If you thought the global economy was going to rebound any time soon, China just dumped a bucket of cold water on those hopes. In a Reuters exclusive, the news agency revealed China plans on laying off five to six million workers over the next two to three years. Most of the layoffs are coming in the coal and steel industries, an indicator that China expects the weakness in its manufacturing sector to extend at least that long.
China’s falling axe is an open admission that things are going to get worse before they get better. The move also makes it clear the risks facing the global economy over the next three years may be much worse than we’ve been led to believe.
Trying to Avoid a Panic
Fears of massive social unrest prompted China to try and keep their layoffs quiet. It was known for some time that China’s been keeping “zombie” companies on the books; companies that have cut production, but kept workers on the payroll to prevent riots in cities supported by those industries.
There’s also been overproduction in many industries well before this current slowdown in the economy. The fact that the Chinese government felt forced, at this moment, to deal so definitively with the crisis is telling – but how much do we know even now? The government is setting aside cash to re-settle workers but, as Reuters points out:
“[T]he funds currently being offered will do little to resolve the problems of debts held by zombie firms, which could overwhelm local banks if they are not handled correctly.
‘They have proposed this dedicated fund only to pay the workers, but there is no money for the bad debts, and if the bad debts are too big the banks will have problems and there will be panic,’ said Xu Zhongbo, head of Beijing Metal Consulting, who advises Chinese steel mills.”
Can Renewable Energy Save Them?
To absorb some of these newly-idled workers China will begin projects to transition to renewable energy, in a long-overdue push to clean up its dreadfully dirty manufacturing industry. The conversion’s not going to be cheap, with some estimates topping the equivalent of twenty billion U.S. dollars. China will also be clamping down on migrant workers from outlying areas who moved to these big cities to find jobs. Authorities will be “encouraging” them to move back to where they came from, with the suggestion to start small businesses instead of taking jobs from city workers.
Huge Logistical Challenge
According to BusinessInsider, the task Chinese authorities have in front of them is monumental. China will be laying off roughly fifteen percent of its coal and steel workforce, which will mean both relocation and retraining for many workers and their families. There’s also going to be conflict with local governments, which will get stuck with some of the bills from letting those industries go bankrupt. It’s hard to gauge the actual size of the layoff problem because there’s widespread belief among observers that China tends to underreport bad news. Officially, their unemployment rate is an enviable four percent, which is full employment in an economy that size – make of that what you will.
2009 All Over Again
If you look at this chart showing outsiders’ best guess of the Chinese Consumer Price Index, the scale of the problem becomes clearer. At least as far as the effect on China is concerned, we’re looking at 2009-scale bad news, although it’s been a more gradual process getting there. What made 2008 and 2009 such a disaster wasn’t the slowdown in economic activity; it was the freezing up of the credit markets. Because credit markets in China have remained open, although we could tell things were going badly, the sheer scale of the impending disaster has largely gone unnoticed.
The extreme measures the Chinese government has now been forced into make it startlingly clear that anyone assuming there will be a quick end to this global slowdown is completely off base. Chinese authorities are allotting at least three years to burn through the current overhang of idle workers. That means we have at least that much more global economic volatility in front of us. The elephant in the room no one is talking about is the very real possibility that what we’re seeing right now in China and the global economy might not be temporary. We may indeed be looking at a permanent slowdown in global economic growth and that means what we’re seeing today is merely the beginning of something much larger.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.