The Truth about Chinese Unemployment Rates

Zhang Jun

 .China labourors
 

SHANGHAI – Since 2002, China’s economy has undergone significant changes, including a shift from acceleration to deceleration of GDP growth. Yet the official urban unemployment rate, jointly issued by the National Bureau of Statistics (NBS) and the Department of Labor and Social Security, has remained remarkably steady, at around 4-4.1%. Since 2010, it has stood at precisely 4.1%. This is surprising, to say the least – and has led some to ask whether the NBS could be fudging the numbers.
 
The NBS is not lying; it simply lacks data. The unemployment rate that the NBS provides reflects how many members of the registered urban population have reported to the government to receive unemployment benefits. But, unlike in developed countries, China’s piecemeal unemployment insurance and underdeveloped reemployment programs weaken the incentive for people to seek assistance. As a result, the NBS unemployment figures are far from accurate.
 
China’s government has moved to remedy this, by carrying out urban unemployment surveys.
 
But, despite having been collected a decade ago, those statistics have yet to be released.
 
In lieu of convincing official figures, some economists have taken matters into their own hands, using data from the urban household survey (UHS) to estimate the real unemployment rate.

Extrapolating from UHS data gathered in six provinces, Jun Han and Junsen Zhang, for example, concluded that, in 2005-2006, Chinese unemployment stood at around 10%. Using UHS data from almost all of China, Feng Shuaizhang, Hu Yingyao, and Robert Moffitt calculated an average urban unemployment rate of 10.9% from 2002 to 2009 – the highest estimate ever produced.
 
But these estimates are just that – estimates. Because UHS data are not freely available, different people obtain results for different years and provinces from the various sources they could access. This has caused considerable frustration for researchers, and has resulted in estimates with ranges so wide as to be statistically insignificant.
 
In our own research at Fudan University in Shanghai, my two PhD students, Liheng Xu and Huihui Zhang, and I managed to obtain a reasonably broad supply of official statistics: the 2005-2012 data for four provinces, the 2005-2009 data for three provinces, and monthly data for 2010-2012 for four of these seven provinces. While the sample is technically small, the provinces for which we acquired data represent the coastal, inland, and northeast regions. With the right adjustments and processing, we were able to infer the unemployment rates in different kinds of provinces and municipalities, thereby estimating the real nationwide unemployment rate.
 
We found that, although China’s urban unemployment rate was probably quite high in 2005, standing at 10.7%, it has most likely dropped over the last decade, reaching 7% in 2012. That puts the annual average for the 2005-2012 period at 8.5%. (These and our other findings correlate with a cross-sectional analysis of the official data, meaning that the data for registered unemployment, subjected to such an analysis, might serve as a proxy for the real unemployment rate.)
 
Moreover, while rapid GDP growth contributed to falling unemployment in, say, 2007, unemployment continued to decline even after the global financial crisis of 2008 began to weaken economic performance. Most economists would assume that declining unemployment amid falling GDP growth is related to a decline in labor-force participation. But our calculations, based on the UHS data, show that labor-force participation in China actually increased slightly after 2008, as the proportion of workers exiting the labor market decreased.
 
In other words, China’s employment growth has accelerated in recent years, even as GDP growth has slowed.
 
This can be explained partly by an ongoing structural shift in the Chinese economy, from a manufacturing-driven growth model to a services-led model that empowers private innovators.
 
And, indeed, as UHS data show, this shift led to continuous job creation in the services sector from 2005 to 2012.
 
What has not happened is significant destruction of jobs in the state sector and manufacturing industries, especially since 2009. As the UHS data suggest, the average time it takes an unemployed worker to find a new job in the services and non-state sectors is shorter than in the manufacturing and state sectors. If the manufacturing and state sectors do begin to lay off more employees, urban unemployment rates are bound to rise.
 
The reason that hasn’t already happened is that the government has, to some extent, been propping up these sectors since the global financial crisis, by implementing massive stimulus packages focused on investment in infrastructure and real-estate development. This has sustained the rapid growth of the secondary sector (especially manufacturing and construction), which has thus been absorbing large numbers of low-skill workers. In fact, upon closer examination of the UHS data, we found that the least-educated workers largely accounted for the decline in overall unemployment.
 
This stimulated infrastructure and real-estate construction boom has also led to the expansion of heavy industry, including state-owned steel, cement, chemicals, glass, and other enterprises, causing employment growth to accelerate from 2005 onward. The NBS data show that the employment growth rate in the state sector was negative before 2009, when it turned positive.
 
The fact that the unemployment rate is declining while GDP growth slows suggests that China’s labor productivity is actually worsening – a trend that is likely to lower China’s long-term potential growth rate. Since the effects of the stimulus obviously cannot last, the sectors that were being propped up will soon begin to shed more workers, causing the unemployment rate to rise. Only further government intervention could prevent this outcome; but that might mean delaying structural reforms that are needed to sustain productivity growth. China’s leaders are thus being confronted with a difficult choice: higher near-term unemployment or slower long-term growth.
 
 


I.M.F. Warns of Economic Risk of British Exit From E.U.

By STEPHEN CASTLE


Clockwise from top left, Jean-Claude Juncker, the European Commission president; Prime Minister David Cameron of Britain; and Donald Tusk, the president of the European Council, at a February meeting at the European Council in Brussels. Credit Pool photo by Yves Herman     
 
 
LONDON — A stark warning about the potentially negative economic impact of a British withdrawal from the European Union and a new report on immigration have galvanized debate over the country’s future in the bloc, a little more than two months before a referendum on whether to leave.
 
Britons appear to be sharply divided over European Union membership, and those who want to remain, including Prime Minister David Cameron, hope that worries about the economic uncertainty that would probably accompany a British exit will influence voters.
 
The concerns about the economy were highlighted on Tuesday in a statement from the International Monetary Fund, which said that a British withdrawal from the bloc, a possibility known as “Brexit,” would pose “major challenges for both the United Kingdom and the rest of Europe.”
 
Mr. Cameron received less welcome news on Wednesday, when researchers at Oxford University reported that the existing economic problems in the eurozone, of which Britain is not a member, were prompting a growing number of people from Southern Europe to seek work in Britain.
The debate over the referendum had taken a back seat here in recent days after it was revealed that Mr. Cameron’s father had been named in documents related to offshore banking from the Panamanian law firm Mossack Fonseca, and that Mr. Cameron and his wife had sold their interest in his father’s trust just before Mr. Cameron became prime minister in 2010.  
 
The assessment from the I.M.F. gave Mr. Cameron an avenue to return the focus to an issue that he wants to make central to the referendum.
 
“Negotiations on post-exit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility,” the fund said in the report, called the World Economic Outlook.
 
The statement was supported by Mr. Cameron and by the chancellor of the Exchequer, George Osborne, who described the report as the “clearest independent warning of the taste of bad things to come.”
 
Norman Lamont, a former Conservative chancellor who wants Britain to leave the bloc, dismissed the report as “a highly political intervention, but not a surprising one,” while Matthew Elliott, the chief executive of Vote Leave, said the fund had “talked down the British economy in the past, and now it is doing it again at the request of our own chancellor.”
 
Campaigners for withdrawal are also angry about the government’s distribution, at a cost of 9 million pounds, or about $12.8 million, of a pamphlet to every household arguing that a vote to leave “would create years of uncertainty and potential economic disruption.”
 
Immigration is among the leading issues for those who oppose membership in the bloc. European Union citizens have a right to live and work in other member nations, and the report released on Wednesday from the Migration Observatory at Oxford University reflected those concerns.
 


China Investment in U.S. Economy Set for Record, But Political Concerns Grow

China firms expected to invest $20 billion to $30 billion in U.S. in 2016 but scrutiny could hurt deals

By William Mauldin

China’s Anbang Insurance dropped its bid for Starwood Hotels in March. 

China’s Anbang Insurance dropped its bid for Starwood Hotels in March. Photo: Associated Press
 

Chinese direct investment in the U.S. economy is set to reach a new high this year due to a wave of deals announced in early 2016. But experts say the pace is already slowing as politicians and regulators increase their scrutiny of Chinese details.

Chinese companies are expected to invest $20 billion to $30 billion in the U.S. in 2016, mainly through mergers and acquisitions, compared with a record $15 billion last year and $11.9 billion in 2014, according to a report published Tuesday by research firm Rhodium Group and the National Committee on U.S.-China Relations, which promotes cooperation between Beijing and Washington.

The investment is starting to attract attention, including among Washington regulators and politicians in the 2016 campaign season. Many voters are expressing deep mistrust of U.S. economic and trade ties as Donald Trump criticizes moves by China, Mexico and Japan.

Despite its ascent to the world’s second-biggest economy, China has so far invested little in the U.S. compared with the American investments coming from firms based in the U.K., Japanese and other advanced economies.

Only one-eighth of China’s $120 billion in outward investment last year went to the U.S., according to the report. Companies in North America trailed those in Europe and Asia as targets of Chinese acquisitions in 2015, Dealogic says. But the amount invested in the U.S. is growing rapidly as China plows less into commodity-rich developing countries as Beijing seeks to shift the economy toward technology, services and greater consumer spending.

“They’re scrambling to upgrade their technology, they’re scrambling to build household brands quickly,” said Thilo Hanemann, economist at the Rhodium Group. “We’re seeing a big shift in Chinese investment from the developing world and emerging markets to high-income markets including the U.S., Europe and Australia.”

The first quarter saw Chinese bids for U.S. companies at a dizzying pace, in part an effort to diversify abroad after the country’s market turmoil last August and concerns about a shift in the dollar-yuan exchange rate. Now, some U.S. acquisition targets are more worried about the ability of Chinese companies—many controlled by the state—to get the green light for foreign deals and obtain financing, Mr. Hanemann said.

Without major new deals—such as Anbang Insurance Group Co.’s unsuccessful $13.2 billion bid for Starwood Hotels & Resorts Worldwide Inc.—the pace of acquisitions and “greenfield” investments could ease off for the rest of the year, resulting in a “conservative” estimate of $20 billion to $30 billion for 2016, Mr. Hanemann said.

But the total could be much higher if giant U.S. companies get promising bids in coming months. In Switzerland, China National Chemical Corp.’s $43 billion bid for Swiss pesticide and seed company Syngenta AG helped boost China’s bids for European assets to $61 billion this year, according to Dealogic.

Also weighing on the deals is stepped-up attention from regulators, including the Committee on Foreign Investment in the U.S., which evaluates acquisitions of American business on national-security grounds. Washington lawmakers have pressed U.S. officials to scrutinize deals involving financial infrastructure, such as the Chicago Stock Exchange, and strategic semiconductor technology.

“It certainly could have an impact on the psychology of Chinese buyers—they have a perception that it could be difficult to do a deal in an election year,” Mr. Hanemann said.

Some lawmakers are crying foul, protesting that U.S. firms can’t invest easily in many sectors of China’s economy, while the U.S. market is wide open for their Chinese competitors, or nearly so. Efforts to negotiate a bilateral investment treaty between the two countries have stalled as Beijing has sought to rope off numerous industries.

Still, Chinese-affiliated companies extend across 362 out of 435 congressional districts, according to the report. New York has benefited from Chinese deals related to tourism and financial services, while the Southeast is seeing investments from petrochemicals to manufacturing.

Chicago ranked third on the report’s list of congressional districts in terms of Chinese direct investment in the last 15 years, and the Chicago Stock Exchange triggered alarm bells in Washington this year after it agreed to be bought by a Chinese firm.

“We don’t necessarily want to be invested in by trading partners and have to be overly concerned that they might be getting a better deal from us that what we’re getting from them,” said Rep. Danny Davis (D., Ill.) whose district includes the exchange. Mr. Davis said he has concerns about the U.S. trade deficit and alleged Chinese currency manipulation but understands the deal for his hometown stock exchange, which handles only a fraction of daily U.S. equity trades, is part of living in a global economy.
 


What Citigroup’s ‘Living Will’ Win Means for Big Banks

Five big banks’ living wills were deemed to be not credible by regulators; that Citi passed is significant

By John Carney

Citigroup was the only one of the big U.S. banks to submit a ‘living will’ plan regulators didn’t find not credible.

Citigroup was the only one of the big U.S. banks to submit a ‘living will’ plan regulators didn’t find not credible. Photo: Agence France-Presse/Getty Images
 
 
Citigroup C 5.61 % earned bragging rights on Wall Street this week by being the only big U.S. bank whose so-called living will wasn’t found to be not credible by either the Federal Reserve or the Federal Deposit Insurance Corp.
 
The fact that Citi succeeded where its rivals, including J.P. Morgan Chase JPM 4.23 % , stumbled will no doubt be a cause for mirth on Wall Street. After all, just two years ago, Citi’s stress-test submissions were found wanting by the Fed. Ironically, in the eyes of many on Wall Street, if regulators wanted to make an example of one bank, Citi was the most likely candidate—just not in a positive way.
 
Instead, Citi stands tall. By accepting Citi’s plan, the Fed and the FDIC have shown that it is possible for a bank often considered too big to fail to earn a passing grade. Which is to say, Citi has convinced regulators that it could credibly be resolved in an orderly manner through bankruptcy rather than bailout.
 
This is good news for the five banks whose resolution plans were deemed “not credible” by both the Fed and the FDIC. It suggests there is a path forward for them. The crucial point for investors: Regulators aren’t rejecting banks simply because of their size.
 
The snag is that might be tougher than investors anticipate. While regulators rejected the resolution plans of the banks, it is clear that the objections go beyond just paperwork.
 
The plans of at least some of the banks that failed lack credibility because, as currently structured, they can’t be resolved through bankruptcy. Regulators aren’t just asking for better plans. They are demanding better—more resolvable—banks.

That is a big difference. And it is an especially important one given that the living-will process gives regulators extraordinary powers that ranging from requiring a firm to hold more capital to the ability to effective force a breakup. Regulators won’t be rash to embrace the nuclear option, but banks and investors shouldn’t forget that it exists.

More immediately, the resolution process is viewed by regulators as a tool to require changes in real time to the basic structures and operations of the biggest banks. Which means it is likely a mistake to think banks that failed this time just need to spend more money putting together more persuasive or comprehensive plans.

Keep in mind that even Citi didn’t exactly pass with flying colors. Regulators cited shortcomings in governance, assumptions about the bank’s ability to hedge portfolio risk and estimating liquidity needs during resolution. They officially put Citi on notice that failure to address these shortcomings could land them in the penalty box next time around.

In other words, regulators intend to tighten the screws over time—just as they have with the stress tests. Each year, getting regulatory approval will likely become incrementally more difficult. Passing now isn’t a guarantee of passing forever.