Economic Insight: Greater China

Transcription

1 Economic Insight: Greater China Quarterly briefing Q1 215 China s long-term outlook remains solid despite missed growth target in 214 Welcome to ICAEW s Economic Insight: Greater China, a quarterly forecast for the region prepared specifically for the finance profession. Produced by Cebr, ICAEW s partner and acknowledged experts in global economic forecasting, it provides a unique perspective on the prospects for China over the coming years. In addition to mainland China, we look at the Hong Kong and Macau Special Administrative Regions (SARs). China s economy returned to the spotlight when official data revealed it missed its growth target of 7.5 for 214. Delving below such alarming headlines, China s economic trajectory remains on course. While it is almost certain that continuously slower growth will be the order of the day for the coming decade, this should be no cause for concern but rather a cause for cheer. If slowing growth continues in a gentle, managed fashion, it is expected to help China develop to an advanced economy with more sustainable prospects. Weaker economic growth will also be good news for environmental sustainability, a key concern for China at present. With all this in mind, even when adopting conservative estimates for the rate of future growth, it is inevitable that China will surpass the US to become the world s largest economy in dollar cash terms sometime in the next decade. Perhaps more important than judging China by the numbers is to try and paint the picture of what China s future economy will look like. One thing is certain: the transformation of China from an investment-driven economy to one with a greater role for consumption, and from being the world s factory to a services powerhouse, will have profound effects on its labour market. To achieve its goals of development, China will need more high-skilled workers, and a more efficient way to match them to jobs in the sectors that will gain prominence in its new economic structure. In this issue of Economic Insight: Greater China, we examine the changing nature of China s job market. We look into how demographic, economic, and social dynamics are coming together to create new challenges, such as the mismatch between the pool of labour and skills, and the needs of the businesses driving growth in a new kind of China. Such mismatches occur in a manner of ways, from geographic location, to knowledge, to skills levels, with education sometimes failing to match the needs of the sectors that will be driving growth. Finally, we present our latest forecasts for the Chinese economy, based on recent developments at home and overseas. BUSINESS WITH confidence icaew.com/economicinsight

2 The transformation of China s higher education The economic reform and market liberalisation that took place in China towards the end of the last century were also felt in the education system. Sparked by a World Bank report and the 1998 UNESCO Declaration of the World Conference on Higher Education that identified the limits on growth of a low proportion of students in higher education, Chinese policymakers embarked on a strategy of accelerated development for the education sector. The impact was threefold: a sharp expansion in scale; a reduction in subsidies and consequent increase in tuition fees; and changes in the process of matching graduates with employers. The scale of higher education had begun expanding from the end of the twentieth century, but was fairly modest: over the span of the 2 years between 1979 and 1999 the number of Higher Education Institutions rose from 633 to 1,71, a 7 increase. In 1999, the central government adopted a strategy to expand higher education through policy, increasing the number of students admitted to tertiary education by.22m initially and then by a further.33m later in the same year. These decisions made 1999 a historic year in China s higher education: over a single year the number of new students admitted to tertiary institutions increased by 48. In subsequent years, the expansion in higher education continued at a much faster pace than during the preceding decades. Between and 213, the number of Regular Higher Education Institutions more than doubled to reach a record high of almost 2,5. Figure 1: Number of Regular Higher Education Institutions (total) Naturally, this expansion increased the probability of college attendance among high school graduates. The number of students graduating from university rose six-fold to over 6m per year between and 213. Policy also involved a lowering of the subsidies for higher education, which used to be high under the previous central planning regime. As a result, expenditure on education grew its share of total household expenditure significantly after the reforms. This in turn meant that some families experienced intense financial pressure, with many students from poor families giving up college opportunities and benefiting less from the expansion policies. Finally, the system for allocating university graduates to jobs which was centrally planned previously was also changed as part of the reform. The system was liberalised, leaving matching to the market, with graduates finding jobs based on mutual agreements with employers, and with much less intervention from the government. This increased the effort required to find a job and hence the competition in the labour market, which was already high due to the expansion of higher education and the increase in the number of graduates Figure 2: Number of graduates in Higher Education Institutions, by level of education (m) In the next section we look into how these changes in the education system have affected the labour market, and whether it is fair to say that they are a possible cause of elevated unemployment among young college graduates. Are the higher education reforms responsible for graduate unemployment trends? Using the traditional economic approach of labour demand and supply, it is tempting to attribute the presence of graduate unemployment to the sudden increase in the supply of graduates in the labour market that resulted from the expansion policies and continued steadily and robustly throughout the first decade of the new millennium. However, the reality is different: while there has been no shortage in demand to match supply, anecdotal and survey evidence suggests that the skills that Chinese graduates have developed do not match those that employers need. This has led to the puzzling coexistence of graduate unemployment and complaints from employers about skills shortages. A useful indicator of the demand and supply balance in the labour market is the ratio of job vacancies to job seekers. As can be seen in Figure 3, despite the educational reforms in 1999 and the expansion of college graduates in the labour supply, the ratio of job vacancies to job seekers has been rising steadily. After recovering from a dip during the global financial crisis, the ratio has now stood above 1. for the past five years, indicating that there have been more vacancies than job seekers in the labour market. At least in part, this is likely to reflect a significant gap between the skills of job seekers and the needs of employers. Figure 3: Job Vacancies to Job Seekers ratio in China Undergraduates Source: Ministry of Human Resources & Social Security Postgraduates icaew.com/economicinsight cebr.com economic insight Greater China Q1 215

3 This paradox of coexisting unemployed workers and vacant jobs exposes the inability of the traditional labour supply and demand approach to explain what is going on in China s labour market. Rather, it seems more possible that the universities are not providing the right kind of supply to respond to the demand needs of the economy. As such, a more sophisticated approach is needed that takes into account factors such as job-to-worker matching, imperfect information, job creation and job destruction trends, rural-to-urban migration patterns, and other labour market frictions. The educational reforms still have a place in the story here, but their effect is understood differently than simply as an expansion in supply. In addition to leading to a higher presence of graduates in the labour force, the sudden nature of reforms meant that the requirements for high school graduates to be admitted to college were lower than before (as there were more spaces now and competition was weaker). This may have meant that most graduates were not as skilled or talented as their level of education may have previously suggested, and may partly explain why they were unemployed and why employers were complaining about the quality of graduates in the job market. In this context, data shown in Figure 4 are worrying: those who are less educated are more likely to find employment than those who are better educated, with an unemployment rate spread higher than 1 percentage points between the two extremes. This is contrary to what is observed in other countries where a higher level of education is a valuable asset in helping graduates secure a job. A potential explanation for this is that China s economy has been primarily centred around the manufacturing, construction, and energy sectors, which are all capital-intensive and with low requirements for white-collar labour. Putting the figures into context, China s overall unemployment rate stood at 4.1 in 212, four times smaller than that seen for university graduates. Estimates for youth unemployment as a whole range from 4 to 2. Still, youth unemployment in China is lower than what is seen in Europe, where in Greece and Spain, for example, over 5 of young people are unemployed. In Germany, the figure was closer to 8 in 212 and in the UK just over 2. Figure 4: Unemployment rate for the age group broken down by education level (212) Primary Education Junior High School Source: China Household Finance Survey Senior High School & Vocational 11.3 Junior College 16.4 University & Graduate School Information imperfections are another potential cause for the simultaneous presence of unemployment and vacancies. In simple terms, it is unrealistic to assume that job seekers and vacancies create employment immediately, and there is usually an interim period during which some workers may not be finding work while some firms may have positions vacant. This search and matching process is likely to be shorter and more efficient in advanced economies where widespread use of effective information distribution networks such as the internet and a high number of recruitment professionals are common. In China, however, such a process is likely to be long enough to allow for a persistent mismatch. What s more, such delays are especially acute in the period of economic transition. Technology catch-up, for example, usually leads to high worker rotation, and in so doing increases the friction in the matching process between jobs and workers. In China, this forms an important part of the story because of the dramatic job reallocations that began in the 199s. Figure 5 shows the changes in the number of workers in industrial State-owned Enterprises (SOEs) and Private Enterprises. Between 1998 and 212, more than 2m jobs in the country s SOE sector were destroyed, while at the same time many new jobs were created in the private sector. Such large-scale job reallocation requires a high level of labour mobility to work successfully. Moreover, although many new jobs were created during the economic and restructuring process, most were quite different to the jobs that had been lost, and workers needed time to adjust to the new requirements and find suitable posts. Looking ahead, as China s economy continues to transform in character, the frictions caused by large job rotations and worker reallocations are expected to remain an important determinant of the country s unemployment dynamics. Figure 5: Number of workers in China (m) SOEs 24 Labour market frictions key to understanding unemployment in China Labour mismatches can be further caused by geographical factors and manifest themselves at a regional level. In China, for example, the increase in tuition fees that came along with the educational reforms in order to fund the expansions meant that access to a college education became more challenging for China s poorest households despite an expansion in capacity. The central and western regions, home to China s poorest households, were the ones that suffered the most as a result, with a greater increase in the unemployment rate in the period that followed compared to the eastern, coastal provinces. In a society characterised by high labour mobility this would not be a big issue, as young college graduates from the non-coastal provinces would move to find jobs in coastal regions. This resembles the eurozone s current woes, where young graduates from the currency Private enterprises icaew.com/economicinsight cebr.com economic insight Greater China Q1 215

4 area s periphery with high unemployment are moving to countries whose economies are doing better. It is easy to see why there may be constrained labour mobility across Europe: the need to learn a new language, to adapt to a different culture, and to set up new bank accounts etc, naturally discourages mobility. But what about China? Even though these particular challenges are less prevalent when moving across different regions of the same country, there are other impediments preventing college graduates from choosing locations freely. The most important one is the Hukou system of resident permits. Many college graduates find it difficult to obtain official permanent resident status in destination cities, especially large coastal cities such as Beijing and Shanghai. The absence of permanent resident status in turn means that they are not entitled to the benefits or the welfare system associated with the Hukou status. A second factor is the limited supply of housing that stems from the monopolistic control of land by local governments. Further, policymakers tend to encourage college graduates to find jobs in cities in central-western regions, where the college premiums are significantly lower than in coastal regions. Another potential factor is disparities in the quality of education across China. If these are present then, even with increases in educational attainment throughout China, the labour market of the mega-cities may still be too competitive for migrants to enter. Figure 6: Unemployment rate at regional level Central East West Finally, the mismatch also occurs on a skills level, and this is another possible reason for the presence of unemployment among college graduates. According to Pissarides Nobel-prize winning theory on labour market mismatches, these are more likely to occur when there are exogenous shocks or structural changes in labour supply and demand. In the case of China, despite an increasing demand for college graduates (as evidenced by the increasing college premium), the increasing supply of college graduates was so large and increased in such a short period of time that both the education system and the labour market need some time to adjust. How can China s graduate unemployment problem be tackled? As we have shown that the causes of China s graduate unemployment are not just straightforward supply and demand mismatches, the solutions required to tackle it are also complex. One way for the market to clear is through adjustment in wages: if demand is greater than supply then an increase in the wage offered should be able to attract more job seekers to fill the gap. This has indeed been taking place in China over the past decade, with urban salaries rising by about 15 a year over the period. This has often been seen as a worrying development, as it raises costs for businesses and makes China less competitive in the global stage by taking away its advantage of cheap labour-intensive manufacturing. However, the reality is more positive: the rises in wages have come at the same time as productivity improvements. According to the International Labour Organisation, productivity (measured as output per person employed) more than tripled from $4,66 in to $15,25 in While this is welcome news, however, it may still fail to prevent production flight out of China as low-end manufacturers begin to get priced out and start looking at cheaper economies such as India and Vietnam. In some ways, this is a good thing and a sign of China s advancing prosperity, and it bodes well for the national economic strategy that emphasises higher value, higher skilled work. Ultimately then, improvements in productivity should be welcome as they help raise wages and living standards, increase prosperity, and aid economic development. But it is important to keep in mind that there are consequences, both intended (richer workers), and unintended (skills shortages). Another way to alleviate labour market mismatches would be to encourage freer mobility of labour by eliminating institutional impediments such as the Hukou system. Such a policy has the power to reduce unemployment at the national level, but as argued in an earlier Economic Insight it may create problems for urban development and the sustainability of cities. Graduate unemployment has important social implications. Sociologist Lian Si refers to the army of under-employed or underpaid graduates as China s Ant Tribe. These graduates are now becoming detached from wider society and, despite being intelligent and hardworking, are slowly joining the country s underclass, alongside social groups such as peasants, migrant workers, and the unemployed. While at present there are no such signs, it is not entirely inconceivable that graduate unemployment could in future trigger some social instability, especially in the event of a sharp economic downturn that would lead to a sudden uptick in unemployment. To avoid this, China needs to invest in improving those industries that have the capacity to take full advantage of the talent and skills of the young Chinese, instead of directing the money at expanding manufacturing capacity and exports. Workforce peak puts pressure on labour market Looking ahead, profound demographic changes will be key drivers of China s labour market. China is the world s most populous nation, and over the past 5 years the country s population has doubled. According to the 21 census, about 1.34bn people now live in mainland China. During this period, the working-age population has grown especially strongly. The United Nations estimates the population of those aged between 15 and 64 at 96m for 214, 2m more than at the beginning of the new millennium. The rise is now coming to an end, however. While the baby-boomer generation is now in its 3s, China s youth population (those between 15 and 29) is expected to drop significantly from 347m in 22 to 25m in 25. icaew.com/economicinsight cebr.com economic insight Greater China Q1 215

5 Figure 7: China s population by age group (bn) Source: United Nations World Urbanisation Prospects, Cebr analysis As a result, the demographic dividend of a society with more workers, fewer dependants and a falling birth rate spurred on by the one-child policy, has ceased. The share of people of working age in the population has peaked, meaning that the ratio of dependants to working-age people is starting to rise. China s population is expected to peak at 1.4bn in 245 according to UN projections. By then, the working age population will have fallen by about 24m from today s level, but there will be 183m more dependants. Looking 5 years ahead, the dependency ratio will have risen to.5, up from.3 in 214, imposing a substantial economic burden on society. Figure 8: Dependency ratio After a delay because of protests and civil unrest in Hong Kong, the long-awaited Shanghai-Hong Kong stock exchange connection launched in late 214. According to the project s framework, investors in the two markets can buy and sell shares on each other s stock exchange. This is expected to be a boost to economic activity for Hong Kong in 215, strengthened further by the rise of the appeal of the renminbi. This will be somewhat offset by increased uncertainty on the global stage especially in the eurozone that is expected to take a toll on the outward-looking island economy. Overall, these dynamics should help growth reach a pace of 2. this year, accelerating to 2.3 in 216. Further ahead there will be some pressure as tightening monetary policy by the US Federal Reserve and the Bank of England feed through to the financial markets. Growth in Hong Kong is expected to slow to 2.1 in 217. Macau s leisure and tourism-based economy is undergoing a crisis, fuelled by efforts in the mainland to contain corruption through tighter visa restrictions to the island. The economy contracted by 2.1 year on year in Q3 214, after three quarters of growth close to doubledigit pace. Given this, growth is forecast to slow to 7.7 in 215 as the island takes a further hit from competition from the mainland s newly-launched Hengqin island hub. Further integration with the rest of China through the Shanghai Free Trade Zone, and the opening of the Hong Kong-Zhuhai-Macau bridge are expected to sustain solid growth of 7.2 and 7.9 in 216 and 217 respectively. Figure 9: Greater China GDP growth forecasts Mainland China Hong Kong Macau Source: Cebr forecasts China India Source: United Nations World Urbanisation Prospects, Cebr analysis Stock exchange connection to Shanghai boosts economic outlook for Hong Kong The economy of mainland China expanded by 7.4 over 214, just shy of the target set by the government for 7.5 and below the average seen in previous years. Despite this slowdown, the economic outlook for the years ahead remains fairly solid. Even though growth will continue to slow, this is due to China s transformation into a mature and developed economy, with a heavier focus on reforms. This is a much more sustainable course for the world s second-largest economy, compared to the option of growth-boosting risky measures such as the expansion of credit and asset prices that makes bubbles and crashes more likely. To the extent that this rebalancing continues to be the focus of China s policymakers, we expect the economy to expand by a solid 6.9 this year, cooling gently to 6.5 in 216 and 6.3 in 217. icaew.com/economicinsight cebr.com economic insight Greater China Q1 215

6 1 In constant 199 Purchasing Power Parity (PPP) terms 2 Dependent population (those younger than 15 plus those older than 64), share of working-age population (15-64 years old) For enquiries or additional information, please contact: Juni Ngai T / E juni.ngai@icaew.com Cebr The Centre for Economics and Business Research is an independent consultancy with a reputation for sound business advice based on thorough and insightful analysis. Since 1993 Cebr has been at the forefront of business and public interest research. They provide analysis, forecasts and strategic advice to major multinational companies, financial institutions, government departments and trade bodies. ICAEW is a world leading professional membership organisation that promotes, develops and supports over 144, chartered accountants worldwide. We provide qualifications and professional development, share our knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession. As leaders in accountancy, finance and business our members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together we contribute to the success of individuals, organisations, communities and economies around the world. Because of us, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance. ICAEW Greater China Room 113, Tower C1, Oriental Plaza, No. 1 East Chang An Avenue Beijing 1738, China icaew.com/china ICAEW Chartered Accountants Hall Moorgate Place London EC2R 6EA UK icaew.com ICAEW 215 MKTPLN1382 3/15