In 2014 China reported yearly economic growth at 7.3% of GDP. In 2015, it reported 6.9%, the slowest annual growth rate since 1990. On March 5th Premier Li Keqiang announced China’s GDP growth target for 2016 to be between 6.5% and 7%. Forecasts from the IMF estimate an expansion of 6.3%. In January of 2017 many expect China to announce it hit its goal. In January of 2017 many will doubt it actually did.
Reasons abound for the skepticism and pessimism. Analysts increasingly take official Chinese economic data with some salt (a pinch or bucketful depending on who you ask). Such skepticism makes private analysis on economic trends especially valuable. The Caixin/Markit China Purchasing Manager’s Index (PMI) is one such analysis. Designed to give a “single-figure snapshot” of the current climate in Chinese manufacturing, the Caixin PMI registered at 49.4 for April. A number under 50 indicates contraction. According to this metric, Chinese manufacturing contracted every month over the last 14 months.
Growth in China’s service sector, accounting for over half of GDP output, helped balance this year long contraction. However, its expansion is slowing—perhaps unsurprising given that manufacturing accounts for over 40% of GDP, and any contraction in such a large sector of the economy will be felt elsewhere.
But what caused the manufacturing slowdown in China?
The answer is complex. In industries dominated by state owned enterprises (SOEs), Beijing ordered the slowdown. In an effort to transition the economy from export led to consumption led growth, the Party plans to cut 1.8 million jobs at bloated and insulated SOEs in coal and steal manufacturing. Outside SOE’s, the transition to emphasizing domestic consumption over exports leads the government to further dampen growth by cutting deficit spending and (over) investment in infrastructure.
In the private sector, complications abound. As AmCham China’s 2016 Business Climate Survey reports, although most companies are optimistic about growth opportunities in China’s emergent middle class, they are increasingly frustrated. The survey of 500 companies working with the Chamber of Commerce found opaque laws, arbitrary enforcement, and governmental interference in industries considered strategic (like aerospace and fossil fuels) at the top of the list of frustrations.
But, potentially the biggest drag on the private sector is the rise in operating costs. Wages for manufacturing jobs in China, at least for those who receive them, have been going up for some time. China has long since passed what is known as the Lewis Turning Point, or the point where there are no longer excess migrant workers willing to move from the countryside to coastal cities to work. In fact, as economic opportunities in villages and smaller cities improve, a growing number of workers chose to move away from manufacturing centers like the Pearl River Delta, the area just north of Hong Kong.
Those workers who remain are much more organized than they once were. According to the China Labor Bulletin, a Hong Kong based NGO, Chinese workers organized over 6,500 collective actions in the past five years, 3,095 of which were held in the last 12 months. Some strikes, protests, and sit-ins were for overtime, and some were for better working conditions. Many of the more recent incidents are over wage arrears. China’s National Bureau of Statistics reported that in 2015 some 2.7 million migrant workers were not paid on time.
All this pushes international (and domestic) corporations, who primarily came to China for low production costs, to adapt or leave. Many, forced by their workers, start paying higher wages and providing safer working conditions. Simultaneously, many start heavily investing in automation, as factories around the world have done for years now. Others move abroad to countries like Mexico, Vietnam, and Bangladesh.
Given the rhetoric of some presidential candidates, Americans could be forgiven for picturing China as filled with a limitless supply of workers desperate for jobs that until recently were done in America. This image was partially accurate 15 years ago. Today it is not. Today many Chinese workers themselves fear they will never see their wages or their jobs will leave China. This past January most migrant workers in China left large manufacturing cites to return home for Chinese New Years. Some will not return.