China weighs slowdown risks as world ponders spillover

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While the rest of the world frets about the knock-on effect of China‘s economic slowdown, the Chinese have a bigger worry: themselves.

As the transition of the world’s largest manufacturing hub to a consumption and services-led economy gets into full swing, jobs and money are being lost, threatening social stability in the communist state.

China premier Li Keqiang has repeatedly defended China’s economic policies, pledging to cut corporate red tape, reduce corporate debt, improve financial regulation and ensure no mass layoffs.

“We are confident that as long as we continue to reform and open up, China’s economy will not suffer a hard landing,” Li said as recently as March 16, in a message that resonated worldwide because what happens in China does not stay in China.

But inside China, there are protests as thousands of mine workers go unpaid, angry retail investors blame regulators for lost capital in and Beijing cracks down on unflattering news.

Here are the key issues China’s leaders are grappling with:

It’s no secret China’s gigantic steel and coal industries are in big trouble, as construction slows and industrial overcapacity becomes unmanageable.

According to Standard Chartered, housing and sectors dependent on housing contributed 1.1 percent points to GDP growth in 2015 – down from 3 percent in 2010.

In February, the Minister of Human Resources and Social Security Yin Weimin said the country is expected to lay off1.8 million workers in the steel and coal sectors as it restructured loss-making state businesses. He did not give a time frame for the layoffs, Reuters reported.

Premier Li has tried to sooth domestic tensions by assuring workers that central funding could be increased to help laid-off staff. The Chinese government had previously announced a 100 billion yuan ($15.3 billion) fund aimed at relocating and retraining affected workers.

According to reports, many are already being moved to jobs in the agriculture, logging and sanitation sectors.

Li did not specify the number of workers that would be laid off or retrained but numbers could be as high as five to six million over the next two to three years, Reuters has reported, and many that do find new jobs will likely be in lower-paid roles.

No jobs or lower-paid jobs will likely hit income growth, which could hurt hamper China’s move to a consumption-driven economy.

Disgruntled workers have been up in arms over what they claim are months’ worth of unpaid wages, as well as cuts to existing salaries.

In one of the latest incidents, thousands of Chinese miners staged a protest in northeastern Shuangyashan City in March, with reports that the miners were encouraging colleagues in other cities to rally.

The labor movement has the potential to threaten social stability in China.

According to Hong Kong-based non-governmental organization China Labour Bulletin, there was a dramatic increase in protests running up to the Lunar New Year in February, and protests that may well increase in the future as Beijing pushes ahead with mass layoffs.

The NGO has so far recorded over 800 labor protests this year in China, with most incidents happening in January before workers headed home for the festive season.

As well as the industrial sector, the garment, textile and shoe industries have been hit particularly badly; they accounted for 40 percent of all factory closure and relocation disputes in the run up to the New Year holiday, the NGO said.

Authorities are increasing less tolerant of worker protests, said CLB’s communications director, Geoffrey Crothall.

“(They are) more focused on reducing costs for business. Workers are being threatened and riot police are increasingly used to break up protests.”

Nowhere are jitters about China’s economic heath more pronounced than in financial markets, where Chinese equities entered 2016 with wild swings.

Investors are also nervous about yuan after the People’s Bank of China devalued the mainland’s currency twice last year and as the gap between onshore and offshore yuan widened.

The prospect of a sharp yuan devaluation has raised concerns of rapid capital outflows from China, which could spillover, posing risk to global growth, said International Monetary Fund Managing Director Christine Lagarde at the opening of a G20 meeting of central bank governors and finance ministers in Shanghai.

Beijing logged $100 billion per month in average currency outflows during November, December and January, with the yuan declining 1.8 percent against the greenback in that period. In February, capital outflows eased with central bank data showing reserves fell just $29 billion in February.

Chinese Premier Li Keqiang said last week at the Boao Forum for Asia in China’s Hainan province that the country will not devalue its currency to boost exports, according to a Reuters translation.

The prospect that any dirty laundry—from mass layoffs to furious— may come out in the open appears to be making the Chinese administration skittish.

In February, President Xi Jinping went on a media blitz, visiting party-controlled newsrooms and extolling the virtues of a media that operates with the best interests of the party and the state at heart.

State-run media Xinhua news agency, broadcaster CCTV and party paper People’s Daily covered his visits in an adulatory fashion, fawning over Xi sitting in a TV anchor’s seat; a Xinhua editor even penned a sentimental tribute to the Communist leader that included lines such as “my eyes follow in your wake” and “My fingers are heating up my phone with this poem that my vision has borne.”

Xi on his part, did not mince his words, telling the media that all their work “must reflect the party’s will, safeguard the party’s authority, and safeguard the party’s unity.”

The media appears to be taking heed; Western media noted that there were no news reports of recent protests by mine workers.

As well it might, having seen in August a financial reporter from top financial magazine Caijing make a televised confession that he should not have published a report about regulatory intervention in the stock market, having obtained the story through the “abnormal way” of using sources.

“I did it just to create a sensational effect and catch eyeballs,” Wang Xiaolu admitted on CCTV, according to a translation by Hong Kong Free Press.”It cost the country and investors very big losses.”

Another possible risk to China’s financial system comes from high debt levels at both banks and local authorities, although it is difficult to measure the severity of the issue given China’s opaque financial system.

Charlene Chu, who is senior partner at Autonomous Research Asia,told CNBC early this year that China’s seven-year debt boom may have been the world’s biggest over such a short period of time, with a lot of the debt having been spent on assets that aren’t performing.

“The size of banking sector assets has gone from $9 trillion in 2008 to $30 trillion at the end of 2015,” she said, noting that most of these borrowings went to the corporate, not the household, sector.

Meanwhile, provincial governments’ debt, often issued via local government financing vehicles,or LGFVs, has worried economists for years, with outstanding debt climbing to around 17.9 trillion yuan by the end of the first half of 2013, according to the most recently released national audit results, from around 10.7 trillion yuan in 2010.

Authorities have long been shy of addressing the issue but in late 2014, China’s State Council, the country’s highest authority, set quotas on the amount of debt that local governments could issue — a 16 trillion yuan cap — and required that funds raised be used for public projects rather than operational spending. The council tied debt levels to local officials’ performance reviews.

The State Council also barred local governments from using LGFVs and state-owned enterprises (SOEs) to raise debt and from guaranteeing or covering the liabilities of financial institutions or local companies.

Nyshka Chandran and Leslie Shaffer contributed to this article.

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