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China’s official unemployment rate has been poorly reported as does not take into account nearly 300 million migrant workers, according to Liu Kaiming, head of the Shenzhen-based Institute of Contemporary Observation. Illustration: Perry Tse

China’s small businesses forced to cut back on staff just to survive as economic mood sours amid trade war

  • President Xi Jinping warned in January about a need to pay particular attention to the risks to social stability during the current economic slowdown
  • China’s mood had changed very quickly from a rapid expansion of consumer spending last year to a cautious ‘consumption downgrade’

With the Chinese economy slowing, concern has increased among Chinese policymakers about the outlook for employment, since ensuring a sufficient number of new jobs is seen as a necessary ingredient in maintaining social stability in the country. Employment was the top priority the Politburo set last July when it shifted its economic policy focus to stabilising growth, leading the government to enact a series of policies to counter rising joblessness. This series will explore the employment challenges faced by different segments of the Chinese economy. The first instalment examines the issues confronting small to medium-sized enterprises.

Chinese President Xi Jinping warned on January 21 that the Communist Party needed to pay particular attention to the risks to social stability from rising economic problems, as evidence increasingly suggests that the nation’s employment situation is deteriorating rapidly, particularly among small and medium-sized businesses.

Whether Beijing will take the steps needed to end the trade war with the United States and stabilise growth this year remains to be seen, but Xi’s warning is borne out by the experience of business owner Guo Fengcen in southern Guangdong province, one of China’s export manufacturing hubs.

When deciding whether to borrow money to expand his business two years ago, Guo, who runs a group of small cake shops in the city of Dongguan, had not expected that the ups and downs of China’s economy would change so fast that they could upend his dream.

In February 2017, Guo and his family began their ambitious venture to expand a few small shops into a chain throughout the city, at the time when there was a common belief throughout the nation that every sector would continue to boom.

Beijing has pledged to increase its support to the private sector to boost growth. Photo: Xinhua

The outlook for all aspects of the economy, including consumer purchasing power, private investment, personal income, property prices, and the country’s technological advances, was bright.

Infused with this optimism, Guo and his family borrowed 2.3 million yuan (US$341,000) to supplement their savings, rented a one-floor factory for their new baking equipment, opened and decorated 24 new shops and hired about 150 new staff.

But the growth engine that had supported the dream suddenly sputtered last year due to the effects of the escalating trade war with the United States.

And despite upgrading to the fixtures and fittings in the shops and improving the quality of the cakes and pastries, Guo’s business was worse off than before the investment, as the nation’s confidence rapidly declined, forcing China’s middle class to cut their spending, and small and middle-sized firms to cut their investment and employment levels in expectation of a cold winter ahead.

Employment has also fallen at firms in once-booming sectors, including the internet, hi-tech and online game start-ups, and even at those with famous domestic brands, according to industry insiders.

Small businesses are increasingly struggling with shrinking foreign orders due to US tariffs, tight cash flows, a depreciating yuan that raises the cost of imported materials and soaring domestic costs for energy, taxes, rent and labour, causing the entire venture capital community to become very cautious about investing.

Guo had to cut his losses quickly by closing the factory, selling equipment at a low price and cutting the number of shops from 24 to nine and the workforce from 150 to about 35 in less than two years.

“I found I had not taken into account a fatal factor. That’s the trend spreading and increasing in Dongguan that factories there have been downsizing their workforce,” he said.

“But most of our cake shops were located in industrial townships in Dongguan. The size of staff at these factories is actually the most practical index for my business.

“The Suyin electronics factory in Qingxi township has also downsized from 10,000 to currently about 2,000 workers. These workers were my clients. They bought cakes every day for breakfast, birthday parties and various occasions.”

After 20 years of running a garment factory in Guangzhou, China’s manufacturing hub, 42-year-old Leo Liis also shrinking his workforce, as profits in the country’s manufacturing sector are locked in a downward spiral. His factory focuses on manufacturing men’s underwear for the mainland middle-class market and once employed 600 workers at its peak in late 2000s, with that number now cut to just 100.

The mood in China changed very quickly last year from a rapid expansion of consumer spending to a cautious “consumption downgrade” for fear of the economic outlook, Li said, noting that as profits drop so does the workforce.

“I have kept on only the senior skilled workers. According to what I know from many of my friends and their friends, all private manufacturers are doing the same because there aren’t enough orders to sustain so many workers.” he said.

The size of staff at these factories is actually the most practical index for my business.
Guo Fengcen, entrepreneur

“We can hire temporary workers if new orders come.”

The added benefit of temporary workers is that firms do not have to pay social security contributions, reducing one of the largest operating costs, as they are generally paid less and receive fewer benefits than full-time workers.

Internet and gaming companies in China have been going through a cold winter, with the likes of online travel app Qunar, consumer website Meituan Dianping and question-and-answer website Zhihu reporting job cuts.

Liu Yue, a veteran infrastructure engineer, was laid off in August by a Beijing-based online gaming company, which cut its staff from some 500 to 350.

He said many gaming companies in Beijing, Shanghai, Wuhan, Guangzhou and Shenzhen, had cut employment by up to half since early last year after regulators vowed to cap the number of new game releases and limit the time children spend playing games under Xi’s call to address eyesight issues among minors.

“The sector was booming in 2015 and 2016. Even private farms, businesses selling wedding dresses or mine operators were investing in gaming workshops to develop new games that they bet would become bestsellers,” said Joseph Ma, who works for a Guangzhou-based mobile gaming distributor.

“A young computer gaming programmer or designer could earn more than 30,000 yuan a month (US$4,448) at that time. Now it’s another story entirely.”

In the hi-tech sector, more than 200 new graduates from top universities across the country had their contract offers withdrawn by Shenzhen-listed Mindray Bio-Medical Electronics in December due to a change in the company’s recruitment plans.

China’s largest medical equipment manufacturer later reinstated the job offers citing “corporate social responsibility” having initially sparked a public outcry.

Jobseekers wait in line to enter a recruitment fair specially for teaching jobs in Shanghai in October 2018. Photo: Xinhua

China’s official unemployment rate has been poorly reported as does not take into account nearly 300 million migrant workers, according to Liu Kaiming, head of the Shenzhen-based Institute of Contemporary Observation, which monitors working conditions at hundreds of Chinese contract manufacturers.

Concern will increase among investors about whether to invest or whether they should close factories and move out of China. This would definitely hurt the job market.
Liu Kaiming, Institute of Contemporary Observation

“So far the unemployment level is under control in China. On the one hand, China’s labour force is shrinking. On the other hand, the services industry has become much bigger than it was during the financial crisis in 2008 and has been able to absorb a large proportion of laid-off workers in a short period of time,” Liu said.

“We have to see if the US-China trade war and tensions in the relationship ease this year or worsen. If they get worse, concern will increase among investors about whether to invest or whether they should close factories and move out of China. This would definitely hurt the job market.”

Ernan Cui, an analyst from research firm Gavekal, argued that China would face a difficult job market regardless of whether Beijing could reach a deal with Washington to end the tariff war.

China looked to be headed for a more broad-based slowdown in consumer spending in at least the first half of 2019, since the employment components of the purchasing managers’ surveys, both for the manufacturing and non-manufacturing sectors, started to deteriorate sharply in September, Cui said.

He said these were good leading indicators of household income growth, so a further slowdown in income and consumption in the next several quarters was almost guaranteed.

Jobs are cut as Chinese factories automate to move manufacturing up the value chain. Photo: Xinhua

Other signals from Chinese industry echo the worries about the outlook for China’s job market. China’s industrial robot productions, including output by foreign companies in China, has declined in each of the four months from September to December last year, including a drop of 12.1 per cent in December compared to a year earlier.

This is a sharp reversal of the average monthly growth rate of 30 per cent per month in the first five months of last year.

China accounts for 70 per cent of the world’s electronic production capacity, and the trade war is weighing on manufacturers’ decisions on whether to invest in industrial robotics.

“China’s robotics industry is showing weakness from the impact of the trade war on the electronics industry, which is one of the most important customers for robot makers, accounting for one-third of its sales,” Nikkie Lu, an analyst at Bloomberg Intelligence said.

The second instalment examines the issues faced by Chinese students returning from studying overseas as well as foreign workers.