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Sunday, February 17, 2008   East-Asia-Intel.com     Free Headline Alerts

Is the party over in China? Massive unemployment looms

China watchers are predicting a drop in the GNP growth rate this year and for the foreseeable future. Most are attributing the expected fall off this year — from last year’s official 11.4 percent, the fifth year in a row of double digit expansion — to the expected downturn in the U.S. and the world economy in general.

A group of unemployed Chinese migrant workers take a nap in the shade of a building.       AFP/Getty Images

Even the 2007 growth rate wasn’t that high when compared with the peaks of the 1980s and 1990s, when GDP growth in some years surpassed 15 percent, coming out of the stagnation and even losses at the end of the Maoist era.

The downturn is going to be welcomed in some Chinese leadership quarters because of the fear of runaway inflation from an overheated economy — now fed by food shortages and the impact of the worst winter in 50 years.

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But a look over that horizon isn’t good news either: massive unemployment is China’s continuing biggest long-term problem.

The macro-statistics look good: China's official GDP reached $3.43 trillion in 2007, the National Bureau of Statistics reported, making it the third-largest economy in the world after the United States and Japan. China is also the third-largest exporting country after the U.S. and Germany. China's foreign currency reserves are the largest in the world, driving up more than $1.4 trillion. And China appears to have shifted from a primarily agricultural country to an industrial one.

The official urban unemployment rate has typically remained around 4 percent, but that isn’t the real story. Chinese unemployment statistics do not include the laid off — and workers can be laid off for up to three years before they officially count as unemployed.

It’s now believed that urban unemployment increased by about 8 percent annually in the mid 1990s, but in the next decade the number of laid-off workers increased by around 40 percent annually with the attempt to collapse the old Soviet-style bankrupt state owned enterprises (SOEs). Nor did the officially “unemployed” include men past the age of 50 and women over 45 or those who have migrated to the cities and are thus not registered as formally urban dwellers.

The official long-term policy is for as many as 800 million people to migrate to the cities from the virtually stagnant rural areas where subsistence agriculture does not support them and is an impediment through land dispersion to a reform of agriculture.

Some foreign academics working with Chinese officials came up with a guesstimate of 15 percent of the urban population as currently unemployed. The Rand Corporation factored included those in the countryside who effectively have nothing to do and came up with a figure of 23 percent of the workforce being without a job.

So, faced with something like 300 million people without jobs, it is easy to see why, despite all the talk about inflation (and pollution), Beijing leadership will always go for growth and providing new jobs. That is true even when threatened by inflation.

What China needs to do, according to many observers, is use the downturn in growth to shift the emphasis from heavy industry and exports to domestic consumption.

“If China is able to rebalance the economy, making it less intensive in resources and capital, cleaner and more widely shared, growth of 9-10 percent a year for long periods would be the [outcome] developing countries across the world are looking for,” said Louis Kuijs of the World Bank in Beijing.

But if the downturn this year is sharp — that is, for example, if an American recession sets in and the multinationals that produce probably 60 percent of China’s exports, mostly for the U.S. and EU markets, have to cut back — painful structural reforms are probably not going to be on Beijing’s shopping list.

A whole set of new leadership takes office in March as a result of last fall’s 17th National Chinese Communist Party Congress. Incoming officials have usually spent heavily at the beginning of their terms to entrench their positions. And there is growing evidence that despite a tidal wave of new regulations and laws, the Chinese central authority has less and less control over the regional and local officials who must find their own devices to cope with problems, not the least of which is apparently growing unemployment.


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