Addressing Unemployment in China

June 17, 2020

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The paramount goal coming out of the annual meeting of China’s legislators in Beijing last month was stability, specifically employment stability. Where in the economy is unemployment most likely to spike and what actions will central and local government take to reduce its scale?

Where might unemployment spike?

By sector, three major areas look vulnerable:

  • Exporters: The swift recovery of export volumes as the lockdown ended was primarily to catch up on earlier orders. The pipeline has not refilled and major uncertainties remain. Government planning considers up to 10 million jobs to be at risk.
  • Service sector SMEs: Many SMEs had no capital reserves and made just enough cash flow each week to continue to operate. To reopen they need to borrow working capital from friends and family but even then, they can’t operate sustainably if social distancing and hygiene requirements impose cost and capacity constraints on them.
  • Multinationals: The global edicts to cut x% of staff are rolling out. Even companies operating at 90% of pre-virus levels are developing plans to cut staff and many have already frozen hiring. Letting staff go in China is an intentionally burdensome process, some multinationals will be tempted to cut corners.

By type of worker, the two most vulnerable segments, as usual, are:

  • Migrant workers: Government reports indicate that 90% of pre-virus migrant workers are back at their jobs. But as many work in export industries, their income and jobs are clearly vulnerable. Migrant workers working in restaurants and other local service firms have fewer hours and are the most vulnerable to cutbacks. Only in the construction sector do migrant workers look secure, as government funds to boost infrastructure spending this year roll out.
  • New graduates: 2020 was always going to be a tough year for graduates. It has been a challenge for several years now for graduates to find jobs that meet their expectations. With multinationals and many private sector companies scaling back, available options are much reduced. The state-owned sector and government itself is not of the scale to take up the slack.

By geography, three areas stand out:

  • North East China, where the economy was already struggling to achieve any growth, even in years when China overall was growing at 6%.
  • Export focused cities in the east and south, where the percent of output that normally heads for export can be over 50%.
  • University towns. Many graduates like to take up jobs in cities where they have studied. The pressure to find jobs for graduates is not evenly spread across the country.

What actions will Government take?

Central and local government is becoming increasingly active, indicating their level of concern.

  • For Exporters: Funding is available from special local government bond issues to help exporters pivot to domestic markets.
  • For Service sector SMEs there are multiple programs: The People’s Bank of China (PBOC) is buying SME loan books from Chinese banks, taking the risk of non-payment off their books, and to encourage them to lend more. Central government funds are bypassing provincial level intermediaries to go directly to local governments to pass on through reduced fees and taxes to local SMEs. State banks are partnering with internet companies, who have troves of data on SMEs, who use their platforms to co-lend to SMEs with greater confidence.
  • For multinationals: There will be more stick than carrot. Local governments will seek to arm twist, and name and shame companies to minimize layoffs. If that fails, expect that employment laws will be enforced to the last letter.
  • For migrant workers: The return of subsistence retail is being encouraged across China. This will allow workers to set up low/no overhead street stalls, that had gradually been banned over the last twenty years. While this clearly risks breaching health and safety standards, this is seen as a lesser evil than high unemployment. This is likely to be a temporary measure, with these stallholders pushed into the formal economy or out of business within a year. Local governments are also supporting gig economy companies (e.g. food delivery) to take on hundreds of thousands of extra workers, even if the implication of that is that the existing body of drivers receive lower income. Sharing the pie is the goal. Drivers have gone on strike in some cities over these changes, but government will likely continue to back employers.
  • For new graduates: Cities, such as Xian, are offering to subsidize graduate roles with local companies in “industries of the future” such as AI, healthcare, robotics, and big data. Graduates are also eligible for housing subsidies, with higher subsidies available to graduates of overseas universities. State-owned enterprises and government departments have been instructed to increase their recruiting as in the past. 

Closing

Amidst this gloom there is a silver lining for multinationals, provided they still believe in the long-term potential for their business in China. Across the board, more talent is available, and it is currently cheaper and potentially more stable than in recent years. Specifically in technology sectors, actions by the US government to exclude Chinese graduates from certain PhD programs in the US, to make it extremely difficult for hundreds of thousands to return to the US to complete ongoing studies, and to put off even more from even applying to US post-graduate programs, means that this talent is now available to hire in China.

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