China Eyes Effect of Slowing Economic Growth on Jobs

An analysis by Michael Lelyveld
china-park-may2013.gif Chinese workers labor at the site of an industrial park in central Henan province in a file photo.

As China's government moves toward a new development model, it appears to be abandoning old formulas for job creation and economic growth.

For years, government planners believed that economic growth rates of at least 8 percent were needed to provide jobs for new entrants to China's cities. Minimum growth of 8 percent in gross domestic product (GDP), a key benchmark for economic expansion, was seen as the key to employment and social stability.

Some commentators have traced the origin of the assumption back to the days of Communist Party leader Deng Xiaoping in the 1980s and his goal of quadrupling GDP by 2000.

But China's new leaders who took power in March seem to have scrapped the 8-percent rule for good by refusing to launch new stimulus programs as GDP rates drop to 7.5 percent.

The government has been sending signals that the job market is "generally stable" despite the drop, downplaying social stability fears as planners guide the economy to slower, more sustainable rates.

On July 16, Yin Weimin, minister of human resources and social security, said China had added 7.25 million jobs in the first half of the year, although GDP growth slowed.

The figure showed a gain of 310,000 jobs from a year earlier, the official Xinhua agency said. China's registered urban unemployment rate has also stayed at a steady 4.1 percent, said Yin.

Break with tradition

Former Premier Wen Jiabao previously broke with tradition by setting a GDP target as low as 7 percent in 2004. But growth-minded officials ignored it and continued to pump up the economy with cheap loans, producing a 9.5-percent surge in the economy that year.

At the outset at least, President Xi Jinping and Premier Li Keqiang have shown more determination to resist calls for wasteful stimulus spending after GDP growth dropped to 7.8 percent in 2012 and 7.5 percent in the second quarter of this year.

"We should not shift our policy orientation just because of temporary changes in economic indicators," Li told economists and corporate leaders on July 16, the official English-language China Daily reported.

Days earlier, Finance Minister Lou Jiwei suggested the government could allow growth to slip even lower.

"We don't think 6.5 percent or 7 percent will be a big problem," Lou said, according to Bloomberg News.

So, what happened to the concerns about jobs, social stability, and the 8-percent principle?

Fundamental changes

Yukon Huang, senior associate in the Asia program at the Carnegie Endowment for International Peace, cited fundamental changes in the jobs market and the economy.

"Before, growth had to be nearly double-digit to absorb the twin inflows of job seekers from the countryside and labor being shed by overstaffed state enterprises. This phase is over," Huang said.

"The labor force is now shrinking," said Huang. "Thus 6.5 percent is enough to deal with employment of the average worker."

The new problem is finding jobs for college-educated workers, he said, now that China is producing six times as many graduates as a decade ago.

Huang calls matching the skill mix with opportunities "a different and more complicated issue." It is also unlikely to be solved by old formulas for job growth and GDP.

The changes may mean that the government will stick with its economic rebalancing strategy, rather than be driven back into stimulus strategies by fears of unrest.

A key reason may be that China no longer needs such high rates of job growth.

In May, Zeng Xiangquan, dean of Renmin University's School of Labor and Human Resources, warned in a paper that the surplus supply of rural labor would drop to "zero" this year.

The National Bureau of Statistics (NBS) has estimated that China's workforce of 937 million fell by nearly 3.5 million last year.

Slow to shift?

To some economists, like New York Times columnist Paul Krugman, that means China is in "big trouble" because it has been too slow to shift from its old investment-driven model to consumption-led growth.

"You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be," Krugman wrote on July 18.

In its recent annual report on China, the International Monetary Fund also urged a faster transition, warning of "the consequences of continuing the current growth model."

"With demographic trends implying a decline in the labor force after 2015 and exhaustion of surplus labor around 2020, the returns on investment would be progressively lower than envisaged, which would cause bankruptcies and losses," the IMF said.

The result would be a boomerang effect, resulting in higher unemployment, the fund said.

The reports by Zeng and the NBS on the labor force suggest the risks cited by the IMF are not futuristic but are already at work now.

'Fictional data'

One problem with getting an accurate read on both jobs and the effects of economic growth is the credibility of China's official statistics, which are also used in IMF reports.

"All economic data are best viewed as a particularly boring genre of science fiction, but Chinese data are even more fictional than most," Krugman wrote.

China's unemployment figures may be a case in point.

While official GDP has varied from year to year with the effects of stimulus spending and the global downturn, the unemployment rate has been suspiciously constant, holding at exactly 4.1 percent since 2010.

In 2008 and 2009, it was virtually unchanged at 4.2 and 4.3 percent respectively.

Even if the reports were accurate, they would only reflect employment in the urban job market, which represented 48 percent of China's workforce of 767 million last year, according to NBS reports.

"What if the NBS decided to put out a real unemployment or a real investment figure?" said Heritage Foundation senior research fellow Derek Scissors in a recent interview.

"It would be completely different from the ones they've been putting out for years, so they're not going to do that, either," Scissors said.

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