evidence to suggest that the jobs market is not working as well as it has in the past, or as the government would prefer in the interests of social stability. Private sector firms—SMEs in particular—have been the main engine of job creation, and they are struggling. They have been hit especially hard by shrinking foreign orders because of both weaker world trade and US tariffs. They have been under pressure from rising defaults in the bond market, and from dwindling cash flows, rising costs, and reduced access to credit. They have also lost confidence as government policies have placed party cadres into operational management and tilted strongly towards state enterprises. The monthly purchasing manager indices of business sentiment in both manufacturing and non-manufacturing, have been disappointing for a while now. The employment sub-components of the main indices have been giving off worrying signals that jobs are being lost. Even in modern industries, including technology, labour market conditions have worsened. Last year, retail and e-commerce giant Alibaba said that it was scaling back campus recruitment, Baidu said that it was stopping social media recruitment and Tencent announced a lay-off programme for 6,000 workers. In the third quarter 2018, the number of job openings and job applicants shrank significantly according to a survey conducted by Zhaopin, a major Chinese online job agency, and the China Institute for Employment Research (CIER) at Renmin University. Job openings fell by 27 per cent year over year, led by a 51 per cent fall in demand for staff in internet-related businesses. The CIER reported a recovery in the the final quarter, but warned that conditions were worse than a year ago, and that in the first quarter 2019 further disappointment on job openings was highly likely. Beijing and local and provincial governments have introduced a steady stream of measures to stabilise the labour market. But in many ways, they are fighting an uphill battle. Cities and provinces have to contend with local demand for new jobs from school leavers and new graduates, along with others laid off in factory closures and returning migrants who no longer have work in major urban areas—notably in the coastal provinces. And they have to do this in the context of faltering or slowing economic growth rates, and the government’s ambivalent messages about financial conduct. Local governments, for example, are being encouraged to borrow more to spend on infrastructure, but are also being told to pay close attention to “hard budget constraints,” that is to ensure that new spending is funded and controlled so as not to create a lot of new debt. New stimulus measures may well help to stabilise the economy and the jobs market in a few months, and for a little while at least. Especially if the current trade war negotiations result in China getting a stay of execution from higher US tariffs. But we should not be fooled that this will resolve the structural pressures building on China’s growth capacity, and as a consequence on the jobs market. In the absence of reliable labour market data, employment anecdotes and above all, the urgency of public policy measures will have to suffice as yardsticks.