Page 2 of 2 China seeks road back to growth
By Pieter Bottelier
graduates have been unemployed or underemployed for many years. Of China's 5.6
million university graduates in 2008, 1.7 million are reported to have been
unable to find a job. The main blame for this is thought to be a disconnect
between some of China's higher education programs and market needs, but the
slowing economy must also have been a factor. The projected number of
university graduates for 2009 is 6.1 million.
There is no short-term solution for China's unemployment problem other than to
maintain a high overall growth rate and to generate as many jobs as possible
through fiscal stimulus. In the medium-term, the solution lies in changing the
growth pattern such that labor/GDP elasticity increases, adjusting education
programs to market needs, and demographic dynamics. China's total labor
force is projected to peak in the next seven to eight years and to start
shrinking at a rate of 0.5-1.0% per annum for several decades thereafter [3].
While a shrinking total labor force will take some pressure off China's chronic
employment problem, it is important to realize that the urban part of the total
labor force will continue to grow for decades.
Government measures to counter the downturn
It did not take the government long to realize that the economy had been hit by
a double whammy: the residual effects of its own efforts to cool the property
bubble in 2007 and the international financial crisis that broke in 2008.
Already in November 2008, the government announced plans for a major fiscal
stimulus plan and began preparing other measures to counter the socio-economic
effects of the sharp downturn. A comprehensive plan, including all measures to
stimulate growth, protect employment and minimum incomes, is not yet available,
but the following initiatives have been announced:
Reduced lending rates and eliminated lending quotas;
Softer terms for mortgage loans;
Easier access to finance for SMEs;
Programs to help university graduates start their own business;
Restored export tax rebates to pre-crisis levels;
Stop further nominal yuan/US$ appreciation, from around July 2008;
A yuan 4 trillion (US$586 billion) fiscal stimulus investment program for 2009
and 2010;
Increased recurrent central budget expenditures for a wide range of social
programs, including education, rural health insurance, income support for rural
and urban poor, and pensions;
Temporary reductions in employer contributions to medical insurance,
unemployment insurance and other pay-roll deductions for urban workers;
Allow unemployment insurance funds to be used for job-retraining and subsidies
to employers for up to 70% of local minimum wage;
SOEs are encouraged to avoid lay-offs as much as possible by accepting lower
profits;
A conversion of the Value Added Tax (VAT) system from production-based to
consumption-based;
Extended rural land use rights and made tradable (to boost agricultural
productivity).
Several of these measures are already being implemented. The big question is
whether the government will be able to avoid large-scale civil unrest. Since
the cause of the crisis is widely perceived to be external, while the
government is seen to be making unprecedented efforts to create and extend
social safety nets, the odds appear to be in Beijing's favor.
In light of the government's aggressive and apparently well-organized efforts
to fight the recession, its experience with running fiscal stimulus programs
(1998-2003), the new flexibility of China's economy and the relatively strong
position of its banks, the recession may bottom out in the first half of 2009.
The author believes that serious deflation can be avoided. Yet, because of the
substantial residential property overhang in major cities, it is unlikely that
high growth (by Chinese standards) will be resumed soon. It is more important,
however, for China to restructure its economy than to resume double digit, but
unsustainable growth. If China succeeds in rebalancing its economy, it may,
after some years, be in a stronger position that it was when it entered the
crisis.
Implications for the United States
The present crisis has underlined the growing importance of China's role in the
global economy and global governance. The United States, the European Union and
other rich countries should make more serious efforts to capitalize on China's
willingness to be a stake holder in the nascent global order. None of the
existing "G" groups of countries (such as the Group of Eight, or the Group of
20) is well suited to effectively integrate China into global governance
systems. Moreover, China - and other major developing countries - have to be
given much greater voice in multilateral agencies such as the International
Monetary Fund and the World Bank.
In the present situation, the greatest risk is that the international crisis
will trigger cascading protectionism around the world, undermining both letter
and spirit of the World Trade Organization and associated agreements. This
would be catastrophic for many poor countries and make it harder to avoid
depression in rich ones.
Notes:
1. Chen Xiwen's statement was based on a survey of rural migrants in 15
provinces conducted by his office in January 2009. The survey showed that 15.3%
of respondents reported to have lost their job in 2008 or were unable to find
employment. The government's estimate of the total number of rural migrants in
China is 130 million.
2. The estimated average labor/GDP elasticity from 2000-2007 was about 0.11.
That means that every 1% of GDP growth generates employment growth of 0.11%.
Total employment in China at the end of 2007 is officially estimated at about
770 million (about 5 times the U.S. labor force), including 276 million farm
workers and 494 million non-agricultural workers. Official employment numbers
for 2008 are not yet available. If GDP growth in 2009 is 7.5%, the associated
increase in total employment would be 6-7 million jobs.
3. See for example: Richard Jackson & Neil Howe, The Graying of the Middle
Kingdom. The Demographics and Economics of Retirement Policy in China. Center
for Strategic & International Studies and Prudential Foundation, April
2004.
Pieter Bottelier is a senior adjunct professor at The Johns Hopkins
University's School of Advanced International Studies (SAIS). Prior to this, he
served at the World Bank from 1970-1998 and was the chief of the World Bank's
resident mission in Beijing from 1993-1997.
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