About the weak points of the two superpowers in the trade war – focus on China
Hadn’t China’s Prime Minister Xi Jinping just recently drawn his people’s attention to a period of meagre deprivation? The reasons for this go back a little and are massively intensified by the trade dispute.
China’s achilles heel: the labour market
China’s unemployment statistics is probably the most unreliable economic figure from the developed countries. Between 2002 and 2018, this figure never rose above 4.3 percent and never fell below 3.9 percent. This is a level that is currently “officially” sustainable. Despite the financial crisis in 2008 and China’s growth problem in 2015/2016.
Can this economic fairy tale be trusted even in the smallest sense? This reveals the great concern that drives China’s government the most. The fear of a slump in the labor market. Last Wednesday we pointed out the social dynamite behind this issue in connection with the well over 100 million migrant workers in China who need to be cared for. Here are a few arguments.
China’s way of counting unemployment
One reason for the strange unemployment figures is probably the registration. According to the Chinese population registration system (Hukou) city residents are registered as workers and the countryside population as farmers. This means that the hundreds of millions of migrant workers are not properly recorded by the statistics when they leave their homeland to work in a factory.
China’s social systems
Since very low contributions to unemployment insurance are paid in China – in Beijing it is just 0.2% of salary and 0.8% paid by the employer – many people do not register unemployed after a job loss. This is because there is hardly anything to be done. Other statistics ( Beijing People’s University) show alarming developments. Throughout the country job offers have fallen by 10% while demand has risen by 8%. In Beijing alone the number of jobseekers in the last quarter of 2018 rose by 47% compared to the previous quarter. This was well before Donald Trump’s further tightening of customs tariffs.
Although the state supports its companies and encourages hiring but the proportion of private companies is already at 85%. China is currently experiencing the greatest structural change in decades – the transformation from a production site for the world to a high-tech country with a service sector.
Another problem – industrial robots
Automation is also progressing in China. According to official Chinese figures the number of industrial workers fell by 60 million between 2012 and 2017. The balance was made up by jobs in the service sector. Currently very interesting is also the intention of the final manufacturer of Apple’s iPhone Foxconn to replace 30 % of its workers with robots.
From all the arguments presented it becomes clear why Xi Jinping has committed his citizens to tougher times. Even regardless of the trade dispute. He trusts in his citizens’ ability to suffer. But in the event of massive job losses without a safety system it should quickly reach its limits. The infamous social unrest. Even if Xi Jinping was elected for life he has no almighty power and a recession would generate a social problem of unprecedented proportions.
It is without doubt a struggle of the economic giants. It is a trade war between the United States and the People’s Republic of China. And at the moment it is not predictable who will give in at what point in order to reach a fair compromise.
But there are two weaknesses that no government can ignore. In the US it is the stock market that we have already written several comments about, “The trillion dollar risk…” and for China, it is the employment problem outlined above. Let’s see who is hit harder and who is more likely to give in. But there is one thing we would almost like to bet on: Donald Trump will be quite deceptive in the event of a 10% plus stock market slump. But so far the markets still trust in the economic status of the superpower – soon those times are over?