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James Flanigan

China Also Is Feeling Labor Pains

September 03, 2003|James Flanigan

Americans who are increasingly fretting about the loss of jobs to China should know that there is another country out there even more worried about the pitiful state of its labor market. That, oddly enough, is China.

Though its economy is developing rapidly, as noted in this space on Sunday, China faces huge challenges. In particular, the country of 1.2 billion is beset by overwhelming unemployment in rural areas. What's more, 100 million to 200 million people toil in underperforming and overstaffed state-owned industries that must try to make the shift into private ventures -- a thorny transition for the Communist regime.

All of this helps explain why China pushes two economic policies: holding down the value of its currency and wooing foreign investment. The first creates jobs by boosting exports. The latter creates jobs by increasing economic development. Given the extent of the employment problems, Chinese President Hu Jintao is sure to remain reluctant to abandon either of these approaches.

You can expect U.S. Treasury Secretary John W. Snow to come away from his visit to Beijing this week with polite words from Chinese officials -- but no actual rise in the value of the renminbi (the "people's currency"). The exchange rate, which has held at about 8.3 renminbi to the dollar since the mid-1990s, will persist.

Should Americans consider that a rebuff? An insult?

Not really. There will be a day when China is more receptive to U.S. trade demands and helps level the playing field by lifting the renminbi's value. For now, though, Hu has little choice but to stay the course.

Areas of rural China are mired with 125 million unemployed, according to "Fault Lines in China's Economic Terrain," a report prepared for the Pentagon by Rand Corp., the Santa Monica-based think tank.

Rural poverty, in turn, is driving throngs to look for work in the cities. This has caused agricultural output to grow less rapidly in the last decade than in previous years, a reversal of the usual pattern in which farm productivity rises as machinery and fertilizers are applied to the land.

Meanwhile, state-owned enterprises -- an enormous swath of the economy involving coal, oil, electricity, transportation, water and the manufacturing of industrial and consumer goods -- are a source of shoddy overproduction and a drag on total output.

No wonder that the state-owned banks financing these dinosaurs are saddled with at least $500 billion of bad loans.

Fixing this mess is far from easy.

Employees in state enterprises have their housing, children's educations and medical care tied directly to their jobs. The worker in Factory Five lives in an apartment owned by Factory Five, sees a doctor employed by Factory Five and so on. It is a throwback to the "company store" arrangements that many Americans worked under in the 19th century.

Attempts to change such arrangements have led to riots in many cities, including Wuhan, Liaoyang, Minyang and Beijing.

In every case, the Chinese government has given in to worker demands for the restoration of government jobs and perks rather than risk the spread of unrest that a private-sector transition would bring.

So, what should America do about this reality? We, after all, have plenty of problems of our own, including a reduction of 2.5 million mostly manufacturing jobs in the U.S. in the last three years. And cheap production from China is at least partly responsible for that.

Should we restrict imports from China? Should we look for other ways to punish that country if its policies don't come around soon?

Actually, the best thing is for us to keep our nerve.

Let's remember that, although it clearly has a long way to go, China is opening for business, not closing.

For example, World Trade Organization rules will unlock China's financial system to foreign competition in another year and a half. Not only will giants such as Citigroup Inc. be able to break into this exceptionally promising market but so, too, will local banking companies such as East West Bancorp Inc. of San Marino and Far East National Bank of Los Angeles.

Even the value of the renminbi is bound to be pumped up one day. Many experts predict that China will let the renminbi become fully convertible and its value float on world markets by the time the nation hosts the Olympic Games in 2008.

But for now, we must be patient and try our best to understand the other fellow's troubles.

As economist Donald Straszheim rightly notes: "China's priorities are simply not ours."

James Flanigan can be reached at

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