By Jacob L. Shapiro

China has crossed a line on its commitment to employment as a foundation of social stability. Since 2002, China has refused to engage in policies that would result in mass numbers of workers losing their jobs, or even to acknowledge any large fluctuations in unemployment. But China has decided not only to change its stance, but to do so publicly. A critical component of both our annual and 25-year forecast is the inevitable economic challenges China will face, and recent reports about large numbers of Chinese workers being laid off in the next few years is a significant step forward in our model.

On Feb. 29, Chinese Minister of Human Resources and Social Security Yin Weimin said China would eliminate 1.8 million jobs in the coal and steel industries on an undefined timeline. Then today Reuters reported, citing two unnamed sources with ties to the Chinese leadership, that 5 million to 6 million state workers would be laid off over the course of the next two to three years in an attempt to solve industrial overcapacity.

That China is admitting this publicly is highly significant. Whether it is a minister making a public statement or an official leak from the Chinese government is irrelevant. It is a marked difference from officials’ posture even at the beginning of 2016. In January, Chinese Premier Li Keqiang told a State Council symposium that the steel and coal sectors needed to reduce costs and improve efficiency, but said nothing about eliminating this many jobs. Yang Weimin (not to be confused with Yin), a Communist Party official, said in late December that some workers would be affected, but that Chinese initiatives to tackle overcapacity would not result in huge unemployment.

Previous reports in the Chinese media had floated the 1.8 million workers figure. Xinhua News Agency reported on Jan. 22 that 1.8 million workers would be “relocated,” and that the central government would allocate approximately $15 billion annually for up to the next five years to ensure a stable transition for these workers. Xinhua also reported that another $15 billion would come from local governments helping to trim excess capacity in steel and coal sectors, where 1.8 million workers is roughly 15 percent of the work force. But yesterday was the first time China released concrete figures for the numbers of workers affected and the first time China characterized these “relocations” as what they are – layoffs.

China has already been in the process of laying off workers even if it hasn’t said as much. Since 2013, the coal and steel industries lost 890,000 jobs and 550,000 jobs respectively, according to a report published by Gavekal. But there are also indicators that these cuts are destabilizing Chinese society. The Washington Post reported today that thousands protested at the Anyuan coal mines in Jiangxi province. These protesters were not just expressing displeasure at the loss of their jobs. Reportedly, the state-owned company running the Anyuan mines has cut back on production and reduced pay for some of its workers to just $70 a month.

China is a country of extreme poverty. According to World Bank data, 650 million Chinese citizens live in households learning less than $4 a day. So the protests in Jiangxi are about Chinese workers who came to work in coal mines for economic opportunity and are discovering that even if you are one of the lucky ones holding on to a job, the result is not prosperity, but rather more poverty – and this after working all day in a coal mine. Information on protests like these is hard to come by and difficult to benchmark, but even so, China Labour Bulletin reported more protests and strikes in China in 2015 than in any year since it began reporting in 2011. This is an issue that cuts directly to China’s core.

china-annual-income-by-province

The protests in Jiangxi are yet another piece of anecdotal evidence of the stresses on Chinese workers. Geopolitical Futures paid close attention to reports that emerged in January of Chinese migrant workers being told to leave early for the New Year holiday so businesses could cut costs. The New Year holiday has since ended, and it is important to watch whether those workers who went home early return to their old jobs or are able to find new jobs. At least 1.8 million, and perhaps as many as 6 million, will have significant trouble doing so over the next few years.

The last time China’s labor markets went through a similar level of tumult was from 1995 to 2002, when some 35 million employees of state-owned enterprises (SOEs) were laid off and state jobs went from 60 percent to 30 percent of all urban jobs. There are two key differences, however, between the loss of state jobs (promising lifetime employment, a pension and virtually free healthcare and housing) and the situation that is playing out today.

First, the convulsions from 1995 to 2002 were about reforming the labor market and allowing companies to fire unproductive employees. They were about making companies more efficient and better-suited for China’s place in the global economy. It was a period of reform – one that resulted in the loss of many state jobs and cost the government at least $11 billion as it resettled workers – but a period of reform nonetheless. The current situation is not proactive reform. It is a reaction to the global economy. China is producing too much coal, too much steel and too many industrial products, all while wages are rising. The industrial sector has no choice but to fire workers.

Second, China cannot return to its preternatural growth rates. According to World Bank data, China’s average growth rate was just under 11 percent from 2002 to 2009 and still almost 9 percent from 1995 to 2002. When China set about reforming its SOEs, the private economy was booming. Many of the workers laid off by SOEs had decent prospects of finding another job. Furthermore, China entered the World Trade Organization in 2002. This made it easier for foreign companies to invest in China, increased competition between foreign and Chinese banks and companies, and most important, opened new markets up for Chinese goods. Labor demand increased and a concerted effort to get more Chinese young people to go to college improved the quality of the labor force.

But now, China’s high growth rates have become unsustainable. There is nothing President Xi Jinping or any of his economic advisors can do to make the Chinese economy go backwards in time. The People’s Bank of China said on Feb. 29 that the required reserve ratio for Chinese banks would drop from 17.5 percent to 17 percent, effective March 1. This is like trying to use a bandage from an old wound on a new injury that has appeared elsewhere. In the old paradigm, spurring lending in an attempt to encourage growth meant encouraging companies to hire people. China’s admission that it is going to have to lay off millions of workers comes even as it tries to stimulate the economy because Beijing knows that it cannot create enough growth to maintain current employment levels. Purchasing Managers’ Index figures for the manufacturing sector, also released on Feb. 29, were the weakest since the end of the 2008 financial crisis, and even the services sector recorded negative numbers for new orders, inventories and employment.

There are those who will say 6 million jobs, or even 1.8 million jobs, are relatively meaningless in a country where official unemployment has ranged between 4 percent and 4.3 percent since 2002, and where the labor force is well over 800 million. But as we have written in the past, we are extremely skeptical of most Chinese statistics and unemployment figures most of all. A more realistic figure for current Chinese unemployment is over 10 percent. And if China is worried enough about the situation to talk about it publicly, it is likely far more serious than superficial indicators demonstrate.

unemployment-rates-by-country-1988-2013-urban-household-survey-data

The time frame in which these jobs will be eliminated, as well as whether many more jobs or other sectors will follow suit, is unclear. Even so, China’s public admission that these jobs will be eliminated is a major development. China’s economy has landed, and reliable employment will be one of the casualties. The question now is whether the subsequent social unrest and anger at the government pushes China toward regionalism or necessitates an even stronger crackdown from Xi and the Communist Party. For now, we watch.

Jacob L. Shapiro
Jacob L. Shapiro is a geopolitical analyst who explains and predicts global trends. He is the director of analysis for Geopolitical Futures, a position he has held since the company’s founding in 2015. He oversees a team of analysts, the company’s forecasting process and the day-to-day analysis of important geopolitical developments. Mr. Shapiro is a regular speaker at international conferences and has appeared both in print and on television as an expert on international affairs in such places as MSNBC, CNBC, the New York Times and Fox News. Prior to Geopolitical Futures, Mr. Shapiro worked at Stratfor as an analyst and as the director of the operations center. He joined Geopolitical Futures to help found a new company dedicated to publishing excellent analysis and accurate forecasts based on the geopolitical method Dr. Friedman pioneered. Mr. Shapiro holds a master’s degree from Oxford University, where he won an award for his dissertation on the link between philosophy and mysticism in 20th century Jewish thought. He also holds a bachelor’s degree from Cornell University in Near Eastern studies.