As Trade Slows, China Rethinks Its Growth Strategy
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A recent article in the NY Times with excerpts below, talks about the continued deepening of China’s economic slowdown. When calculated in China’s own currency for a true local effect, the situation is worse than expected even a few short weeks ago. There is recession in the USA, recession in Japan, cancelled orders and lack of re-orders hitting the Chinese businesses dedicated to export markets.
The Chinese government’s plan is to stimulate the local economy and encourage its people to lower their savings rate. But with the lack of a health care plan or retirement programs, people seem to be saving more, not less. What is the best way for China to head off a recession? Should they establish a rudimentary health care plan for their citizens? Or is the money better spent in other areas?
As Trade Slows, China Rethinks Its Growth Strategy
In nearby Guangdong province, so many factories are shuttering without paying employees that some workers are resigning pre-emptively and demanding immediate pay before their employers go bankrupt.
In Sichuan and other interior provinces, municipal officials are desperately searching for ways to provide jobs for millions of out-of-work migrant laborers whose families no longer need them for farming.
Those are the effects of millions of Americans losing their confidence in the economy, feeling poorer and, as a result, pulling back on their spending. American retailers, after suffering a dismal holiday shopping season, are delaying payment for Chinese goods 90 or even 120 days after shipping, in contrast to the usual 30 to 45 days, forcing their suppliers to try to borrow more money to cover the difference. Some Chinese suppliers who cannot raise the money — many already operate on thin margins — are going out of business.
At the same time, retailers are demanding that exporters show that they have strong balance sheets and will not go bankrupt before completing orders. Exporters, worried the retailers will fail before paying for their purchases, are reluctant to let goods be loaded on ships. And banks, for the same reason, have cut back on guaranteeing retailers’ payments to exporters.
“Trade finance is collapsing,” said Victor K. Fung, the chairman of the Li & Fung Group, the giant supply chain management company that connects factories in China with retailers in the United States and Europe. “We’ve got orders we can’t ship right now.”
Mr. Fung estimates that 10,000 of the 60,000 factories in China owned by Hong Kong interests have closed or will close in the coming months. Other business leaders say the toll may be even higher and that factory closings are an even bigger problem among mainland Chinese businesses because these tend to be smaller and more poorly capitalized than those owned by Hong Kong businesses.
Government statistics show that Chinese exports slipped 2.2 percent in November when calculated in dollars, after seven years of rapid growth. But figures in dollars do not come to close to capturing the real depth of the downturn.
Convert the export figures into China’s own currency, a much better measure of the effect on China’s economy, and exports plunged 9.6 percent last month. Factor in inflation over the last year and the plunge was 11.4 percent.
Indications are that the December data will be even worse.
Consumer electronics manufacturers have been hit the hardest, according to customs data. “No one has any money any more, so demand for our mini hi-fi systems has declined a lot,” said Lion Yuan, the sales manager at the Shenzhen Yidashi Electronics Company, where exports have dropped 30 percent in the last year.
In the last two weeks, Chinese officials have announced a series of measures to help exporters. State banks are being directed to lend more to them, particularly to small and medium-size exporters. Government research funds are being set up. The head of the government of Hong Kong, Donald Tsang, plans to seek legislative approval by late January for the government to guarantee banks’ issuance of $12.9 billion worth of letters of credit for exports.
Particularly noteworthy have been the Chinese government’s steps to help labor-intensive sectors like garment production, one of the industries China has been trying to move away from in an effort to climb the ladder of economic development with more skilled work that pays higher wages. But now China has become reluctant to yield the bottom rungs of the ladder to countries with even lower wages, like Vietnam, Indonesia and Bangladesh.
China has been restoring export tax rebates for its textile sector, for instance, which it had been phasing out. Municipal governments have also stopped raising the minimum wage, which doubled over the last two years in some cities, peaking at $146 a month in Shenzhen.
“China will resort to tariff and trade policies to facilitate export of labor-intensive and core technology-supported industries,” Li Yizhong, the minister of industry and information technology, said at a conference on Dec. 19.
But shifting toward a greater reliance on domestic demand is not easy. Chinese households have one of the world’s highest savings rates because the country’s social safety net is in tatters, with families receiving scant government help with education costs, medical care and retirement; the average hospital stay costs the equivalent of two years’ wages for the average Chinese worker.
Important bureaucratic obstacles also exist. Chinese factories are allowed to import equipment while paying little or no duty, provided that the equipment will be used only to produce goods for export. Obtaining approval to switch the same equipment to making goods for the domestic market can take two years and require the payment of much of the import duties that were previously avoided, a payment that many factories cannot afford.
China’s measures to help exporters are starting to cause concern in other Asian countries that compete with it, and raise the risk of a protectionist reaction against China. Indonesia, one of Asia’s largest markets, is preparing to impose a series of administrative measures on Thursday that are meant to reduce smuggling but will have the practical effect of making it harder to import Chinese goods.
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January 3rd, 2009 at 10:21 pm
China should obviously invest much, much more in healthcare, even in the kind of simple, preventative care that the country was developing before the economic reforms began draining funding (the “barefoot doctors” of the 1960s and 1970s were surprisingly effective). A few state-of-the-art Beijing and Shanghai hospitals with laser eye surgery and the ability to separate conjoined twins are no substitute for an affordable, basic health system in China’s rural areas and industrial neighborhoods, and the P.R.C. is not the only country finding this out the hard way right now.
Migrant workers should, moreover, be able to easily transfer their social security payments—including the payments made by their employers—between provinces.
But I think people are bound to be disappointed if they think that all this will spur consumer demand anytime soon. Giving ordinary people more of a safety net will be a long process. And it will have to be measured by more metrics than its direct impact on the economy. There will have to be a moral / campaign element to it.
I was hopeful a couple years ago when the NPC talked about downplaying GDP growth as a measure of local government success. Hu and Wen’s talk of “scientific development” has always been encouraging, as has been the passage of the Labor Contract Law.
But I haven’t seen that these things (with the possible exception of the Labor Contract Law) have mattered much in practice. In part, I think this is because the central government hasn’t put its money where its mouth is. It hasn’t made any serious attempt at reforming its deeply regressive taxing and spending structures.
January 3rd, 2009 at 11:19 pm
Old Tales Retold – I respect your fair and insightful comments.
January 4th, 2009 at 2:33 am
After 30 years of growth, it is about time for China to face global recession esp. when China is more integrated with the global economy. It is not the first one, and will not be the last one. Thanks for the large foreign reserve, I believe China will fare better and can take advantage of this global recession.
* Major short-term problem: jobs. Stimulate package will help and same for US except it is not for bailouts. Any investment should use rate of return as a measurement. Unfortunately, job is always the primary measurement.
* Tweak the system: QA/enforcement, business laws, pollution improvement/laws/enforcement, corruption…
* Investing in US treasury is a fool’s game. Cheat you two times, shame on you.
* Some foreign companies & technologies are in bargain prices and great for China long-term. Evaluate them with expected rate of return of the investment. Negotiate with US on dual-use technologies which are currently banned by US.
* Stock pile oil (I believe it has been filled to the brim now by China) and minerals that China lacks of. $35 (now $45 range during the unrest in Middle East) per barrel may not appear again in our life time – even it could fluctuate to $20 in 2009. The ratio of oil to gold is normally 10 to 1 (like $800 per ounce of gold to $80 per barrel) and now is about 20 to 1. Most off-shore drilling costs about $60 per barrel.
* Develop internal market. Incentive to save less and provides a better safety net.
I believe China will come back stronger after this recession. I expect the GDP growth will slow to 6 and the migration to city will be reversed in 2009. We should see better economy in late 2009.
For my superstition, all years ended with ‘9’ are good – like the last 40 years of Hong Kong stock market. ‘8’ will not be a lucky no. any more.
January 4th, 2009 at 2:23 pm
China’s economic model has some problem because it replies on exports too much. But hey, they only started learning capitalism in a short time. They can still learn and change. When you got money in hand and are hard working, future is assured.
January 4th, 2009 at 5:26 pm
I think CCP has been rethinking about its growth strategy for some time now (at least the last 5 years) – in terms of moving up the economic ladder, reducing the environmental burden, spreading development more inland (through increased domestic demands), finding opportunities to invest in real assets (not just US treasury bills or buying financial institution papers) abroad, etc.
It’s just that now – finally there is a reason to go full speed ahead on this (with, hopefully, the world now more accepting of Chinese investments abroad)!
I think most people understand where China needs to go. It’s the how that is the difficult part.
Here’s to hoping that the Chinese gov’t will steer well and execute crisply – in 2009 and beyond!
January 4th, 2009 at 9:45 pm
@ Allen,
I think your analysis is basically right on target: the Party knows what the problems are and it has plans and it now has an urgent reason to act. The question is: does it have the political will to actually do something, to overcome bureaucratic paralysis?
TonyP4’s suggestions are all fairly doable in the short-term, with the exception of “develop internal market” –this will take a long time, as I said (and I’d imagine TonyP4 would agree). But your list, with its goals of reducing environmental degradation and spreading wealth inland—and which I also very much agree with—entails reversing a development strategy that has been solidifying over a couple decades. That’s a huge task.
There are vested interests at all levels. Coastal cities are not eager to give up the pension money they’ve been fleecing from migrant workers. Rural provinces are hesitant to open up politically, even to open up their village account books (though they will sometimes surprise you). The new elites aren’t crazy about higher taxes or giving up cozy construction deals.
I’ve argued with others at Fool’s Mountain about whether a liberal or illiberal political system is best equipped for making the right decisions. My preference is a liberal one. However, in truth, fundamental change is tricky for any government.
Ultimately, I think bottom-up pressure will move things along. Worker protests have yielded better labor laws. Anger at pollution (Xiamen PX, the Dongyang riot, etc.) is making officials careful about where they build chemical plants and power plants. And, in the process, for better or worse, the government is becoming more sophisticated, flexible.
January 4th, 2009 at 9:45 pm
Oops… I missed your line “I think most people understand where China needs to go. It’s the how that is the difficult part….” Sorry to repeat you!
January 5th, 2009 at 4:09 pm
OTR, you’re right on the money.
Just my observation, most posters in FM are more interested on China’s social welfare and politics than economic. We’re the exceptions.
Some longer term projects should be started but they should not concentrate the effort on them. The redistribution of wealth and many other long term projects should be postponed as there are better investment right now like improving railroad system (already in the simulation plan).
CCP’s objective is to create jobs to reduce unrest that could topple the system. Sometimes it is too extreme. They use incentives (via tax rebates and investment credits). Some factories sell products at cost but make out in rebates/credits. It leads to product dumping rightfully accused by the west and has very negative public opinion. They will not be good in the long term. Also, avoid buying sensitive industries from US such as dual use technology, oil companies…that you know will not pass Congress but causes bad publicity.
——
From a different post that I like to make my opinions on education clearer.
‘There are about 30% of schools are are really bad”. Risking from being accused of racism, most of these bad schools are in urban and attended by blacks and Latinos. The major problem may not be the school, but the parents. When the children do not want to learn, they cannot learn. The root is their culture (too many teenager parents, single parents…) and the welfare system is too good. Hence, pouring money (as it has been done many times with negative result) may not help a lot. You must be in a better school system than these urban schools. I’m not in education field, so my opinion is from an outsider.
There are about 10% of the jobs that do not need any education, such as cleaning your office after hours. Most of these workers are illegal aliens. Most poor would prefer to live on welfare (human nature to be lazy?) than work. There are about 30% of jobs require high school education only. Auto workers is one of them. My numbers are my estimates, so do not hold me on the numbers.
I quoted $70 per hour for auto worker from Boston Globe. I doubt this no. is true now. It could be the legacy cost in the older days. I think they’re making $25 per hour plus benefits, still high comparing to Mexicans making $2 plus minimum benefit.
US has about 40% of the best (hard to quantify) colleges in the world.
Have a nice day. Always enjoy your insightful comments.
January 5th, 2009 at 4:47 pm
The other investment is the national grid of transmitting electricity. Currently it has about 6 separate grids. A good grid can reduce transporting coal from the North (quality coal from NE) that is good for the environment.
The pollution is ‘fixed’ in some industrial cities like Dongguan due to the closing of thousands of factories. Folks can see clear sky for a long while in South China including Hong Kong. It is not the right way to fix pollution like my doctor told me when I die, my psoriasis would be fixed. 🙂
To lift poverty, we need to migrate farm workers to urban factory workers. It is a fact and can be verified by statistics in most countries (US are among the few exceptions). Now, China is stuck in this phase as we’ve reversed migration to urban this year. The next phase is to move to mid tech products that has been started to some extend.
January 5th, 2009 at 5:27 pm
I found an article published today which against the general impression saying China is not export led. Here is the quote:
http://www.telegraph.co.uk/finance/economics/4123660/Chinas-demise-much-exaggerated.html
‘Although Chinese exports and the influx of foreign companies have received a much attention, their actual contribution to the economy is far smaller than popularly imagined. Much more important are the vast state-owned companies which will swing into gear to implement the government’s stimulus package.
The total value of China’s exports was about 36.5pc of GDP this year, but in net terms, exports account for only between 7pc and 10pc of the economy.
“The idea that China is an export-led economy is probably the biggest and most pervasive myth of them all,” said Jonathan Anderson at UBS. He said once the cost of importing materials to make China’s toys, electronics, clothes and furniture has been stripped out, the value accrued to the economy is “by no means tiny, but still very moderate”.
I was wondering how they reached this 7-10% figure and found this article which gave some explanation.
http://www.allroadsleadtochina.com/index.php/2007/10/01/is-china-export-led/
Do you agree with their figures?
January 5th, 2009 at 5:31 pm
@ TonyP4,
I think it’s possible—in fact, imperative—to focus on both short-term and long-term goals at once. So, redistribution of wealth needs to happen in tandem with some of the fixes you’ve suggested. I’ve never gone in for the Kuznets curve or any of that stuff, but even if it is true that things have to get unequal before they get equal again, at least in some cases, I think China should be further along that cycle.
As to Dongguan, I agree. The air is much better down there and that scares me when it means workers laid off by the millions.
More Chinese people will have to move into the cities in the long run (and more cities will need to be created), this downturn notwithstanding. But I also think we need to give real thought to problems in rural areas as problems in and of themselves, not just problems of an overabundance of labor.
On the issue of education and American workers, I agree that a child’s home environment matters a lot. My parents are teachers and they’ve hammered that point home to me again and again. But a good or bad “home environment” is linked to a larger issue, which I think is economic rather than cultural.
The U.S. hasn’t seen much of a rise in real wages in several decades. Service industries are killing neighborhoods that used to have strong community bonds, that used to pull struggling families along and raise expectations. Class mobility is much lower than it was in the 1960s or 1970s. This is deeply dispiriting on an individual level.
January 5th, 2009 at 6:07 pm
@Sophie, the 7-8% figure is a little optimistic to me as the economy is getting worse every day. I’m more pessimistic and 6% is my estimate, so it is not in the same level as most experts. Many countries will be jealous with 6% growth in any year.
China has a large internal market that should be exploited. When the citizens have more money and feel optimistic about the future, they will naturally spend more. The government should provide incentives and tools like insurance and better safety net. The central government should use their huge reserve to spend on the citizens like health care as OTR pointed out. However, we’ve made a lot of progress in most fronts (except pollutions, corruption…) and I look forward to the next 30 years.
I agree that the export no. is quite confusing. For example, what China gets for an ipod is only a fraction of the ipod.
@OTR, we’re pretty much on same page. China has improved a lot for rural area like bringing electricity, but a lot can be done. I wonder how the reversed migrants will bring changes to rural area.
Yes, for some strange reason, I missed putting poverty with the culture. May be I tried not to say blacks are poor in general – true to some extend but sounds racist. Sometimes I miss my point by trying to be politically correct.
January 5th, 2009 at 6:32 pm
@TonyP4,
The 7-10% in that article is not the GDP growth rate, is the export/GDP ratio.
Besides the slowdown of export, I am wondering what are other reasons contributing to the closing down of those factories in South China. China has been trying to change its economic structure for the past years: abolished the export tax rebate, gradually appreciated currency, passed new labour law… I saw some data that the cost of production has been doubled in the past years. Even before the financial crisis (in 2007 or the beginning of 2008), the economist Steven Ng-Sheong Cheung (张五常) warned that the new labour law plus the tightened moneetary policy would cause lots of Chinese manufactures to close down. The tightened monetary policy was due to the misjudged ‘inflation’. so, now, it’s reversed. But, for the new labour law, the current trend is that whenever there is conflict between employer and employee, the chance for employer to win is very low, at least this is the case i see in Beijing.
January 5th, 2009 at 6:46 pm
@ Sophie,
The reason that employers often lose in Chinese labor cases is that they are generally in the wrong. It takes a lot of guts for workers to take their boss to arbitration or court. They usually don’t do so flippantly.
Unfortunately, it also takes a lot of time. Even with the new arbitration law, which was supposed to speed things up and make it easier to move a case up to People’s Courts, the system is backlogged (maybe the arbitration law and Labor Contract Law have, perversely, made things worse in this regard, a least in the short-term).
So, while the workers are generally right (not just my lefty political vantage point, but also, I think, a legal fact) and they win more than the bosses, the process is still a burden for them.
I’m hoping more things will be solved pre-emptively by the labor inspectorate and, in areas not necessarily covered by regulations, such as wages above the minimum wage, by collective bargaining. The ACFTU has made some encouraging gestures toward bargaining, but I’m still waiting.
January 5th, 2009 at 6:49 pm
I would add that abolishing arbitration fees for BOTH parties, workers and employers, as happened in the new arbitration law, might have been a mistake. While fees were an unnecessary burden to employees, they served the useful purpose of deterring employers from certain abuses. A better solution may have been to abolish fees for employees and keep them for employers. Obviously, if employers won their cases they would be refunded, as in the old system.
January 5th, 2009 at 7:07 pm
@All,
There are many reasons why factories are closing down beside the one OTR pointed out. Most factories at Dongguan are funded by Hong Kong and Taiwan investors. Most of them are in toy and apparel business. Toy is hurt by the lead paint incident – saving few pennies by a few but screwing up the entire industry. World recession is the major blame. I do not think the lower-wage countries in the short term like Vietnam would do a big dent to China as they need the same infrastructure and face problems similar to China.
Labor law is good and bad esp. for a developing country. One recent example in Boston, an illegal alien sued a Chinese grocery chain for paying less than minimum wages and he won. The chain is forced to close down several stores and hundreds of illegal aliens are let go. Without jobs and a tough economy (competing jobs without permit to stay, skills for most and speaking no English), they may have to go back to their original countries. Sometimes supply and demand works fine.
January 5th, 2009 at 7:36 pm
The entire world has deflation problem which is more scary than inflation. We can buy a big house for 70% of the prices one year ago, so are many other merchandise. Gucci and other luxury companies will force to have a sale for a long, long while. Retail will face a tough years – only a few big chains will recover but their stocks will double from their lows in 3 years I expect. Many factories will be gone too. High tech companies will have a tough 2009. All sound gloomy but we always recover.
January 5th, 2009 at 10:38 pm
Good points. There are certainly lots of reasons for the factory shut-downs.
January 6th, 2009 at 2:48 am
These have all been great comments! TonyP4, I think you are correct when you say subjects like this don’t attract much attention but since every comment is a good one, it’s a lot more fun to scroll down and read.
Sophie, thanks for the link to the UBS Report. I hadn’t seen those figures before.
Regardless of how much of China’s economy is export driven, I think most would agree that a spending increase in the domestic market would keep China’s growth rate at acceptable levels. However, one thing I’ve noticed in every country is that the key to spending is consumer confidence in the economy. China’s citizens are pretty well connected to world news these days, and consumers in general tend to be “pack” driven. If the rest of the world in ailing economically, won’t the Chinese be extra careful about spending their savings? I can see them increasing their savings rate, just to be safe. When it comes to money, most Chinese I know are pretty conservative.
So no matter how much China spends, how can the government increase consumer confidence as thousands of factories close in Guangdong province, etc? I think a good indication of the near future will be after the Spring Festival is over. How many of those factories will close down while their migrant workers are home visiting their families? How many of those workers won’t bother returning from their villages since they don’t expect their job to still be there? How will this affect consumer confidence in the rest of China?
One thing is obvious; there won’t be many new orders from western economies after the holidays. For retailers, it was a very bleak Christmas season.
January 6th, 2009 at 5:24 pm
Yes, turning around consumer confidence will be tricky. It will require more than the recent directive to put a positive spin on domestic news coverage of China’s economy, stimulus plan, etc.
January 7th, 2009 at 2:00 pm
I had a conversation with my brother last night that shook my confidence as to my knowledge of China. It has to do with welfare benefit paid to workers. He told me that for years now, employers are required by law to pay combined benefit (medical, retirement, unemployment, housing …) that equals to 40% of the wages paid to the worker. Since the January of last year, employers can not have termed contract with employees, therefore required to pay severance that equals to one month salary for each year the employee worked for the employer. In fact these laws are considered such a burden on the employers that many oversea business owners (South Koreans for example) simply abandoned the business and fled the country. The remaining employers often tried to play the cat-and-mouse game by reducing the nominal wages of employees and compensate the employees in other ways.
Furthermore, employees can sue the employers based on these laws, and such suit have mostly been successful.
Old Tales Retold, you are knowledgeable in this area, do you know of these laws and their implementation? I certainly had no idea, since all media outlets outside of China have told us that Chinese saving rate is 50% because they enjoy very little social protection. There seems to be an amazing knowledge gap in the workings and the working conditions of China.
January 7th, 2009 at 4:33 pm
@ wuming,
Your brother’s information is right.
We are running a business in Beijing, where I spend 4/5 of my time. The new labour law is very difficult to allow employer to lay off people.
We recently lost a case at a labour arbitral tribunal in Beijing. The employee who sued us had been performed very badly for 3 months. But, to be cautious, we didn’t fire him with reason of bad performance, since it’s difficult to prove. Instead, we cited his poor attendance record (he had been coming in late, leaving early and absent for 20+ times in the past 2 months) and long-time chatting on MSN during working hours as reasons. However, MSN record was not recognized by the judge, the computer record of his door card wasn’t either due to lack of the employee’s signature. So, we lost. Now we learned our lesson and rewrote all of our employee manual /regulations.
I am aware that talking negatively about the labour law sounds mean. But, as mentioned in a previous comment, rigid labour market will eventually lead to high unemployed, like what we see in Europe, where employers are reluctant to hire more workers.
@ Steve,
So far, from surface, I can’t tell if the consumer confidence in Beijing is going down. Life goes like usual.
However, the stock market had started falling, the real estate market stagnant before the BJ Olympic. My impression is that the Chinese economy was neither as good as the West thought at the beginning of the financial crisis, nor as bad as the West thinks now.
Chinese people are aware of the economy slowdown and generally quite optimistic – ‘we will muddle through’ ‘we have seen the worst (in 1990s when millions of workers got laid off from privatization of state owned enterprises)’
January 7th, 2009 at 4:43 pm
Wuming,
To the best of my understanding your brother is basically right about those laws. However, I would guess that the overwhelming majority of employers don’t pay much in the way of benefits.
As employers’ pension payments are basically a gift to the local government—workers have to live somewhere for 10 years before they can access the money and it is not transferable to their home provinces (though their own contributions to their pensions can be withdrawn after a time-consuming process)—both workers and employers have an incentive to illegally avoid this fee and work out a deal between themselves.
A common practice on work injury insurance is to buy the insurance for just a few of a given factory’s workers and then, if a worker is injured, make the injured worker use another worker’s ID and insurance card to get compensation. This creates a huge legal headache if the worker ever needs to take his employer to court for MORE compensation. But it’s great for the bosses.
Health insurance is rarely bought. The severance pay is generous, but, I think pretty reasonable—and rarely paid in full. Lots of arbitration and court cases are now over severance pay.
So… there are a number of different problems with the way these benefits are handled right now, from labor’s perspective. The Labor Contract Law strengthened enforcement somewhat, but I’m guessing that the South Koreans and others who pulled out (a bunch of Koreans left Shandong all at once) did so for other reasons. Fuel and shipping costs are hurting businesses. And then, of course, there’s been the big, global drop in demand. It’s convenient for businesses to blame progressive legislation because they can then knock down another nuisance in the process, hit two birds with one stone, so to speak.
But noting a lack of enforcement doesn’t really resolve the problem. We want the laws to be enforced, of course, and if, in fact, their enforcement causes businesses to move, then we have to deal with your brother’s complaints face-on. Ultimately, I think the government is going to have to step in and take on some of these costs. We have plenty of lessons from around the world of what a mess results when all social burdens are handed over to the private sector.
Also, China will have to lose some of its worst sweatshops—something that the leaderships seemed fine with until, understandably, the economic crisis gave them the jitters. Now, we’re seeing the Guangdong trade union saying that collective bargaining is on hold and the Guangdong government saying it will go light on small corporate infractions.
That was a rather wordy response and I’m not sure if I answered your question!
January 7th, 2009 at 4:47 pm
@ Sophie,
It seems like our comments crossed in cyberspace. The new law obviously makes it harder for employers to lay off employees. But there are a million loopholes (actually, that’s an exaggeration—13 or 14, I believe). And from the perspective of building communities and investing in human resources, I think a more stable (“rigid”, if you will) labor market makes sense.
Of course, Professor Dong Baohua and others think this law really only benefits white collar employees and doesn’t deal with real labor problems, like mine disasters or wage arrears. I’m not sure I agree with him: why can’t we have job stability AND safe mines?
January 8th, 2009 at 1:39 am
@Sophie,
My brother was sued and lost just like you. But in fact he wasn’t complaining to me, instead he was trying to tell me that, as he put it, China is becoming a workers’ paradise again.
@OTR
Thank you for your reply. I know I can rely on you on matters such as this. However, I didn’t state my point clearly enough. I meant to express the astonishment that we (you are the exception) missed this story entirely. Many media outlets and experts here in US have talked about the need to stimulate consumption in China, the medicine these thoughtful people prescribed is that China need a social safety net to free Chinese from their worries and start to consume like they should have. The implication was that such safety net is non-existent now. But as you explained clearly, though this safety net is still porous and enforcement uneven, it is still a substantial system. There are perhaps other explanations on why Chinese are not consuming.
Actually, this begs another question, have Chinese been consuming? At least from my visits to China, I never get the impression that Chinese are not consuming at the level that is in pace with the economic growth. The difference may have been that many products, especially the service products, are not priced so outrageously as they do in US, Europe and Japan. Maybe Chinese are saving because: first they can afford to save a large portion of their income and still see their life improving; second, frugality is encoded in the genes of many Chinese.
January 8th, 2009 at 2:51 am
@ Wuming,
I think you hit it on the head: China does have a strong set of social benefits for workers—stronger than those in many countries—but, like a lot of things, the relevant laws aren’t enforced. So, perhaps the new laws go further than expected (closer to the European system than the American system) just to drag enforcement closer to what’s needed, not to set an absolute ideal. When you go on business websites they are mostly complaining about how the Labor Contract Law is forcing them to obey laws already on the books, like overtime pay—not complaining about non-fixed-term contracts, hiring and firing, etc.
The story is a little different in the countryside. Workers, as I understand it, were always privileged over farmers, for reasons of orthodox Marxism and as a practical measure to encourage production. I like the idea of workers (at least workers at big SOEs) once being a sort of aristocracy, enjoying practically free housing and childcare, a certain amount of input on factory decisions, and lifetime jobs. That’s my hope for everyone, even if it’s not practical! But it’s a pity that people out in the sticks were left out and are still left out. The Labor Contract Law isn’t really aimed at rural Hunan.
I really don’t know what’s reasonable to expect from Chinese in terms of consumption. I agree that that incredible saving you read about isn’t readily apparent when you meet people.
January 8th, 2009 at 3:24 am
@OTR
Here is an article in China Law Blog that talked about the impact of the Labor Contract Law (I am sure you have read it or something similar.) For somebody like you who fights at the front-line of labor right, the setbacks must be very discouraging. But for a more casual reader like me, it is not what I have known and expected at all.
Other aspects of the welfare system (employer contributing 40% of the wages to worker’s benefit, for example) have predated the LCL by many years. This is also not known to me.
Indeed my discussion with my brother started with the current expansion of the welfare system into the countryside. This is an enormous task of course, but the Chinese government is known for patiently doing such big things.
January 8th, 2009 at 3:57 pm
@ Wuming,
I did read that article and found it refreshingly balanced. It is discouraging that things aren’t better—for all the reasons I mentioned—but at least there’s some motion in China, while labor rights are pretty much stuck in lots of parts of the world.
And, if the welfare system is really extended into the countryside (this will certainly take a long time and require a lot of determination on the government’s part), that will make a huge difference in people’s lives. I don’t know whether to the be excited or not about the “New Socialist Countryside,” but there’s no reason not to raise expectations on it, try to push it to be something more than it was even intended to be.
January 11th, 2009 at 3:15 am
US economy affects the world including China. It is a bad day for the world:
1. US commissioned a new carrier today with 2 nuclear generator. US is rich because the earth’s resources are not evenly distributed. The money to build and support this carrier could feed thousands of world’s poor.
2. The building sector requests bailout. Who is next? Should we blame ourselves for not running a company effectively?
January 12th, 2009 at 5:33 pm
Last night at a Chinese art show I talked with a friend of mine visiting here from Beijing who has a factory there with about 70 people. I asked him about the new labor law and what effect it’s had on his company.
He said it wasn’t a big deal. The change he made was to pay very low salaries with very large performance bonuses. That way, if someone needs to be laid off the hit the company takes is small, but if someone is doing a good job they will make above the going wage. This friend happens to pay better than most companies so he can usually attract pretty good people.
We only had a minute or two to talk, but will meet again before the end of the month when I’ll talk to him in more depth. If any of you have specific questions, let me know and I’ll get his POV.
January 12th, 2009 at 6:29 pm
@Steve
I heard about the same tactic adopted by the employers. It will forever be a cat and mouse game, just like cheating on taxes. My point is that it is a very substantial piece of legislation (are we allowed to call CCP policies legislations?) that affects the behaviors of the employers and employees. If your friend has not already offered relatively higher pay than other companies, he maybe more vulnerable to lawsuits.
Since the ball is on the cat’s side now, does your friend think that new government policies to patch the loopholes are in the offing? How does the government’s priority in stimulating consumption and employment play into this?
January 12th, 2009 at 7:25 pm
@ wuming: I’ll ask him and let you know. He’s pretty well connected with a lot of the party people over there but I could tell that his general attitude about business in China is that all things can be overcome. Thanks for that link you put up; I learned a lot from it and other comments by you, Sophie and OTR. It’s amazing how procedures can change so quickly over there.
One thing I’d like to ask everyone who is currently doing business in China is whether the old system of allowances is still in place. Back in 2001-03, you’d get a salary, year end bonus and typically one or more allowances. They might be for transportation, food, clothing, etc. Is that still done? We also would have company banquets about once per month; get everyone out to dinner. Once or twice a year we’d all go to a resort for a weekend for “teambuilding”, karaoke, etc. Is that still part of the working environment or has it changed? What is the typical year end bonus these days? Is it still one or two months salary? Do you sign yearly contracts with everyone? Sophie, are you going more to performance bonuses in your company?
January 12th, 2009 at 8:06 pm
@Steve
I could be wrong, but I believe the 40% that employers set aside for employee benefits includes the housing and transportation allowances.
Relative to its own history and even relative to other nations of the world, China is in a very strong position to overcome the current crisis. It is on solid financial footing (with only the 2 trillion dollar foreign reserve vulnerable to large scale USD or Euro depreciation) It has built up a very good grain reserve (we can’t appreciate enough about this fact, viewed from the historical point.) Oil price is low and they are building a strategic oil reserve as fast as they can. The only thing lacking is the international demand that fuels the factories in eastern China. Therefore the key factor is employment. Of course this can be said of the most of the nations. My point is that if this had happened 30 years ago, when China could barely feed itself, many lives could be lost.
The $600 billion stimulus package will take sometime to show benefits. It was pointed out that some of the money was planed before the crisis has occurred, therefore it is not really added money. That is too simplistic a view. Take for example the high speed railroad between Beijing and Shanghai, the construction schedule has been dramatically shortened, with construction start simultaneously in many sections at once.
Another topics of interest is the fate of the migrant workers. People are justifiably worried about the potential unrest these unemployed peasants can cause. But I think at least for the time being, the situation may not be so bad. They have moved back to their rural homes, where the cost of the living is low, and the government’s social welfare is expanding to there (health care co-op program that started in 2005 for example), they can sustain for a long period of time before the stimulus start to kick in or the world economy recovers.
January 12th, 2009 at 8:51 pm
@ wuming: Thanks. I’ll confirm what that 40% employee benefit package covers and let you know. Good point about the grain reserve; at least there is no threat of famine in the near future. In fact, I can’t see China suffering from famines ever again, as long as things keep developing as they have. I’ve read the US strategic oil reserve is full to the brim. China is smart to do the same, especially with the price being so low.
I’m no economist, but if countries spend money they don’t have, isn’t that usually followed by inflation? China is reducing its amount of American treasury notes, so there isn’t that source of outside financing to prevent inflation, if I understand it correctly. And if there is inflation, usually people buy now rather than later so they can pay back in cheaper dollars. It could get complicated.
You mentioned high speed railroads. This morning I was listening to Stratfor’s Daily Podcast and they mentioned that the latest worldwide government craze is building railroads. The podcast is about the UK but they mention China later when discussing new railways. I guess the UK is talking about it and as you mentioned, China wants to put a bullet train line from Beijing to Shanghai. There’s talk in California to put in a high speed rail line from San Diego to San Francisco. Currently, the commuter and passenger trains have to share rails with freight trains, who have the right of way. So schedules are rarely met but a dedicated line would be different. If I could take a train to San Francisco rather than fly or drive, I’d do it.
I really like rail travel. I took a sleeper once from Tianjin to Shanghai and though it was slow, it was comfortable and fun. I would have done it more often if it could have been quicker. I also think Chinese prefer train travel if the speed is there. The question is whether the rates would be affordable enough to make the line profitable. In Taiwan if you travel on off hours, you can buy cheapers tickets on the high speed rail with a “first come, first serve” system in the last few cars. My wife, son and I did that last April and we found seats with no problems and it was also very affordable.
I think a very good indication of the coming year will be at the beginning of February when migrant workers come back to eastern China to resume their jobs. I hope those jobs will still be there. If someone is waiting for the perfect time to shut down their factory, the Spring Festival is it.
wuming, how long do you think that 2 trillion dollars can last with all those government infrastructure projects along with the expanded social welfare program kicking in? Won’t China’s large population eat it up pretty quickly? Or do you think all that the extra spending will create enough jobs to offset the downturn?
January 12th, 2009 at 9:27 pm
@steve
I think the capacity for Beijing-Shanghai, Beijing-Wuhan-Guangzhou HSR can be filled as soon as it is built. The current one-way price for Beijing-Shanghai soft-sleeper is 500Y, it seemed to be filled to capacity every time I traveled on it, I don’t believe the price will be much higher for the HSR. On the other hand, I believe that California probably can’t afford to build and maintain a HSR system because the population density is just not there. Unfortunately, US is stuck with automobile and air travel for the foreseeable future.
I think Chinese government is not counting on the 2 trillion dollars at all for the stimulus. It is locked up in USD and Euro assets and will be used to adjust the countries currency position relative to these currencies. The central government has accumulated sufficient surplus to cover at least half of the 600 billion stimulus directly. Local governments and banks will make up the other half perhaps (I don’t know the details here.) The more important part is the stimulating function the package suppose to perform. There is a tremendous amount of money in the private hands, the question is to stimulate investments, which in turn will lead to employments.
February is too early for any of the investment to kick in. Rushing into it may not be a good idea anyway. There will be unrest, but nothing like what doom sayers are predicting.
January 12th, 2009 at 9:53 pm
@ wuming: Thanks for the info. I remember paying about 150Y for a hard sleeper (that particular train didn’t have soft sleepers but the hard sleeper was fine since everyone in my car pampered me the entire trip) and 500Y is very reasonable for a journey that distance. But HSR are so expensive to build that do you think the fares will be subsidized by the government to make them affordable?
I read somewhere in the last week that China has invested less in US treasuries than the past. They are not intending to pull out their money but they had apparently reduced their exposure. I’ll see if I can run that article down and give everyone the link.
January 12th, 2009 at 10:19 pm
@steve
This is just my guess base on no solid information. I believe that the government is not expecting to recoup the construction cost. Whether they can cover the maintenance cost depends on usage. Since the travel time is shorter, it is no longer necessary to travel by soft-sleepers anymore for most of the travelers. Right now soft sleepers only run overnight. While HSR can be run all day long, and it can grab substantial share of the airline passengers. Therefore I can see substantial revenue generation. On the other hand, as long as they don’t bleed too much money, it will be considered a success. The actually cost will still be lower overall than air-travel (once again, just my guess)
January 12th, 2009 at 11:55 pm
@Steve and Wuming.
* The more benefits to the workers, the less desirable for investors to open factories and hence gives advantage to countries with low labor cost such as Vietnam.
* HSR. It is only profitable at a certain distance and with a certain population density. Taiwan’s so far is not too cost effective as they’re not making good money to recover the huge cost. As in most big projects, the forecast on return was too rosy.
LA-SF line may never be built. If it is built, it will take a long time to build and will not be cost effective.
China has an advantage with high population density. Beijing-SH will be a huge investment. The fright train is in the stimulation package that will pay back big.
* Steve, it is usually true inflation follows. In the mean time, deflation as cash is the king now.
January 13th, 2009 at 12:41 am
@ TonyP4 #38: I guess the trick is for the employee to have rights against a bad employer, but also for the employer to be able to get rid of a bad employee, as in the case with sophie’s company. How you balance that legally is the tough part.
Is the skill set high enough in Vietnam for the more complex industries? Or can they only handle the low skill, low margin technologies?
I guess we’ll never get a fast train to SF from here. Population density is probably good enough on the east coast, but there is too much empty space between LA and SF to make it worthwhile. Europe has the high density with short distances, and China has the longer distances but high density throughout.
Tony, do you know any more about the freight train? Will it also be HSR or just a parallel line?
@ wuming: Thanks again for all the info! 🙂
January 13th, 2009 at 2:37 pm
Hi Steve, I do not know much about the freight train. I do not think they’re on the same track. The utilization rate of the freight train is over 100% by western standard, so a lot of non-essential goods have to wait (resulting some factories closing up to months). The stimulation plan is supposed to fix this bottleneck. China has its own way to charge cargo freight. I believe in supply/demand policy.
30 years ago, India had more track than China, not any more.
Vietnam can only compete with cheap labor. Actually, the electricity depends on hydro dams built by China.
January 13th, 2009 at 4:54 pm
I haven’t got time to read all comments. Since we are discussing the new labour law, I provide some details here. My impression is that the new labour law are strict on following areas:
– The probation period. 1 month probation for 1 year contract; 2-month for 2 year, 3-month for 3 year. whereas i don’t remember the old labour law specified this
– Compulsory contract signing: employer has to sign working contract with employees, no matter trainee, probation, or contract workers. before 2008, it’s very common for company to use people without signing contract.
– Compulsory to pay 3 insurances (healthcare, pension and unemployment) but encourage 5 insurances + housing fund
– Over time pay: it’s compulsory. for some special holidays, the daily salary is as high as 3 times of normal. for weekends, either pay overtime salary or allow employee to take another day off
– Firing someone:
If for performance reason, then a)prove the worker is not fit for the job, b)give training; c)if he is still not good, then change to another position; d)…i don’t know. I never got to this point. The difficulties are: firstly, it’s difficult to prove a); secondly, the person can refuse the new position. Then, to let him go, the company usually give 1 month notice + compensation which depends on how long he has worked with the company. However, if the company can prove that this employee didn’t follow the company regulations, he can be fired immediately for serious violation or after giving 3 written warnings.
@ Steve,
I agree that ‘all things can be overcome’ in China. Lowering the base salary is very common, since base salary is the base for most calculations. Some employees themselves also negotiate with the company to split his salary into lower base + allowances in order to pay less income tax. I think people who fall in the high income category benefit more from this allowance system. With the new labour law, I expect the allowance system will be more popular.
January 13th, 2009 at 4:58 pm
@ All,
Great discussion; I’ve learned a lot.
I myself like a hard sleeper for a long trip. If you get the middle or top bunk (so people aren’t sitting on your bed), then you can take naps now and then, but also get up and walk around, sit by the window, watch the scenery…. The soft sleeper feels a little too enclosed and if you’re not crazy about your bunk mates, you’re kinda stuck with them. My longest train trip was Beijing-Kunming. It was great.
The only thing I would add to the economic discussion is that the worker-investor balance that TonyP4 cites is not such a zero sum thing. A skilled workforce is also attractive to investors. So is a stable workforce, up to a point (the constant shifting of China’s young, white collar employees has been a headache for bosses), as is the sort of infrastructure–trains, hydro power, etc.—that was just discussed in the context of China’s stimulus package.
While the PRC cannot forever undercut Vietnam in terms of its workers’ earnings, it beats Vietnam soundly in infrastructure. This stuff is obvious, but sometimes it gets overwhelmed in the debate about wages, social benefits, etc. And on a moral level, I would argue that the whole point of development is to support the working class who, read loosely, represent the majority of Chinese—not to support kids in cubicles at Baidu’s headquarters.
Of course, the working class needs jobs. But it also, increasingly, needs good jobs. This may not be appreciated during an economic downturn, but will become important again when things turn up. You can’t just keep migrants cruising at a certain standard endlessly and hope to become a “well-off society in an all-round way,” as Hu Jintao says.
I would add, too, that Vietnam has done some decent things for workers’ rights in recent years. The official Vietnamese trade union has been ahead of the All China Federation of Trade Unions in negotiating with management, leaking stories of labor abuses to the press, and supporting, in some instances, strikes. Not sure how that changes the China-Vietnam balance, but interesting nonetheless.
January 13th, 2009 at 5:45 pm
The hot topics in Chinese news media last few days is whether China can “come out of” the recession first. As I stated yesterday, China thinks it has only one problem — employment. Their strategy is relatively simple as well, find the right mix of investment and consumption stimuli to get the factories churning again.
As for OTR’s point about the skilled workforce, I heard there is a trend that many college grads are increasingly working in blue or gray collar jobs because of the scarcity of white collar jobs. I think Chinese government made 2 major strategic mistakes in the last 20 years, both as result of blindly mimicking US systems:
First is the fast expansion of the automobile industry, culture and infrastructure. This is not really sustainable given the meager natural resources and the damage to the environment. Now the expectation of owning a car as the symbol that you have made it can not be overcome easily.
Second is the attempt to adopt the American style higher education system by building super-sized comprehensive universities, and in the process destroying many technical schools and colleges that train high skilled workers and technicians. The problem is once again expectation, university grads expect to get white collar service jobs that are just not there. More importantly, China can not afford it even in the near future. Though my definition of the working class is perhaps wider than that of OTR’s, it is nevertheless true that China can not turn itself into a service oriented, white-collar dominated economy. The lesson of the US should have made that obvious, not to mention US was a very rich country to start with.
January 13th, 2009 at 5:53 pm
@ sophie and OTR: Thanks for providing such thorough information. Sophie, you mentioned the three insurances but also that it is encouraged to provide 5 insurances + housing fund. What are the other two insurances? Are they transportation and food allowances or something else?
OTR, when you took that trip from Beijing to Kunming, were you able to leave the train at all or were the stops on the way very short? How many hours did it take? I remember we left Tianjin around 4-5 PM and arrived in Shanghai about 9 AM the next day, but we had a lot of stops on the way, since it wasn’t an express. I had a bottom bunk but spent a lot of time by the window. The five other bunkmates in my cubicle were all very nice women. I was a bit worried about smoking and snoring but neither proved to be a problem.
You are so right about the constant shifting from job to job with younger white collar employees. We encountered that in our sales force but mostly with the men and not the women, who seemed to be more stable. Our engineers rarely left. I could never quite figure out why there was this need to change companies every one or two years, but other people I knew said it is very common in developing countries.
I haven’t been to Vietnam yet so thanks for the comparison.
January 13th, 2009 at 6:43 pm
@ Steve,
I don’t remember being able to get off the train much on the trip to Kunming and I think it took about 40 hours, maybe a little more. The conversations are sometimes the best part of train rides.
@ Wuming,
Those points about focusing too much on a service industry are good. I think it should be possible to move China’s economy up the skill ladder without it heading in the American, service-focused direction, which I too think goes nowhere—and is devastating for communities. The ultimate goal should be work with respect and that won’t come just through offering attractive alternatives to factories and farms, but through making factories and farms attractive themselves. The car industry offers that hope because of its (until recently) stable jobs and high skills. However, as you say, it is not sustainable in the bigger picture.
January 14th, 2009 at 4:34 pm
I stumbled across a few articles this morning regarding China’s economic situation:
From the Economist: http://www.economist.com/world/asia/displayStory.cfm?story_id=12923831&source=features_box1
From Newsweek: http://www.newsweek.com/id/178810
From BusinessWeek: http://www.businessweek.com/the_thread/economicsunbound/archives/2009/01/american_recess.html?chan=top+news_top+news+index+-+temp_news+%2B+analysis
From the Associated Press: http://www.google.com/hostednews/ap/article/ALeqM5jQAqU6RQkRq0yLrVYWphldFjlpCQD95MCLGO0
As you can see, they are all over the place in terms of their predictions…
I also noticed the Euro is down to $1.31 vs. the US Dollar this morning, and the British Pound is at $1.46 US. That’s the lowest I’ve seen either of them for a long time. Spain, Greece and Ireland are all in financial trouble so the value of the Euro will probably continue to slide, making European exports more competitive with the rest of the world.
January 15th, 2009 at 11:45 am
Here are two articles about the impact of the new Labor Contract Law in China.
Year Of The Rat Brings A Plague Upon Employers In China
http://www.chinacsr.com/en/2008/05/05/2308-year-of-the-rat-brings-a-plague-upon-employers-in-china/
Labor Law – One Year On
http://www.cibmagazine.com.cn/Features/Trend.asp?id=786&labor_law_-_one_year_on.html
January 15th, 2009 at 11:55 am
@Steve #44,
The other 2 insurances are on job injury and maternity insurances.
One correction, the 5 insurances are compulsory and housing fund is optional
January 15th, 2009 at 8:15 pm
A couple other relevant pieces. One is from way back when the Labor Contract Law was still in draft form and being debated. It is a report by Global Labor Strategies on foreign corporations’ efforts to water down the law: http://laborstrategies.blogs.com/global_labor_strategies/2007/03/new_gls_report_.html. The other is a recent news report about Guangdong going easy on corporate crimes since the economic crisis; it has drawn a lot of fire : http://www.china.com.cn/news/txt/2009-01/07/content_17068446.htm. Interesting stuff.
January 15th, 2009 at 8:25 pm
@ sophie, OTR, wuming and TonyP4: I just wanted to thank all of you for your comments. I’ve learned more from this thread than just about any other. I haven’t highlighted any comments because to be honest, I’d have to highlight every one of them (excepting my own). Facts, opinions, explanations, links; this is what a blog should be all about. 🙂
January 21st, 2009 at 11:23 pm
To answer Steve’s question in the post, China to Spend $123 Billion on Universal Health Coverage.
January 21st, 2009 at 11:48 pm
Here’s an article from today’s Economist. It questions whether China’s banking data is accurate based on some of the most recent economic data that has arisen.
Do you think they have a point? Or is it just negative press?
January 22nd, 2009 at 12:34 am
@Steve,
I don’t think there is such thing as”accurate banking data” anymore. For example, does the US loan loss stand at $1 trillion or $2 trillion?
January 22nd, 2009 at 12:42 am
@ admin: Good point. In the US it seems the banking data was OK because it was regulated but the investment banking data was worthless because of lack of oversight. Right now, the numbers being tossed around by the US government are so huge as to be beyond common understanding. That’s what’s so scary about this whole mess. No one can trust each other’s data.
January 22nd, 2009 at 1:10 am
@admin
@Steve
I have been reading Paul Krugman, Joe Stiglitz, Nassim Taleb and Nouriel Roubini lately.
Speaking of scary, I saw this out at Bloomberg the other day. Paul Krugman also says that Citi is technically insolvent. No big shock. I think it has been apparent for a while.
Regarding Roubini’s predictions, who knows?
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