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Economic Insight:
Greater China
Quarterly briefing Q1 2015
China’s long-term outlook remains solid
despite missed growth target in 2014
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 2014. 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
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In subsequent years, the expansion in higher education
continued at a much faster pace than during the preceding
decades. Between 2000 and 2013, the number of Regular
Higher Education Institutions more than doubled to reach a
record high of almost 2,500.
Figure 1: Number of Regular Higher Education
Institutions (total)
3000
2500
2000
1500
1000
2013
2009
2005
2001
1997
1993
1989
1985
1981
1977
1973
1969
1965
1961
1957
1953
0
1949
500
Source: National Bureau of Statistics of China, Cebr analysis
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 2000 and 2013.
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.
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8
7
6
5
4
3
2
Undergraduates
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
1995
1
1990
The scale of higher education had begun expanding from
the end of the twentieth century, but was fairly modest:
over the span of the 20 years between 1979 and 1999 the
number of Higher Education Institutions rose from 633 to
1,071, a 70% 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 0.22m initially and then by a further
0.33m 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%.
Figure 2: Number of graduates in Higher Education
Institutions, by level of education (m)
1985
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.
1980
The transformation of China’s higher education
Postgraduates
Source: National Bureau of Statistics of China, Cebr analysis
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 1.0 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
1.2
1.1
1.0
0.9
0.8
0.7
0.6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Ministry of Human Resources & Social Security
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16.4
16
80
60
40
20
11.3
10
8
8.1
8.2
Junior
High School
Senior
High School
& Vocational
6
4.2
2
Primary
Education
Junior
College
University &
Graduate School
Source: China Household Finance Survey
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
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2012
2011
2010
2009
2007
2008
2006
2005
2004
2003
0
Private enterprises
Source: National Bureau of Statistics of China, Cebr analysis
Labour market frictions key to understanding
unemployment in China
14
12
0
100
SOEs
%
18
4
120
2002
Figure 4: Unemployment rate for the 21–25 age group
broken down by education level (2012)
140
2001
Putting the figures into context, China’s overall
unemployment rate stood at 4.1% in 2012, four times
smaller than that seen for university graduates. Estimates
for youth unemployment as a whole range from 4% to
20%. Still, youth unemployment in China is lower than
what is seen in Europe, where in Greece and Spain, for
example, over 50% of young people are unemployed. In
Germany, the figure was closer to 8% in 2012 and in the
UK just over 20%.
Figure 5: Number of workers in China (m)
2000
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 10 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.
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 1990s. Figure 5 shows
the changes in the number of workers in industrial
State-owned Enterprises (SOEs) and Private Enterprises.
Between 1998 and 2012, more than 20m 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.
1999
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.
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.
1998
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.
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
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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
%
4.6
4.4
4.2
4.0
3.8
3.6
3.4
3.2
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Central
East
West
Source: National Bureau of Statistics of China, Cebr analysis
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
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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 $4,660 in
2000 to $15,250 in 20121. 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 50 years the
country’s population has doubled. According to the 2010
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 960m
for 2014, 200m 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 30s,
China’s youth population (those between 15 and 29)
is expected to drop significantly from 347m in 2020 to
250m in 2050.
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Figure 7: China’s population by age group (bn)
1.4
1.2
1.0
0.8
0.6
0.4
0.2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0.0
0–14
15–29
30–59
60+
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 2045 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 50 years ahead, the dependency
ratio will have risen to 0.5, up from 0.3 in 2014, imposing
a substantial economic burden on society.
Figure 8: Dependency ratio2
After a delay because of protests and civil unrest in Hong
Kong, the long-awaited Shanghai-Hong Kong stock
exchange connection launched in late 2014. 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 2015, 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 2.0% this year,
accelerating to 2.3% in 2016. 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 2017.
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 2014, after three quarters of growth close to doubledigit pace. Given this, growth is forecast to slow to 7.7%
in 2015 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 2016 and 2017 respectively.
Figure 9: Greater China GDP growth forecasts
%
9
8
7
%
6
65
5
60
4
55
3
50
2
45
1
40
0
Mainland China
35
Hong Kong
2015
30
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
China
2016
Macau
2017
Source: Cebr forecasts
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 2014, 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 2016 and 6.3% in 2017.
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1 In constant 1990 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 +852 2287 7277 / 6381 1687
E [email protected]
Cebr
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