Beijing’s delicate balancing act relies on job creation For Chinese economic policymakers employment is top of the worry list
GEORGE MAGNUS


China’s leaders are becoming concerned about the economy. In the face of what the state news agency recently called “downward economic pressure amid intertwined structural, institutional and cyclical problems”, they are prioritising stability. To this end, top bankers and finance officials have been sent into provincial governments to attend to debt problems and concessions have been made to the US to try to reach a limited “phase one” trade deal. Behind all this, though, it is clear that employment is top of the worry list for economic policymakers in the Chinese Communist party. As 2020 starts, the party will be relieved that the economic slowdown has stabilised again for a while, and will be happy to trumpet two key accomplishments: the elimination of poverty, and the establishment of China as an upper-middle-income country, having fulfilled a decade-old pledge to double income per head by 2020. In 2019 it was just over $10,000.

But looking to the new decade, managing the slowdown in economic growth will be key to China’s biggest challenges involving financial stability, rapid ageing, and re-energising productivity growth. The gross domestic product growth target for 2020 will not be revealed until next March at the National People’s Congress, but reports suggest the government will tolerate slightly lower growth of about 6 per cent and maintain “prudent” monetary and fiscal policies. Though the state does not want to overstimulate the economy with credit, it has nonetheless acted to lower interest rates and bank reserve requirements, weaken the renminbi, channel borrowing into small firms and bail out three failing banks. The status quo is not sustainable. The economy will almost certainly expand by much less than 6 per cent in the next few years. The investment, export and real estate sectors are barely growing. The financial and regulatory authorities are mindful of the risk of contagion among hundreds of smaller banks in the financial system that are overly reliant on unstable sources of funding, and the risks posed by cash-strapped, highly indebted local governments. Rhetoric aimed at shoring up the flagging and default-prone private sector is not matched by policies that favour the more inefficient, lossmaking state sector. Consumer spending is still growing but is under pressure from rising indebtedness and rapid increases in debt service obligations, high levels of inequality and concerns over jobs. Employment growth in urban areas has dropped from over 4 per cent a year in the decade to 2012 to 2.5 per cent in the past few years.

Nearly 17m jobs in industry and construction have been lost since 2014, according to the National Bureau of Statistics, with annual declines of about 6 per cent in each of the past two years. Service sector jobs, growing at about 3 per cent a year until recently, have kept the labour market stable. Yet here, too, growth has been slowing in a sector plagued by poorly paid and insecure jobs and low productivity. Lack of competition has held back new opportunities — as has a growing skills mismatch, with just under 40 per cent of the labour force completing secondary school and slightly less than 20 per cent finishing college education. Recommended The FT ViewThe editorial board China’s authoritarian turn is a challenge for the world The trade war presents a new threat to Chinese employment as companies reconsider their hitherto China-centric supply chain operations.

Tariffs have joined a long list of festering issues for foreign companies including non-tariff barriers, forced technology transfer, weak intellectual property protection, cyber theft, trade secrets security, industrial policies that favour domestic businesses and party policies that interfere with the management of private companies. Both the American and EU Chambers of Commerce have reported on a significant proportion of members that have already moved, or are considering relocating, parts of their supply chains to other countries in Asia and as far away as Mexico. Since the trade war is likely to continue for some time, and supply-chain planning is a long and expensive process, we should expect perhaps millions of jobs to be lost in the coming years. Employment growth has been a priority in every major government and party meeting during 2019, and we should expect it to remain centre stage, proxied by growth targets for gross domestic product. However, the latter is the wrong tool. If job creation falters further through structural and cyclical reasons, and if labour unrest grows, Beijing’s delicate balancing act between deleveraging and elevated economic growth will not be sustainable.

 The government is likely to try to boost growth. Prudence, though, would demand persisting with deleveraging, accompanied by the very market-oriented reform and opening-up agenda that worked in the last decades, and that the new governance system has stifled or reversed. The craving for stability, in other words, may produce precisely the opposite outcome. The writer, author of ‘Red Flags: Why Xi’s China is in Jeopardy’, is a research associate at the China Centre, Oxford