JILPT Research Eye
China Facing Employment Risks in the Process of Structural Adjustment
―From the 13th Northeast Asia Labor Forum, “Employment Problems and Policy Countermeasures in Industrial Restructuring and Upgrading”

June 14, 2016
(Originally published on January 6, 2016 in Japanese)

Mitsuji AMASE

Director, International Affairs Department

On November 19th, 2015, a “Northeast Asia Labor Forum” was held jointly by the Japan Institute for Labour Policy and Training (JILPT), the Chinese Academy of Labor and Social Security (CALSS) and the Korea Labor Institute (KLI) in Beijing. This Forum has been held every year since 2002, as a platform for mutual discussion between Japan, China and South Korea on the theme of shared labor policy issues. The Forum addresses the most important issues of the day, and for this 13th Forum, CALSS (as host organization) set the theme of “Employment Problems and Policy Countermeasures in Industrial Restructuring and Upgrading”^{[Note 1]}. Behind the choice of this theme lies an awareness that these are this critical issue will affect the success of China’s economy in future. The country report from China reflects the sense of urgency being faced with the issue. In this article^{[Note 2]}, I would like to explore China’s current situation based on the Chinese report.

From high economic growth to “new normal”

China is now faced with rapid changes in industrial structure. The explosive economic growth enjoyed over the last 30 years is now but a distant hope, and China is in the process of shifting from a model that supported high-level economic growth to one more in line with moderate, stable growth. China’s decision to introduce private ownership and market mechanisms was made at the 3rd Plenary Session of the 11th Central Committee, held in December 1978. Under Deng Xiaoping’s leadership, the so-called “Reform and Opening Up” policy was adopted, and despite a temporary hiatus caused by the Tiananmen Square Protests in June 1989, the path of reform and opening up was reaffirmed by the “southern tour speeches” in January 1992. Since then, the Chinese economy had continued on its course of robust growth – until recently. It goes without saying that growth in the Chinese economy during that time was underpinned by the strength of manufacturing industries, thanks partly to the introduction of foreign capital attracted by the availability of cheap labor. China’s economic growth transformed the country into the world’s factory. Further growth was stimulated when China joined the WTO in December 2001, sparking double-digit growth for five straight years from 2003 to 2007. But the global financial crisis suddenly transformed the environment surrounding China. Specifically, China has been forced into a structural change shifting from the previous model of growth led by export investment, to growth led by stable domestic demand. Now, under the rapid industrial reorganization in China, the current leadership headed by Xi Jinping asserts that China’s economic development has entered a “new normal”^{[Note 3]}stage.

Economic slowdown exposes overcapacity in manufacturing

As global markets remain in the doldrums and China’s own economic growth starts to falter, a state of oversupply has been exposed in some of China’s industries. Overcapacity is particularly serious in steel, aluminum and other raw material manufacturing, with some companies falling into financial difficulty. According to the “Guiding opinion for resolving the serious excess of manufacturing capacity”^{[Note 4]}, manufacturing capacity utilization in 2012 was 72% in the steel industry, 73.7% in cement, 71.9% in aluminum, 73.1% in glass and 75% in shipbuilding – all far below international levels. Traditional industries such as coal and petrochemicals and newly emerging industries like solar and wind power generation are both said to face the same problem. Unless something is done about it, there is a risk that the supply-demand gap could widen further. Another significant risk, however, is that the employment problems of post conversion, unemployment and re-employment could arise in the process of resolving the manufacturing overcapacity. Addressing this problem, avoiding the potential risk of large-scale unemployment during the process of structural adjustment, is imperative in policy terms.

Causes of overcapacity in manufacturing

CALSS researcher Huang Xiangmin^{[Note 5]}, the author of the report, analyzed the causes of overcapacity in manufacturing as follows. First, the impact of economic fluctuations. Before the financial crisis, vigorous demand on global markets encouraged a rapid expansion of manufacturing capacity, particularly in raw material manufacturing, but a subsequent decline in demand on global markets exposed an overcapacity in manufacturing. Second, excessive investment. Blind investments by some companies led to manufacturing capacity vastly in excess of market demand. Third, an expansion of easy finance. And fourth, the irrationality of the industrial structure. Too many companies flooded bottom-end component sectors in the industrial chain, adding further to the overcapacity in manufacturing.

On the other hand, Mr. Huang also pointed out another important issue, besides market-related factors. Namely, a failure of government involvement has induced overcapacity in manufacturing. His view is that deterioration in the situation has been spurred by a number of factors in this regard. For example, local governments have repeatedly made massive investments based on the narrow-minded motivation of wanting to produce results; the mechanism for screening and approving investments has hardly been working at all; a fair competitive environment has been lost from the market because the market has not been properly supervised and controlled; and the related legislation, standards and regulations have not been developed.

Serious employment risks arising from overcapacity in manufacturing

Sectors suffering a serious overcapacity in manufacturing have been hit by deficits on a broad scale. Average profit levels are said to be stagnating, with losses starting to appear mainly in steel and other raw material manufacturing companies. At the present time, however, even companies faced with overcapacity in manufacturing are holding back on large-scale restructuring, in consideration of factors such as the cost involved and their social responsibility. As a result, serious employment problems have yet to surface. Unemployment in urban areas is currently being kept at around 5%, and in numerical terms, at least, the employment situation looks stable. Indeed, there are still no signs that employment has deteriorated significantly. But once the economy starts to fall, markets stagnate and companies find it harder to raise capital, there is every chance that large-scale unemployment could arise in a short space of time.

Government support policies

Of course, the central government does not disregard this situation without doing anything. As a measure aimed at resolving manufacturing overcapacity, it has raised the four principles of “part digestion (absorbing overcapacity by expanding domestic demand), part transfer (promoting overseas expansion), part integration (company mergers and reorganization), and part selection/elimination (phasing out non-compliant businesses)”. It has also announced support measures designed to secure the posts of employees who will become surplus to requirements in the adjustment process^{[Note 6]}. Moreover, in provinces where the overcapacity in manufacturing is particularly serious, the government plans to introduce specific measures to (1) support corporate stability through unemployment insurance, and strengthen the functions of preventing unemployment and promoting employment; (2) strengthen public employment support services and expand public employment; (3) recommend inter-departmental transfers within companies, and support independent business startups or self-motivating employment; (4) improve workers’ capacity for re-employment through training, etc.; and (5) protect workers’ legal rights.

Problems with the policy

However, Mr. Huang also pointed out that these measures alone will not be enough. Firstly, since their support is limited to workers who have been dismissed from their jobs and have registered as unemployed, these measures may not cover the groups of workers in greatest need of support. Another problem is that the conditions imposed on companies wishing to apply for subsidies aimed at internal employment stability are too strict. Companies may only apply for stability subsidies if they have enrolled in unemployment insurance, have never missed a premium payment, and have no record of restructuring, and these conditions severely limit the number of companies eligible for support. Yet another problem is the low amount of funding available in support subsidies. In other words, Mr. Huang considers it difficult to avoid risks with measures at this level.

Government and market roles need clarifying

As discussed above, China’s current situation is very critical. Considerable difficulties are foreseen in overcoming this situation while avoiding the rising pressure of risk. Here, the problem viewed with greatest misgiving by Mr. Huang is the ambiguity of roles played by the government and markets. Local governments bear a heavy responsibility for falling over themselves to invite easy investment. The extent of damage and the impact if the government became involved and failed would be so much greater. In view of these facts, Mr. Huang feels that the government’s involvement in markets should basically be at arm’s length. Markets should be fully equipped with decisive functions in relation to the distribution of resources (including the labor force), and a clear distinction should be made between what the government “should do” and “should not do”. On this basis, Mr. Huang asserts that the government should specialize in the function of “bottom-up” support for vulnerable members of society, and should thereby achieve greater stability and fairness in society.

Steering a course for China’s economic management will certainly be difficult from now on. Nevertheless, the fact that a researcher can take an objective view of these problems, identify the issues and propose remedies for them might also signal a big change in contemporary China. This kind of change may in itself represent a guiding light that could lead China onto the path of stable growth.

Related Information (only available in Japanese)

• International Labor Information (November 2015) International Workshop Report: 13th Northeast Asia Labor Forum, Employment Problems and Policy Countermeasures in Industrial Restructuring and Upgrading.
• International Labor Information (December 2015) China, Promoting “Entrepreneurship and Business Innovation” in “New Normal Year 1”
• International Labor Information (March 2016) International Labor Information 16-2, the 13th Northeast Asia Labor Forum Report: Employment Problems and Policy Countermeasures in Industrial Restructuring and Upgrading.

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