Recruiting in China

CHINA'S monetary policy will not shift substantially in response to the global downturn. But employers in China should increase wages by 10 per cent in order to attract workers as the labour surplus disappears.

These are among the rare insights opened, through China's leading business publication, Caijing magazine, into the economic advice the country's leaders are being given as they face multiple challenges.

Cai Fang, director of the Institute of Population and Labour Economics at the prestigious Chinese Academy of Social Sciences, has spoken to the magazine about his message to Premier Wen Jiabao and the State Council, China's cabinet, during a closed-door meeting with eight leading economists.

He said: "We talked about whether economic growth will slow, how to contain inflation and stimulate growth, and whether China should maintain its tight monetary policy."

China's economists, he said, "are split on the two major macro tasks: fighting inflation and stimulating growth. However, we generally agreed that monetary policy should remain as it is. We should neither loosen it nor tighten it further."

Cai said officials at the State Council were especially concerned about the extent to which the slowdown of gross domestic product growth -- from 11.9 per cent in 2007 to 10.4 per cent in the first half of 2008 -- will hurt employment. "Should we retain the growth momentum to ensure high employment rates?" This, he said, was his main focus. "The growth rate is flattening out, while unemployment is climbing."

In the last quarter, ending June 30, registered urban unemployment reached 4.1 per cent. Clearly it was rising, he said. Before this year, it was declining.

"A few years ago, China's registered unemployment rate didn't reflect the real situation because it excluded laid-off workers. But the number of laid-off workers has largely been reduced in recent years due to the Government's re-employment efforts. Now the registered rate is close to what it is in reality."

But in China, he said, "economic growth and employment are not closely related. One reason is that Chinese policy favours large size companies. The preference became even more obvious when the Government adjusted its macro-economic policies recently."

Companies receiving government backing, he said, "are usually enterprises with high profits, low emissions, low rates of pollution and less reliance on resources. In reality, they are big companies, especially state-controlled ones, equipped with better technologies."

His institute surveyed 17 industries and found that capital-intensive companies, most of which are large firms, contribute substantially to GDP growth but are not so impressive in terms of creating new jobs.

Last year, the control of credit was tightened in both quantity and quality. Better risk controls and higher earnings were required for lending, and that situation diverted loans toward larger companies and away from small ones because, he said, "lending to them became even riskier".

Most unemployment, he said, is structural rather than cyclical. Coupled with the low employment rate of college graduates, the rate even shows signs of rising.

Cai said private companies, most of them small and medium-sized, had played an important part in absorbing labour displaced by massive lay-offs from state-owned factories.

But "the current economic slowdown, however, has hit them hard. And statistics tend to miss unemployment in these sectors", with migrant workers not being registered at all.

Tight monetary policy was not good news for such businesses, he said. "Historically, it's hard for these companies to borrow from banks, and they turn to the market for financing." With the central bank issuing the commercial banks with firm instructions to tighten lending, the SMEs tend to borrow privately from "grey" sources, which "leads to skyrocketing interest rates".

Tax revenues rose rapidly in the first half of 2008, he said, so, in compensation for the adjustments required from vulnerable businesses, "it's widely agreed among scholars that we can cut tax rates a bit.

"There are needs for more government spending -- natural disasters hit China one after another, and we just hosted the Olympics. And it might want to set aside some money for a rainy day."

However, "nobody is speaking on behalf of SOEs and advocating low taxes".

China has no nationwide social security system, he says. Some provinces don't even have a province-wide social security net. "That leads to many migrant workers withdrawing from the social security system. Why? For instance, in the pension system, workers pay 8 per cent of their salary and companies match it."

In seasonal, labour-intensive industries, workers finish their terms and leave the job for good. But their social security benefits can't go with them. So they have to withdraw from the system, taking back their own contributions, while the company's contribution stays within the system.

"So there is no upside for workers to join the pension system, and for companies it creates a financial burden," he said.

"Officials from inland provinces complain that coastal provinces have seen a fast increase of social security funds because they not only siphoned labourers from inland but social security funds as well."

Cai said that migrant workers' insurance provisions should be portable and nationwide. When workers retired, they should be able to receive both their own contributions and those from their employers. "China's development has reached a stage where labour shortages are occurring, and the labor supply-demand equation is changing. That requires a rise in salary and other benefits."

He backed the new Labour Law that came into effect on January 1, and which has come under attack from some employers, saying wages should rise by some 10 per cent.

"I think we should stick with the new law," he said. "There are problems with enforcing it, which were not created by the law itself but by a lack of support measures.

"Companies feel overburdened, partly because of the inadequate social security system. This is not the fault of the Labour Law. If a company can't bear a modest rise, it is not competitive except as a sweatshop. We should let such companies die, if they have to."

In developing countries, he said, sometimes when laws are made to protect workers the result is higher unemployment. "The unlimited supply of labour in developing countries is to blame.

"India is one good example. Research shows that economic development levels in different parts of India are directly related to their labour policies, and those which have tight labour regulations often lag in economic development."

The reason that Cai backs the Labour Law is that labour in China is moving from a surplus to a relative balance. "There must be some kind of incentive to spur labour supply and attract workers," he said.