Recruiting in China

By DANIEL H. ROSEN

While everyone is glad to put 2009 behind them, 2010 could be an even tougher economic year for China. To climb out of the global contraction, Beijing has engineered a property bubble characterized by oversupply in commercial real estate and unsustainable price gains for residential property. The consequences of this will bite in the new year.

To soak up and justify this excess, China's leaders are trying to stoke demand by accelerating the already epic urbanization trend, reducing constraints on migration and urban registration. The leadership is betting on the connection between accelerated urbanization and consumption, too. In 2008, 43% of China's population was considered urban, versus an average of 79% for Latin America, 73% in the euro area and 82% in the U.S: China still has a long way to go.

By front-loading this urban growth, China will bolster prices for upstream raw materials like iron ore and aluminum in the near term and keep construction companies busy. But many people are concerned that China's urban factories already are overbrimming with overcapacity in almost all sectors, and boosting urban migration will just aggravate overproduction, which will spill into world markets.

If China is already suffering overcapacity in everything, then indeed swelling the urban population would just exacerbate problems. But it isn't. In fact, there are huge swaths of economic activity and employment simply missing from the Chinese marketplace. Policies that address the reasons for this can create tens of millions of new jobs in traditional and new sectors in the years ahead, adding to domestic consumption and diverting the country from a collision course with its trading partners.

Consider three sectors: healthcare, manufacturing white collar, and education.

Healthcare: China has 1.6 doctors per thousand people; the U.S. has more than 23. Not that China wants to replicate everything about U.S. healthcare, but given rising pathology and mortality due to aging baby boomers, changes in diet, lifestyle, longevity and environmental contamination, filling this shortfall is critical. Reaching the U.S. ratio would mean adding almost 30 million doctors, not to mention multiples of the current low numbers of supporting staff—nurses, palliative-care specialists, hospital administrators and hundreds of other subspecialties comprising the modern healthcare sector.

Manufacturing White Collar: For all its storied manufacturing-sector prowess, China's goods makers skimp on R&D, quality control, brand management, financial planning, environmental-health safety and almost every other white-collar position that turns a manufactured commodity into a branded product and generates intangible value for the firm: value that makes up a third or more of assets in most Organization for Economic Co-operation and Development firms.

While China Inc. may have overcapacity on the assembly line, it has extraordinary undercapacity in the business functions that turn a $10 generic toaster coming out of a Chinese factory into a $75 Braun-branded toaster sold at retail in the U.S. or Europe.

China would need at least 60 million more white-collar workers to be comparable with the U.S. on this score. Given the different development levels, we might cut that in half, but 30 million missing office-worker bees is a lot of jobs.

Education: The missing-jobs number is also huge in education. China has 10 teachers per thousand people, as opposed to 22 in the U.S. Basic education for urban migrant-workers' children is a critical task if accelerated urbanization is to generate more prosperity and not just worsening income inequality, social tension and developmental problems like crime and an underclass. China currently needs another 16 million teachers to reach the ratio in the U.S., as well as attendant teacher-trainers, guidance counselors, school administrators, and other related employees.

Of course there are reasons why these jobs don't already exist.

In the case of healthcare and education, Beijing has chosen to save resources or transfer them to state-owned enterprises rather than make sufficient public expenditures, while simultaneously preventing private enterprises from investing in these areas as businesses. There are some low-price private hospitals and clinics in China, but with limited resources and market shares. In manufacturing, the cost of capital to build up white collar employment for private and SME firms is typically two-to-five times that of the low nominal rates heavier state-owned enterprises enjoy. And when they are able to build a brand and their own intellectual property, poor enforcement of regulations and intellectual-property protection jeopardizes their ability to recover their investment.

These three sectors just scratch the surface of new job potential: China is far from suffering "overcapacity in everything." The problem is that what is overcapacity doesn't create many jobs.

Steel, aluminum, cement, plate glass and upstream petrochemicals together create just 14 million jobs in a labor pool of 780 million, which is fewer than the number of service-sector jobs in Guangdong Province alone.

China's consumption-urbanization policy thinking is the right way to go, but only if policy simultaneously addresses the biases in the financial sector that starve job-creating sectors while larding other industries with capital. What China needs to make its urbanization strategy the solution rather than an unsustainable bubble machine, to put it simply, is affirmative action for labor-intensive industries.