Beijing Makes a Push To Keep China Working at All Costs

9 MINS READJun 7, 2019 | 06:19 GMT
This picture taken on Feb. 20, 2019, shows job seekers looking at employment postings at a recruitment fair in Qingdao in China's eastern Shandong province.
(STR/AFP/Getty Images)

This picture taken on Feb. 20, 2019, shows job seekers looking at employment postings at a recruitment fair in Qingdao in China's eastern Shandong province.

  • Extended and possibly greater tariffs on China will increase the country's employment stress in the low-end manufacturing sector, adding further stress to a labor market already dealing with financial and tech sector job losses.
  • An expanded services sector and rural development have helped buffer low-end job losses, but as the exports and services sectors struggle, the risk of expanded unemployment will grow.
  • As it prepares for an enduring trade war, the Chinese government will expand stimulus measures in the coming months, even at the expense of increasing long-term risk.

One of the principal tools at the disposal of Chinese leaders to preserve social stability and bolster political capital is (and always has always been) employment. But their ability to fulfill the ideal of near-universal employment in China has diminished over the past few months under the strains of a cooling economy and the challenges brought by a trade war with the United States. In the wake of the 2008 global financial crisis, when tens of million low-end manufacturing workers lost their jobs as exports suffered, Chinese authorities led an intense effort to diversify the economy by building up the service sector and inland industrial bases. With few other policy paths available to hedge against social disruption, Beijing turned to expansive monetary and fiscal stimulus to soften the unemployment picture, but that strategy exacted a high price.

Debt soared, financial and real estate bubbles swelled, and local governments, swimming in red ink, found their own options limited. But the moves did succeed in building up the services sector, which was able to absorb a large number of workers who had lost their low-end industrial jobs. Today, the twin pressures of a slowing economy and escalating trade war with the United States have raised the specter of widespread unemployment once again. But this time around, the weight of the country's debt and local budgets will limit Beijing's ability to create more jobs, posing a serious test to the government's ability to manage through this malaise – and raising the odds that serious social and political repercussions will follow.

The Big Picture

The goal of securing near-universal employment has long underpinned China's political economy. China's economic transformation and demographic shift in the decade after the global financial crisis have driven significant changes in its labor structure as well. While that restructuring is still underway, an economic slowdown and the trade war with the United States, along with the resultant outflow of manufacturing investment, will make maintaining employment levels difficult, straining Beijing's ability to maintain social stability.

Job Market Under Siege

In trying to tease out a true picture of China's employment, official statistics, which consistently report a rate hovering in the 4 to 6 percent range, are not necessarily the most insightful metric. So beyond the official numbers, which measured unemployment at 5 percent in April, it's useful to monitor the hiring strengths of individual sectors and companies. In one example, even before the trade war with the United States began hitting Chinese manufacturing jobs, employment in some high-end industries had already begun to flag. Since the second half of 2018, new hires in the information technology, financial and financial technology dipped among a number of large employers, with some prominent companies, such as Tencent, Smartisan and Meituan, even reporting tens of thousands of layoffs or pay cuts for workers. These individual cases hardly represent the entire job market in these industries, and many hiring platforms continued to report that there are more jobs than job seekers. But an apparent cool-off in these industries coincides with growing anxiety over job security among the middle class.
In part, the indications of job weakness among these primarily private companies can be chalked up in part to job market adjustments after the boom years, as well as the government's efforts to deleverage China's financial sectors. As the Chinese economy continued to decelerate, the general stress on these sectors is unlikely to ease off and will contribute to a tight job market, particularly for skilled laborers and the record influx of new graduates looking for work.

This graph shows changes in non-agricultural employment since 2008.

But the lower-end job market is showing even greater indications of stress. Since March 2018, the employment sub-index of the manufacturing purchasing managers index, a bellwether for economic trends, has fallen, and is now at its lowest level since the height of the financial crisis in 2009. This shows a decreasing appetite for new hires. Financial research firm Gavekal Dragonomics, citing an official survey covering 374,000 industrial firms, determined that total employment declined by 2.8 million in the 12 months through November 2018. As traditional industrial sectors continue to weaken, it's not just job losses that are being observed, but also demand for workers in the retail and services sectors, which are experiencing reduced consumption as the economy slows. With the trade war getting uglier, intensifying tariffs that have already affected the labor-intensive electronics and consumer goods industries could also extend to lower-end manufactured products such as toys, garments and footwear, increasing unemployment among those manufacturers. Existing tariffs could lead to the elimination of up to 4.4 million jobs over the next one to three years, and the numbers could grow much higher under an all-out-tariffs scenario, particularly given that they could precipitate more domestic and foreign manufacturers to relocate outside of China. Altogether, serious employment stress is building relentlessly, jeopardizing manufacturing jobs, the majority of which are filled by the country's 300 million workers who migrated from rural regions.

Building Up an Employment Cushion

The high social and political stakes of having a job in China has made maintaining high employment levels a key imperative for Beijing. The process of making the adjustments necessary to achieve that goal has shaped the social and economic transformation of the country. Before the turn of the century, state-owned enterprises employed more than half of the country's 200 million urban workers, albeit at the cost of exceedingly low productivity and competitiveness. As China began to open up with an eye to future accession to the World Trade Organization, it began a painful retooling of the state sectors, removing about 20 million jobs from the labor market in the process. The strategy eventually paid off, drawing a wave of cheap labor from the countryside that helped beef up China's economic growth, industrialization and manufacturing. However, its manufacturing sector, as revealed by the 2008 financial crisis, became highly susceptible to external shocks, setting off Beijing's resultant scramble to redevelop the economy with a liberal application of borrowed money.
Indeed, their efforts have steadily transformed the low-end labor structure. By 2012, the share of workers employed in manufacturing jobs reached a peak of 19.2 percent of the labor pool, or about 148 million people in total. By contrast, jobs in the services industry — especially delivery, retail, e-commerce and tourism — rapidly increased, bolstered by greater domestic demand. Between 2013 and 2017, the economy added about 52 million jobs in the service sector, absorbing a large number of displaced industrial and construction workers. During the same period, at least 2.5 million were lost from export-oriented manufacturing industries, with another 5 million just from the coal and steel industries. But around 50 million positions were added in the logistics sector alone, accounting for 6.5 percent of China's total employment in 2017.

Beijing has used expansive monetary and fiscal stimulus to boost construction and infrastructure development to try and provide a steady source of jobs.

Meanwhile, partly due to the rising cost of living in urban areas and the diminishing job prospects there, more workers, particularly younger ones, are opting to stay home, instead of migrating to cities, to find work. The National Statistics Bureau estimated that the number of job-seekers moving to urban areas has continually diminished over the past five years, with a decline of 2 million in 2018 alone. The drop in migrant job-seekers has notably been concentrated in the Pearl River Delta, where a number of low-end manufacturing operations are clustered. The trend is likely to continue and, coupled with the already declining overall labor force, will likely provide a buffer for the low-end job market there.  

The High Price of Employment

The process of offsetting the loss of low-end manufacturing jobs has proved to be slow and come at a high cost. Domestic demand and inland development have been insufficient to replace all the lost low-end employment. In trying to solve the problem, Beijing used expansive monetary and fiscal stimulus to boost construction and infrastructure development in its effort to stabilize employment. This came at a tremendous price: The national debt level now sits at 248 percent of gross domestic product, and local government budgets, particularly those in western and central regions, are severely limited. This has left the Chinese government with precious little room to respond to more economic shocks. And further efforts to prop up the economy will exact an even steeper price. More important, with much of the country's household income tied up in the property market, an economic slowdown that raises anxiety levels will compel people to limit consumption, which in turn will cause a cycle of depressed demand; that, in turn, will reduce downstream manufacturing and services employment.

The threat to the job market — and its importance to social stability – has made employment stability a top priority for Chinese leaders in what it anticipates will be a prolonged period of economic difficulty. Over the past six months, officials have announced a slew of measures to combat unemployment, including making $14.9 billion in funds available to support vocational training, refunding unemployment insurance payments for companies that minimize layoffs and offering subsidies to unemployed youths. Beijing, meanwhile, had scrambled to expand financing to help keep struggling private enterprises afloat. Especially in a year filled with symbolic anniversaries — from the 30th anniversary of the crackdown at Tiananmen Square to the upcoming 70th anniversary of the founding of the People's Republic of China in October — the government can hardly afford to allow the social disruptions that job losses in a poor economy could bring. But as it takes the likely course of further expanding stimulus to stabilize employment, it will only risk further ballooning the country's already unsustainable debt and inflation. As the trade war continues, and the Chinese economy continues to lag, the challenge of upholding employment and containing social disruption in the years ahead will become even more daunting.

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