China Jobs Squeeze: Why It Is Happening And What It Means

Business, China, Company Strategy, Sustainability, Technology

Jobs, jobs and jobs are the three main priorities for politicians everywhere. In the first of my series of country and region-specific posts on this subject, I look at what this means for China.

Chinamanufacturingservicesgap23Feb2015

 

By John Richardson

SOME of those who thought that China’s investment-led growth was a sound long-term way forward are now saying: Ok, we got that wrong, but we were still right about China’s strong potential, it was just for the wrong reasons. Look at how the services sector has replaced manufacturing as a bigger driver of GDP, for example – and just look at the growth in consumer spending.

Let’s take an alternative, and I think more realistic, look at the services sector. According to Pauline Loong, managing director of Asia-analytica Research:

  • China’s net trade in services has been in negative territory since 1994. And the deficit in all but one of the past 15 years has been big enough to wipe away the benefits from the annual increase in net merchandise trade. The only exception was 2009 when manufacturing exports collapsed.
  • In 2013, a turning point was supposedly reached when the services share of GDP was bigger than manufacturing for the first time ever. But this was only in nominal terms. Strip out prices effects and manufacturing remained bigger. Preliminary data from last year suggests that this trend is continuing.
  • She writes: From pharmacists to actuaries to auto mechanics to corporate translators, the shortage of qualified professionals is do dire that the government has launched various recruitment programmes to retain local talent and attract skilled workers from overseas.

Gordon Orr, a director for McKinsey in its Shanghai office, is also, in my view, on the money when he warns that:

  • 2015 will be the year that sees the lowest annual income growth in China for at least a decade. The reason is that workers have priced themselves out of lower-value manufacturing, resulting in the migration of some of that manufacturing overseas. Chinese private companies where wage rises have been higher than the state-owned enterprises, will as a result be under enormous pressure to reduce costs.
  • One way of doing this is through automation in manufacturing. The same applies to services, where Orr writes: Chinese airlines use e-ticketing to substitute for desk agents at least as aggressively as any mature-market airline. Telecommunications, financial services, and retail are all being challenged by “people lite” Internet-based business models from new competitors, which have already led them to substantially reduce hiring. In 2015, they will need to quietly cut back further.
  • He says that this will lead to another year of frustration for students, a record 7.36m of which graduated from China’s universities last year. Orr adds: A substantial proportion of new graduates will not find jobs that require a degree. Indeed, many will find what they learned and how they learned at university has done little to prepare them for the 2015 job market in China. Other than for an elite minority, starting salaries will be flat yet again, at levels less than the income level of a full-time taxi driver.
  • Then you have what he aptly calls the further “Detroisation” of certain regions and cities in China [these are the regions heavily dependent on highly polluting, oversupplied heavy industries such as steel, cement and some chemicals. Since the beginning of 2013, for instance, The Economist reports that in Hebei province alone, 18,000 polluting factories have been shut down.
  • Orr believes all of this will translate into lower consumer confidence and so lower growth in consumer spending [you also need to take into account the end of the “wealth effect” of the 2008-2013 economic stimulus programme).

Yes, I think that China has all the right plans in place to eventually become a service and consumption-driven economy.  Just look at what it has already achieved in the smartphones sector.

But that is the long term and does not mean that any of us can afford to sit back and say that everything will be more or less fine over the next few years.

Instead, the strain on both manufacturing, service jobs and thus consumer spending to me point in this direction: The potential for a devaluation of the Yuan in order to boost exports as a means of compensating for weaker growth at home.

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