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The Spectre Of Unemployment Is Beginning To Haunt The Beijing Leadership

February 12, 2009

The Spectre Of Unemployment Is Beginning To Haunt The Beijing Leadership Martin McCauley writes: Unemployment in China is a ticking bomb. Those who lose their jobs receive little or no social security benefits. How are they to survive? They cannot simply live on promises from the central government. Fear is spreading among the ruling élite that jobless workers could ignite a fire which could engulf the whole country.

The economic downturn began in 2007, well before the impact of the subprime mortgage crisis in the US was felt internationally. Although economic growth was 13 per cent in 2007 the property bubble which was on a par with the United Kingdom was about to burst. There was also an unsustainable stock market growth which was not underpined by real assets.

The government tightened credit and made it more difficult to buy land for development. As a result the property market slumped in 2008 and this affected construction and production of building materials, such as cement, glass, steel and concrete. Then the stock markets in Shanghai, Shenzhen and Hong Kong collapsed in October 2008. House prices plummeted. This had a knock on effect on consumer confidence. The sales of cars and other consumer durables nosedived. Then exports slumped and turned negative in November 2008.

All this took place before the economic meltdown in the United States and from then on demand for Chinese goods slumped even more.

Since Chinese banks had little exposure to subprime mortgage loans in the US, the direct impact was initially relativelly small. However, the indirect impact was enormous. Export demand contracted dramatically and forced factories to shed labour or even close down.

Most experts started to talk about the danger of growing unemployment in export industries on the east coast. However, layoffs in small and medium sized enterprises (SMEs), which supply the large companies, has been significant too. Hardest hit has been the construction industry.

Estimates of jobless in 2008 in China vary between 17 and 30 million in export industries, SMEs and construction companies. Many of these are migrant workers and they are not included in official statistics. Officially Beijing acknowledges about 20 million unemployed.

What is the outlook for 2009? If the economy grows at the rate of 7.5 per cent, one estimate is that there will be between 39 and 48 million looking for jobs by the end of this year.

This total is made up of 15 million migrant workers, assuming that half of those laid off return to farming. Then there are about 10 million urban unemployed. The government estimates that 1.7 million university graduated failed to find jobs in 2008. Beijing estimates that 6.1 million will graduate this year. Then there are about 15 million other graduates entering the labour market this year.

If the economy grows by 7.5 per cent (some economists regard this as too optimistic) it will create only 7 million new jobs. That leaves 41 million or 8 per cent of the non-agricultural labour force unemployed. The picture is even bleaker. Non-agricultural employment may contract by 1.5 per cent in 2009. And the state sector is planning to shed 45 million jobs over the next 5 years.

The worst case scenario is that Beijing will be confronted with about 50 million unemployed. The most volatile groups among the unemployed are migrant workers and university graduates. Many of the migrant workers will simply refuse to return to farming and, anyway, the consolidation of small farms means that there is little demand for extra labour.

The problem of unemployed university graduates is a new phenomenon in China. In some ways the graduate market in China is beginning to resemble that in India. Undergraduate courses need to be brought more sharply in line with economic demands.

China’s labour force is expected to peak in 2018 and thereafter decline by about 1 per cent for several decades. However, the urban labour force is set to grow substantially in the near and distant future.

January trade figures added to the gloom. Exports were down 17.5 per cent compared to a year earlier and imports dropped 43.1 per cent. ‘These are dreadful figures’, said one economist. The drop in imports is very serious as much of these are parts which are then assembled in China and then re-exported. About one worker in six depends on the export market.

Prime Minister Wen Jiabao’s recent world tour, after the Davos summit, had one primary goal: to discover if developed economies were contemplating protectionism. The latter would be disastrous for the Chinese economy. Not only that, it could trigger unrest which could undermine the power of the Communist Party of China. As Marx said, economics drives politics. On this issue, at least, Karl was absolutely right.

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