EconoMonitor

The Wilder View

8% growth will challenge China’s social structure

Usually I am fiscally conservative, but right now is no time to adhere to an economic “code of conduct.” To be sure, deficit spending can lead to problems down the road, but at what cost does an economy stave off expansionary spending? Congress is dragging its feet – how much output must we give up to get funding for new infrastructure and for those who need it – the unemployed.

The U.S. welfare infrastructure is not well-equipped to handle 8%-8.5% unemployment, which is why Congress is expected to extend unemployment benefits. But this is especially true for China, whose growth rate averaged 10.8% over 2003-2007, but is expected to slow to around 9.0%-9.5% in 2008, and to 7.5%-8.5% in 2009.

Admittedly, a slowdown to 7.5%-8.5% growth sounds like a mild setback compared to the U.S., where growth it expected to be negative in 2009 (on an average basis). However, the Chinese economy is not equipped to handle the rising unemployment that goes along with slackening demand. The labor market will suffer markedly, and fortunately the government is in a place to spend.

`china_fiscal_balance_chart.png

From the Financial Times:

”China’s employment outlook is becoming “grim”, say officials, as the global financial crisis triggers fresh factory closures in the export sector.

Urban unemployment has begun to rise and will increase next year, Yin Weimin, minister of human resources and social security, said on Thursday.

“Stabilising employment is the top priority for us right now,” said Mr Yin, in comments reflecting growing worries about the potential threat to social stability.

“The current situation is grim, and the impact is still unfolding,” he said. “Since October, our country’s employment situation has been affected along with changes in international economic conditions.”

China’s official urban unemployment rate is 4 per cent. But this figure includes only registered urban residents. Tens of millions of rural migrants who have moved to cities to work in factories over the past decade are generally not included in unemployment data if they lose their jobs.

The national economy has been slowing gradually since the start of the year. However, the pace at which it is cooling accelerated sharply in September and October, prompting a steep drop in confidence among companies and some consumers.

Even when the economy was growing strongly, China witnessed a stream of localised protests. Recent trouble has included strikes by taxi drivers in three cities and rioting in a city in Gansu province this week.

Statements by Chinese leaders have shown that they were worried about the social impact of a sharp downturn. In an article in a Communist party magazine this month, Wen Jiabao, the premier, said: “We must be crystal clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development . . . factors damaging social stability will grow.”

Zhang Xiaojian, vice-minister of human resources and social security, said on Thursday competition for jobs among growing numbers of college graduates would intensify if the economy slumped. The authorities jast week unveiled a huge fiscal stimulus programme aimed at keeping growth at about 8 per cent a year.

The slowdown began in the housing market, spreading to related industries such as steel and cement. With Europe now in recession, and many of its other markets slowing, some economists think that Chinese exporters are about to face an extremely tough patch.

In one indication of the gathering slowdown, Japan said its exports to the rest of Asia recorded their first decline for seven years last month, with exports to China dropping 0.9 per cent compared with the same period last year. Japanese companies have been large suppliers of components and other products to the array of factories in China that assemble goods for export.

Two provincial governments this week announced measures aimed at deterring businesses from laying off workers. Hubei and Shandong said companies trying to lay off more than 40 staff would need prior approval from the local authorities.”

RW: Fiscally, the Chinese government is in a better situation than it was just six years ago (see above chart). Its revenues totaled 5.8 trillion yuan in 2007, which is 2.7 times greater than those in 2002, 1.9 trillion yuan.

The Human Resources and Social Security Ministry Yin Weimin expects that the government’s spending measures – the stimulus package worth almost $US600 billion – will improve labor market conditions by the second quarter of 2009.

I imagine that estimate weighs in on the optimistic side, and in the interim things will get tough. With labor riots already underway, social conditions will worsen between now and the second quarter of 2009.


Originally published at the News N Economics blog and reproduced here with the author’s permission.

5 Responses to “8% growth will challenge China’s social structure”

assmanNovember 23rd, 2008 at 8:25 pm

I still don’t understand why people expect Chinese growth to be so high. Your saying 8%. My view is that they won’t have any growth. Maybe not now but soon they are heading for a massive massive depression. I don’t understand why this isn’t obvious. Much much worse than the United States. Its kind of obvious this is going to happen since they have massive over capacity.

AnonymousNovember 23rd, 2008 at 11:24 pm

I would say that this is what you want to have happen rather than the reality. This is a website for economic analysis; not a forum for neo-cons and racists.

AnonymousNovember 24th, 2008 at 3:18 am

He asked a valid question, provide some economic analysis instead of an insult or just dont say anything at all, after all this is a website for analysis not polemics.

AnonymousNovember 25th, 2008 at 11:21 am

Maybe the comments from assman came a little hard and without to much of analysis, but his point needs to be answered with data and analysis not accussations w/o any foundament.”To see the straw in your brother’s eye, and not the rafter in your own.”

AnonymousNovember 25th, 2008 at 6:51 pm

I watched a BBC program recently, where a Senior VP from BOC confirmed that GDP growth of less than 8% will be a disaster because of population growth and the influx of workers to the urban areas. Now that World Bank has downgraded China’s growth to 7.5%, will we see a major collapse of some major industries or social unrest? We’ll see.

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