First published: 14th February 2019
It is widely acknowledged that China’s economy is cooling off quite a lot. Official data showing that the economy expanded by 6.4 per cent at the end of 2018, and rhetoric that an even lower number should be expected in the first quarter 2019 is just the tip of this iceberg. On my numbers, the economy may have slowed from about 7 per cent a year ago to 5 percent or less at the end of 2018 and the start of this year. We have seen a variety of monetary, banking, housing, fiscal and regulatory measures taken to stabilise this trend. Indeed, the spring or latest, the second half of 2019, growth may need have bottomed out. But other than true cheerleaders, few observers will hoodwinked into believing anything material has changed.
I draw three conclusions at this stage:
- The degree of stimulus injected to date is relatively modest, so that while the slowdown may be arrested, we won’t see a new growth spurt
- Some of the slowdown is cyclical, and related to world trade and the US-China trade war, but for the most part, structural home-made headwinds are in the ascendant, arising from past over-investment, high levels of non-financial corporate, local government and household debt, and weakening income growth. And inadequate policy attention being paid to energising the consumer, services and social security sectors.
- As these things evolve, we are going to have to pay more attention to China’s most elusive economic barometers, the labour market, and especially, unemployment.
I’m going to elaborate on this third factor here. Though the official unemployment data are poor and convey little information, it may have been around 8-10 per cent before the latest slowdown began. We know the economy is slowing down not just now, but most likely over the medium-term too. We could even see a ‘Chinese characteristics’ recession at some point. The labour market consequences for China and for public policy will therefore become increasingly important.
China’s flashing labour market signals
According to the National Bureau of Statistics, China’s active populations is about 808 million, of which 776 million are employed. Of the latter, 54 per cent are employed in urban areas, and of the urban employed, just over half work in private firms or are self-employed. After rising by about 10 million a year in the last few years, urban employment rose by 13.6 million in 2018.
Yet as much as we might know about employment, we know very little about unemployment. As I will detail below, the official unemployment data are unreliable, and there is no official collection or publication of labour force participation data. As reports cumulate about the slowing economy, we can assume that labor demand has been weakening and that the incidence of layoffs has also risen. Anecdote, company announcements, surveys from the China Labour Bulletin NGO in Hong Kong, and the lengthening holidays for migrant workers over the recent lunar new year all testify to a turn for the worse in labour market conditions.
One of the key anecdotes of weakness is the plight of private sector firms, and SMEs in particular that have been struggling. Remember that at the end of 2017, for example, At the end of 2017, there were 65.8m individually-owned businesses and 27.3m private enterprises across the entire economy, employing some 340m people. These businesses 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. In fact, politically, private enterprise has been on the back foot in the last year or two, as government policies have tilted strongly towards state enterprises, the Party has become embedded in the operational management of forms with more than 3 Party members, and a rhetoric has risen in which the private sector is deemed to have already fulfilled ‘its historic mission’.
In finance, for example, private firms’ access to bank credit has fallen sharply to less than 10 per cent of total loans, compared to 70 percent for state enterprises. As recently as 2011, the private firms’ share was 60 per cent. As banks allocated less and less to private firms, the latter became increasingly reliant on more expensive funding from financial institutions in the shadow banking sector, but this sector has borne the brunt of the financial crackdown that’s been going on since late 2016. Nowadays, then private firms are facing financial difficulties, and SOEs are growing faster than private competitors for first time since 1978. This year, moreover, they are being affected adversely by a change in social security tax collection regulations, which increases the costs for SMEs especially.
Employment is weakening
Financial markets always await eagerly the early month release of the official and Caixin purchasing manager indices for both manufacturing and non-manufacturing, and the numbers over year-end have been disappointing, suggesting a contraction in manufacturing, and slowing momentum in services.
The employment sub-components in the main PMI’s though have been giving off rather worrying readings.
The employment sub-components are both below 50, suggesting contraction, and have been in that territory for some time. Moreover a recent survey of 374,000 industrial firms by the consulting firm Gavekal Dragonomics drew attention to a 2.8 million decline in employment in the 12 months to November 2018 (cited in http://www.globalbusinessoutlook.com/chinese-unemployment-worries-grow-as-beijing-increases-stimulus/ along with other anecdotal and survey evidence of job losses).
Even in modern industries, including technology, there has been a spate of announcements that suggest a distinct cooling in the labour market. Last year, Alibaba said it was scaling back campus recruitment, Baidu and J.D.com said they were stopping social recruitment, and Tencent announced a 6,000 lay-off programme.
In the third quarter 2018, job openings and 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. The number of 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 (see, for example, https://www.scmp.com/economy/china-economy/article/2171176/what-chinas-unemployment-rate-state-survey-says-its-falling)
The jobs outlook in China is also becoming rather murky now because of the rising incidence of non-regular employment and the problem of open urban unemployment. Though aggregate regular employment has been quite high in China, there is still a lot of non-regular employment, but much of it has become urbanised along with reductions in the levels in the rural sector as a result of regulatory and residence permit changes. Open urban unemployment, which, according to the International Labour Office amounted to 21.6 million way back in 2011, is most likely considerably higher today, partly because of weakening trend growth, and partly because of the demands for ever higher skills from upcoming and newer enterprises.
Foreign firms in China have also been prominent in announcing job losses. Samsung closed its smartphone factory in Tianjin in north eastern China – one of the 5 cities with the fastest economic growth in recent years). Its headcount at the site was 2,600 employees. Foxconn announced a global programme of job cuts, including unspecified numbers in China, as well as cuts in overtime.
Foreign firms may not be the biggest employers in China – they employ less than 27 million people or 6 per cent of the urban work force – but they account for half of China;’s foreign trade and a fifth of total tax revenues. So what they do has knock-on effects on employment beyond their own headcount totals. We wouldn’t normally expect foreign firms to be especially sensitive to cyclical factors which ebb and flow all the time, but they might be more forcefully affected by structural shifts in which they perceive longer-term issues that impinge on their business and earnings potential. In this respect, a recent survey by UBS of 200 or so companies revealed that the trade war mainly – but also political and policy uncertainty, rising environmental standards, higher labour and land costs – had already induced 37 per cent of firms to move some production out of China in the past 12 months. A further third planned to move some out of China in the coming 6-12 months. On average, slightly more than 30% of export production was earmarked to move out.
How high is Chinese unemployment?
The official unemployment rate in China is based on the number of registered unemployed but it is a relatively meaningless and under-stated data set. Many unemployed people are not qualified, often because of residency status, to register with government agencies, and even those who are qualified may often choose not to register because of the low level of unemployment benefits. Moreover, there is a growing proliferation of people in companies and industries where employment contracts are weak or inadequate, especially in the fast growing service industries like food delivery and preparation, media, and the child and elderly care sector. These workers, often migrants, can easily slip through the social security net.
The official unemployment series has placed the unemployment rate at +/- 4 per cent for as long as the series has been published. And this, through, periods of both rapid expansion and deep cyclical slowdown. At the end of 2018, it stood at 3.8 per cent. In 2014, the government announced that it would change the estimate from one based on administrative guesswork to one based on survey evidence, and that at the time it was about 5 per cent. Unfortunately, the optimism about the shift in unemployment reporting has not been backed up by action because the national statistical system has still not proven capable of producing timely and reliable data on a regular basis. Further, it’s hard to have a proper estimate of national unemployment in a country with an 800 million work force, when good regional and local data don’t really exist.
Moreover, it’s difficult to get a good idea of unemployment if you don’t have data on labour force participation (LFP), and China produces and publishes none, officially. Private estimates have appeared, and suggest that LFP, which was around 82 per cent between 1988-1995, fell steadily to 78 per cent in the 1990s, 72.8% by 2006, and 68.9 per cent in 2017. This is sometimes a perfectly acceptable and normal phenomenon, for example, as young people spend increasing numbers of years in education and training. And undoubtedly, this was a factor.
Yet, it can also be a sign of trouble – as it was in the US after the financial crisis and until recently.
Falling LFP can also be accompanied by rising unemployment if or as workers become discouraged and withdraw from the labour force. Or it can mask unemployment problems, if it is falling because of rising numbers of people leaving the labour force because of retirement. This is almost certainly a factor in ageing China, given the low retirement age of 60 for men, and 50 or 55 for women, depending on their occupations.
It is also thought that female LFP is falling faster than for males for both good reasons – higher educational enrolment in tertiary education, and improvements in maternity and unemployment insurance – but also for not so good reasons – higher returnees to the rural sector to tend to ageing families, and ageing of the female work force. In any event, the fall in female LFP in manufacturing and agriculture seems to have outpaced more modest gains in service industries.
The more recent decline in LFP, then, looks like it has been accompanied by a higher incidence of unemployment. One well known NBER study (https://www.nber.org/digest/oct15/w21460.html) re-estimated the unemployment rate between 1988 and 2012, suggesting that it rose from 3 per cent to 10 per cent in 2002 in the wake of SOE restructuring and privatisation, slipped to 8 per cent before the financial crisis, and subsequently rose to 9 per cent again. The study hasn’t been extended, but through the economic slowdown of 2015-16, pick-up in 2017-18, and the latest slowdown again, the unemployment rate has most likely fluctuated between 8-10 per cent, perhaps now reaching up to or through the upper end of this range.
To get more real-time information content, you can also look at the CIER Employment Index, referred above. The index is calculated by dividing the number of job vacancies in a given period by the number of unique job seekers that apply for jobs in the same period. The lower the index, the worse the jobs situation is becoming. Most recently, it bounced back in the final quarter of 2018, but it was still owes than a year before, and the CIER is warning that the first quarter of 2019 readings will also lie below year ago levels.
If the government is concerned, so should we
The central and local governments have introduced a steady stream of measures to stabilise the labour market.
In July 2018, the Politburo said that it was seeking stability in employment, finance, foreign trade and investment, with employment the first and most important of all. In December, the State Council issued a call to prioritise stable employment and job creation, supported by training opportunities for unemployed people, and other initiatives. For example, 50 percent of the unemployment insurance paid by companies in 2018 will be returned to companies that are willing to reduce planned job cuts. New incentives for unemployed people to start a business were also launched. About 20 provinces announced measures to boost employment. And then at the end of the year, the Central Economic Work Conference made employment the number one focus for stabilisation in 2019.
Unemployment is the ghost at China’s economic feast. China watchers and financial markets know that the official GDP numbers convey very little useful information, and that a determined attempt to deleverage has to lead to markedly lower growth, with implications. There is still a more nuanced view in government circles, I think, about the debt-GDP growth nexus. Patently, some believe the party is over, and that China has to knuckle down to lower growth and try to manage the consequences as best as it can. Yet, others are likely to be unhappy with this: they still want cake – or the appearance of deleveraging and financial stability policies, but not the lower growth and weaker labour markets this would imply.
How 2019 evolves will be the outcome of who triumphs. In the end it won’t matter much because any short-term pick up in activity, resulting from greater infrastructure spending and fiscal or monetary stimulus, is likely to one temporary. China’s unemployment rate is highly likely to become an increasingly important economic, and more importantly, political and social phenomenon.