Services Shield China From Trade War

With the US-China trade war apparently at an impasse, with President Donald Trump saying last week that an agreement could go on past the 2020 election, the impasse is not hitting the world’s second-biggest economy where it hurts most, employment. One of Beijing’s biggest fears is severe job losses that could spark social unrest.

Since July of 2018, the Trump administration has slapped tariffs on US$550 billion of Chinese goods. In November, the president told reporters that China was “having the worst year they’ve had in 57 years. Their supply chain is all broken, like an egg, they want to make a deal, perhaps they have to make a deal, I don’t know, I don’t care, that’s up to them.”

But while the tariffs have caused Chinese factories to lay off workers, the services sector is compensating for the manufacturing job losses. In addition, according to UBS economist Tao Wang, China is adopting modest policy stimulus, with infrastructure fixed-asset growth expected to rebound to 6-8 percent in 2020, with RMB3 trillion in special local government bonds to be issued.

In general, while the tariffs have hurt, if there is no further pressure, China’s economy will survive. While the trade war is admittedly damaging supply chains, countervailing factors are starting to work.

Activity in China’s services sector, which includes logistics, rose significantly in November, when the Caixin/Markit services purchasing managers’ index (PMI) rose to 53.5 from 51.1 in October. This PMI has stayed above 50 points since late 2005, which means China’s services sector has continued to grow since then. A PMI above 50 indicates growth of business activity. November’s PMI of 53.5 is the highest expansion rate since April.

“China’s labor market has been resilient in spite of an economic slowdown. Services have become a buffer labor market, while manufacturing has become a smaller part of employment,” said Aidan Yao, senior emerging Asia economist with AXA Investment Managers. “This structural rebalancing of employment is providing an insulation for the labor market against the US-China trade war.”

China’s urban unemployment fell to 5.1 percent in October from 5.2 percent in September, 5.2 percent in August and 5.3 percent in July, according to China’s National Bureau of Statistics. Urban unemployment rates from August to October were below the government’s target of 5.5 percent for this year. The services sector tends to be more labor-intensive than manufacturing, which can absorb more workers if they get laid off from factories, Yao said.

“It seems there are the regular factory closures,” said Douglas Sheridan, who lives in Vancouver, Canada, but frequently visits China to source footwear for export to the US.

Footwear orders are down significantly for Chinese factories for the larger-scale branded products, for which there have been increasing orders to Southeast Asia and Bangladesh, said Sheridan, a director of China Merchant Global Trading, a Chinese company.

Many workers who lost jobs in factories are moving into logistics, said Willy Lin Sun-mo, chairman of the Hong Kong Shippers’ Council. “Fast food delivery is absorbing a huge amount of people.” That isn’t to say these are necessarily great jobs. As Asia Sentinel reported in March, the tens of millions of workers in the so-called “gig economy” are paid far less than their manufacturing compatriots.

Nonetheless, SF Holding, China’s largest privately-owned logistics company, increased the number of its delivery employees to 286,400 in the middle of 2019 from 213,000 in 2017, according to the Shenzhen-listed company’s financial reports. However, SF’s headcount of delivery employees at 286,400 in the middle of this year was a slight decline from 291,400 last year.

“Overall, the significant job creation in services has outweighed the fall in industrial employment,” said a report of Oxford Economics on November 28, 2019.

Services created 6.2 million new jobs in China in 2018, said Oxford Economics, a UK economic forecasting and analysis firm. In the meantime, employment in China’s export manufacturing sector has fallen sharply, to slightly above 17 million people in 2018 from roughly 27 million in 2007 according to AXA, Bloomberg, UBS, IM Research and CEIC. As the country has made its long transition to a more mature economy, employment in the entire manufacturing sector has declined to slightly above 140 million people in 2018 from about 155 million in 2012.

The decline in the percentage of GDP attributable to manufacturing isn’t due to the trade war. China began deliberately turning towards the services sector in the middle of the past decade. By 2013, services had accounted by more than 50 percent of GDP. That has continued to climb, to about 52.4 percent in 2018. The share of the nation’s employment held by the service sector has surged to nearly 50 percent in 2018 from about 30 percent in 2007, according to AXA, Bloomberg, UBS, IM Research and CEIC. According to China’s National Bureau of Statistics, the service sector’s share of the country’s employment rose to 46.3 percent in 2018 from 44.9 percent in 2017 and 40.6 percent in 2014.

ZF, a German supplier of systems to vehicles, has been stable in its 15,000-strong workforce in China, said Holger Klein, a board member of ZF. The company has both manufacturing and services facilities in China.

“Our global and China business are vulnerable to many more factors than trade conflicts,” said Klein. “The automotive industry is facing a lot of disruption including information technology and connectivity, policy-makers and citizens’ expectations about emission,” Klein added.

The decline in manufacturing and export-manufacturing jobs is not only a result of the trade war, but a structural transformation of the Chinese economy as its growth model shifts from trade/manufacturing to services/consumption, Yao said.

However, David Wang, head of China economics at Credit Suisse, said, “Although China’s manufacturing employment as a fraction of overall employment has been on a declining trend, the speed of decrease has likely been intensified by trade uncertainties.”

The upside to the growth of services is that China’s employment is less dependent on external demand than it once was, Wang said. The downside is that on average, manufacturing jobs still pay better than services jobs, so as labor composition shifts away from manufacturing to services, overall purchasing power might decrease in China, Wang added.

In 2018, service industry foreign direct investment accounted for 68.1 percent of the total FDI in China, up from 24.7 percent in 2005, according to official Chinese data.

Services as a share of China’s nominal GDP has risen to slightly over 50 percent now from just below 40 percent in 2000, according to CEIC and UBS. Consumption and services as a share of China’s GDP should continue to rise, predicted a UBS report on November 12. In the next few years, Chinese people’s income growth of 5 to 6 percent per annum and improving services infrastructure should spur consumers to upgrade to higher quality and more services, the report said.

“The downside is that the services sector typically has lower productivity than the manufacturing sector, and is generally believed to be less innovative,” Yao said.

“Hence, a mindless pursuit of economic rebalancing from secondary to tertiary industries, leading to a rapid shrinkage of the manufacturing sector, can be dangerous for China at this stage of economic development,” Yao cautioned.

Toh Han Shih is a Singaporean writer in Hong Kong.