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China Economic Debate

The document discusses economic challenges facing China, including record high youth unemployment, struggling local governments with high debt, and a reliance on informal sector jobs with low wages. Structural issues in China's economy like declining manufacturing employment and a lack of tax revenue are exacerbating problems of weak demand, employment, and government support for the population.

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41 views5 pages

China Economic Debate

The document discusses economic challenges facing China, including record high youth unemployment, struggling local governments with high debt, and a reliance on informal sector jobs with low wages. Structural issues in China's economy like declining manufacturing employment and a lack of tax revenue are exacerbating problems of weak demand, employment, and government support for the population.

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papanomba
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© © All Rights Reserved
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The Guardian - Back to homeThe Guardian: news website of the year

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Show caption
Peak China?
Peak China? Jobs, local services and welfare strain
under economy’s structural faults
Faced with record high youth unemployment and bankrupt local councils, the
country’s population is beginning to feel the weight of the economy’s flaws
Peak China? How the booming middle class hit a brick wall
Amy Hawkins senior China correspondent
@amyhawk_

Mon 18 Sep 2023 00.01 BST


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When finding a job feels as unlikely as winning the lottery, playing the actual
lottery may seem like a more productive use of time. In the first half of 2023,
faced with a struggling economy, Chinese consumers spent 273.9bn yuan
($37bn/£30bn) on lottery tickets, an increase of more than 50% on the same
period in 2022.
It’s just the latest symptom of an economy in distress. A record high youth
unemployment rate of 21.3% in June prompted the government to stop
publishing data on the issue – along with other areas such as the consumer
confidence index – all which showed China’s economy was struggling.
Global economic fears deepen as service sector dips in China and Europe
Several factors have contributed to the unusually high youth unemployment
rate. Education, real estate and technology – industries that graduates
previously flocked to – have been hit by a regulatory storm in recent years
which annihilated millions of jobs. And during the Covid-19 pandemic, more
students stayed in education while the jobs market was all but frozen, leading
to a pent-up supply of recent graduates on the jobs market.
But the bigger problems for the Chinese economy may be structural. Most of
the people in the youth unemployment cohort are not recent college graduates
but school leavers who are unable to get the types of service-sector jobs that
have previously kept China’s cities buzzing. Millions of would-be hospitality
workers, security guards, couriers and nannies are unemployed. Educated,
creative college graduates going without work is a problem for a “politically
significant part of the workforce”, says Eli Friedman, a professor who focuses
on Chinese labour issues at Cornell University, but the fact that people are not
finding more low end jobs is the “big concern”.
Since 2013, as factories have moved to countries with cheaper labour, the
number of people employed in manufacturing has been in decline. That has
led to an “era of polarisation”, according to a study published by economists at
Stanford and Wenzhou universities, in which wages have risen for high-skilled
professionals, while the surplus of workers at the low-skilled end of the
economy has driven down wages.
Between 2004 and 2019, the share of people working in China’s cities in the
informal sector grew from 33% to about 60%. As well as contributing to
yawning inequality, this hampers China’s ability to boost its productivity rates.
“You don’t turn yourself into a high-income country with [close to] 70% of
your economy in the informal sector,” says Scott Rozelle, an economist who
led the wage polarisation study.
China’s economic model is faltering – does it have the political will to fix it? |
George Magnus
‘A peculiar time to be cutting entitlements’
Another problem created by the explosion in China’s informal sector is that it
inhibits the ability of local governments to collect taxes. Personal income tax
accounts for just 6% of China’s total tax revenues, compared with 24% in
OECD countries. Only a tiny fraction of the country’s population pay any
income tax at all.
As a result, local governments are forced to rely on non-tax sources of
revenue, such as land sales. Between 2012 and 2021, the share of local
government revenues that came from land sales increased from 20% to 30%.
But in 2020, armed with the mantra that “houses are for living in, not for
speculation”, the government unleashed a wave of regulatory shocks to the
real estate sector, prompting a record number of defaults and the worst slump
in the housing market in the 21st century. That was bad news for local
governments, which saw their land sale revenues fall by nearly a quarter in
2022.

Re
sidential buildings under construction in Beijing. Photograph: Tingshu Wang/Reuters
The slumping revenues exposed a problem that has been brewing for years.
China’s provincial governments have all but run out of money. Local
government debt is estimated to total $23tn, and 22 municipalities are at
medium or high risk of default, according to MacroPolo, a thinktank. The
effects are already being felt across China.
Yang Huiyan: Country Garden owner who was once Asia’s richest woman
In Hegang, a frosty coal-producing town near the Russian border, residents
were left without heating, which is normally subsidised by the government,
after the city made history by becoming the first to undergo fiscal
restructuring in December 2021.
In February, the public bus operator in Shangqiu, a city of 7 million people in
Henan province, said it was suspending services as it had run out of money to
pay wages, insurance contributions or even to charge the electric buses.
In a bid to balance the books, Beijing has encouraged local governments to
slash welfare payments, prompting pensioner protests earlier this year. With a
rapidly ageing population and an already weak social safety net, it is a
“peculiar time to be cutting entitlements”, Houze Song, a MacroPolo fellow,
has noted, especially because reducing benefits encourages people to stash
away their money, hurting consumption.
And so China’s economic problems risk falling into a vicious circle, where
weak demand drags down employment and public revenue, which – in the
absence of a free market – undermines the ability of the state to support jobs
and economic confidence.
 This is the second in a series of articles that examine the challenges facing
China’s government and its population – at a time of upheaval for the
country’s economy
Topics
 China
 Peak China?
 Chinese economy
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