Top China official's criticism of labour policy sparks controversy

Minister blames labour laws for limiting supply of urban workers and affecting GDP growth

PUBLISHED : Sunday, 03 May, 2015, 4:40am
UPDATED : Sunday, 03 May, 2015, 4:40am

A senior central government official's rare public attack on labour policies has generated heated debate online.

In a speech to students of Tsinghua University's School of Economics and Management on April 24, Finance Minister Lou Jiwei said China had a 50 per cent chance of sliding into the middle-income trap within the next five to 10 years when its annual gross domestic product growth slows to 5 per cent.

The middle-income trap refers to a situation where a country that has achieved stable growth becomes stuck at that level.

Comprehensive reforms were desperately needed to raise the urban labour supply in order to avoid falling into the trap and to ensure an annual 6.5 to 7 per cent GDP growth in the next few years, Lou said, according to Tsinghua's official release on Thursday.

But before the university's release, an unofficial transcript of the speech had already made its rounds on the internet, stirring up controversy over whether the reforms Lou was pushing would come at the price of the nation's workers and farmers.

Lou, known for his reformist outlook and preference for a market-oriented economy, had noted China's growth might stagnate with the rapid erosion of its competitive edge as its large and cheap worker population aged.

China's labour contract law was flawed as it "reduced the labour market's liquidity and flexibility" by not allowing bosses to fire their workers, he said.

The law makes it compulsory for companies to sign open-ended contracts with employees with more than two years of service and to provide them with insurance and overtime pay.

It hence exposes employers to more wage and compensation claims from their staff, and business owners have complained that it raises their operating costs.

"That's why many investors chose to leave China," Lou said.

In response, contributor Huang He wrote on Ground Breaking, a website focused on China's disadvantaged group: "I understand his point is to meet the demand of capital increment by sacrificing workers' interests.

"[But] such a solution leaves Chinese labourers mired in low income and benefits capitalists in developed countries [instead]."

Lou also said China should cut farmers' subsidies, liberalise rural labour from farmlands, and improve its residence registration system so urban areas could have bigger labour populations.

But these would endanger China's lifeline of grain safety, wrote South China Normal University economics professor Hu Jing on food safety website People's Food Sovereignty.

"When domestic grain supplies are not ensured and Chinese people cannot maintain themselves, China will lose the premise to face the so-called middle-income trap," Hu said.

Lou became finance minister in 2013 after heading China Investment Corp, the mainland's sovereign wealth fund. He is seen as a no-nonsense man with profound knowledge of China's economy and financial system.

Analysts say Lou's remarks underscore top officials' deep concerns over China's economic slowdown, following a slew of disappointing economic data. In the first quarter, GDP grew 7 per cent - the slowest rate in six years.

Qu Hongbin , HSBC's co-head of Asian economic research, said China had a crucial battle to win in the next five years to avoid sliding into the middle-income trap.

"The successful experiences of Japan, South Korea, Taiwan and Singapore show that consistent industrialisation and urbanisation is the correct path to follow and fortunately China has been heading in the right direction," Qu wrote on his microblog.

The mainland's working-age population, aged between 16 and 59, continued to fall last year - by 3.7 million to 915.8 million.

While the shrinking labour pool prevents a rise in unemployment, it is also driving up labour costs and eroding competitiveness. This means labour will contribute less to growth than it had in the past 20 years.

A total of 28 new countries reached middle-income status in the last decade, with their gross national income per person between US$1,005 and US$12,075, according to the Organisation for Economic Co-operation and Development in May 2012.

Only 12 of those 28 graduated to high-income status in the same period. The OECD report said this suggested that at middle-income levels, economic growth and structural upgrading were more arduous.

China's GDP per capita was around US$7,500 last year.