China's job creation machine has stopped and the Chinese Government is frightened. For the first time in 20 years, township enterprises are no longer soaking up the massive surplus pool of rural labour. In fact they are shedding workers. 'It is an unexpected shock and we are very worried. Last year the number of people employed by township enterprises dropped by 4.58 million,' said Chen Jianguang, chief economist at the Agriculture Ministry's township enterprise department. China has about 110 million unemployed rural labourers and every year another 13 million new labourers join the market. In the 1980s, rural enterprises were growing so fast they were hiring as many as 12 million a year. 'In 1995 they still created jobs for eight million, but since then the rate has fallen steadily to fewer than four million,' said Jiang Zhuyi, a top researcher at the Agriculture Ministry. Chinese statistics also show that the number of registered rural enterprises has dropped from 22 million to at least 20 million. This could mark the end of what was once hailed as 'China's unprecedented economic miracle'. Rural unemployment is already more than 35 per cent and could soon start rising rapidly if it grows by an extra nine million a year. 'From now on we may never again see rural industries experience such dramatic growth rates,' said Mr Chen. Han Jun, of the Chinese Academy of Social Sciences, issued a public warning in the People's Daily earlier this year. 'If there are no effective measures, the rise in rural income and consumption could reverse,' he warned. It is now hard to see where the next wave of growth can come from. In the first wave, from 1979 to 1985, rural incomes shot up when the state abandoned collective farming and lifted restrictions on sales of farm goods. Rural enterprises were given another lift in the next 10 years when millions left their farms to work in the coastal regions or the cities. Some reports claimed 100 million or even 130 million were on the move and sending back billions of yuan in remittances, lifting rural incomes by as much as 25 per cent in some inland provinces. Mr Jiang now believes that at the peak there were 90 million on the move but now the number of peasant migrant labourers has fallen by 15 million. 'The number of migrant labourers started dropping from 1996 and is still falling,' Mr Jiang said. 'And even those in work are getting low wages or not receiving their wages.' The urbanisation rate is also being reversed. In Beijing, the number of rural migrants has fallen from a high of 3.2 million to 2.6 million, and peasants have been sent home from many other cities. The growth in rural incomes has slowed to a near-halt for the first time since Deng Xiaoping's reforms started in 1979. When Premier Zhu Rongji started the austerity campaign in 1995, the government tried to boost incomes from agriculture. Government spending rose steeply, and increased by 14 per cent last year and by 12 per cent this year. Grain prices were raised by 60 per cent, and also those for other commodities the state purchased from peasants. This year China's leaders are pinning their hopes on boosting infrastructure spending. The Agriculture Ministry believes that building more roads, repairing dykes and so on could replace some of the jobs lost by the slump in urban construction caused by the tight monetary policies. But this is a temporary stop-gap measure which may help Mr Zhu meet this year's target of eight per cent growth. 'The government has placed a lot of hope on the rural market because the urban market is saturated. But if you want them to buy more products, you need to increase their cash income and much of peasant income is in goods, not cash,' said Mr Chen. 'That's why Premier Zhu has been telling local governments not to pay the peasants with IOUs.' The mainland press has been full of articles supporting this policy by listing the huge savings of rural China, comparatively low ownership of consumer goods, and recounting how Chinese manufacturers had once neglected the peasant market to go after urban consumers. This week one model company, Haier, has been boasting how it has been adapting its washing machines to suit the requirements of its rural customers. It claimed the delicate machines sold to peasants by not-so-clever competitors were breaking down because the peasants were also using them to wash potatoes. Overcapacity in most manufacturing sectors is admitted to be between 50 and 60 per cent and the amount of unsold goods is vast - 20 million bicycles, 1.5 billion shirts for men, 10 million watches, 700,000 motorcycles. The collapse in rural incomes and unemployment cannot have come at a worse time for China. A further 10 million people in the cities could lose their jobs this year and within the next two years China could have 30 million either unemployed or surviving on subsistence wages. 'The government is now trying to solve the urban unemployment problem by sending home migrant workers,' said Feng Lanrui, a former vice-president of the Institute of Marxism-Leninism and a critic of the household permit system. In 1996, China's Public Security Ministry introduced new laws to stop peasants from working in the cities, making it much harder for them to obtain residency permits. Many cities issued regulations disqualifying peasants from about 20 types of jobs. Beijing, like other big cities, is now trying to persuade laid-off workers to leave for the countryside and take up farming. Some Chinese officials are now more anxious than ever to talk up foreign investor confidence in the China market and its potential in light of the present Asian financial crisis. China's whole development strategy and its political stability is now being called into question. If China cannot keep creating enough jobs for both its rural and urban populations, the future could be far bleaker than many hoped. 'This is causing a lot of problems. It is increasing the instability in the countryside. There are already lots of riots and protests which are allowed to be reported,' admits one senior party official. Some want a rethink of the government's industrial strategy which aims at the rapid acquisition of modern technology designed to cut manpower because labour costs are so high in China. 'The trend is always to shift from capital-intensive to technology-intensive industry. We have seen a fourfold drop in the capacity of each unit of capital investment to create jobs,' Mr Chen said. This means that though statistics may show that rural and township enterprises keep increasing production - and the planned increase in output is still a huge 18 per cent this year - they are not creating nearly as many jobs as they used to. It is state policy to attract hi-tech computerised production and the government has created 53 hi-tech development zones. Nearly every province and city has one and the special economic zones have taken the lead in the drive to abandon labour-intensive sweat shop production as part of a campaign to emulate Singapore and Taiwan. The consequence is showing up in the pattern of China's exports. The proportion of primary products and textiles and clothing has been steadily falling in the past five years while the proportion of machinery and mechanical appliances has grown by a corresponding amount. The latter has increased from 17.5 per cent in 1993 to nearly 23 per cent this year. Yet even in the countryside the mere availability of more machinery has reduced the need for manual labourers. Beijing has even issued edicts banning local governments from carrying out rural infrastructure investments with heavy machinery. Domestic critics of China's policies also blame the employment crisis on the country's refusal to join the rest of the world in allowing peasants to migrate to cities. Under Mao Zedong's de-urbanisation policies, some 17 million urban Chinese were sent to the countryside and the urban population fell to as low as 14 per cent. After 1979, the government still kept to a largely Maoist policy of encouraging country towns to expand into small cities but rigorously preventing peasants from moving to the cities, especially big cities. Mexico City has 17 million people but Beijing has fewer than nine million urban residents, even including the illegal migrants. As such China does not have the huge slums of many Third World cities, a fact of which many are still proud in China. There are, however, conflicting statistics about the proportion of China's urban population. Some claim it is 29 per cent and heading towards 40 per cent, but others claim only 18 per cent of the population lives in cities of more than 200,000. The average rate of urbanisation in most developed countries is 70 per cent and in developing countries it is around 40 per cent. China has different sets of figures because one set counts the rural population of urban administrations. This is how many people claim Chongqing is the world's biggest city with 30 million people. In fact, there are fewer than three million city-dwellers. The rest live in villages within a vast municipality bigger than the territory of many United Nations member states. China's hukou or residential permit system prevents people from leaving their villages and correspondingly allows urban people to keep their status even if they live in a village. 'The household permit system must be reformed,' says Ms Feng. 'It is also completely wrong. In principle it is also against the constitution. It deprives them of their right to survival and work.' Further, she argues that cities need labourers to do the hard, dirty and exhausting work. 'Even when you send them home, the jobs they leave are not being filled by urban residents. This is wrong policy which worsens inequality,' she said. Some experts suspect that the rural unemployment crisis will force the Communist Party to reverse the policies started in 1996 of sending the peasants home. The pressure came from the police who were struggling to cope with a crime explosion and officials concerned about birth control because migrants could have more children without being detected. China could for instance change the definition of a city from one with 500,000 residents to one with one million to encourage faster migration. The concentration of resources in big cities has all over the world been shown to generate more wealth and more opportunities. With a billion rural residents, China has a long way to go to catch up and to reach the per capita income levels which many investors have been misled into believing already exist. China has been anxious to create the impression of a larger urban population than exists because urban dwellers have incomes 2.3 times higher than those of rural residents. Inflating the number of urban residents thus increases the potential pool of customers. Statistics have also been massaged to suggest that migrant workers earn incomes close to those of urban residents but in fact they only earn on average 450 yuan (about HK$420) a month and, altogether, such incomes account for only 10 to 12 per cent of the total annual incomes of rural households. Mr Jiang also says he strongly doubts that peasants on average have annual incomes of just more than 2,000 yuan as official statistics claim. Some 63 per cent of peasants are totally dependent on agriculture for their incomes. Out of every 100 rural households, only nine have washing machines and 27 have colour television sets. Although reports suggest many would like to buy VCDs, TV sets and many of the other consumer products which domestic factories are desperate to unload, sales will grow too slowly to save many industrial jobs in the current slowdown.