China Takes Steps to Remedy Growth Issues, but are they Enough?
Due to their current and future growth issues and their attempts to control their population, China continues to face serious social and economic issues. While China once struggled with overpopulation, the opposite is now becoming an issue, as their impending skilled labor shortage threatens to negatively impact their economy. Companies with operations in China should be aware that the talent pool could be limited for local Chinese nationals in the future.
A limited talent pool impacts both global mobility and talent management. Global mobility professionals in charge of forecasting changes to their program in China need to understand the constraints they will face. Relocating from outside of China will likely need to happen, dramatically increasing program budgets if local talent is the current source for employees.
With the highest population in the world, China has an estimated 1.4 billion citizens. Despite this current overpopulation, the potential labor shortage will be an issue if they fail to consider further reformation of policies harming their growth rate. Rising wages have already started to negatively affect the “China price,” which is the extremely low rate at which a good and/or service can be provided, and a shortage of laborers will also further increase the “China price.” So what is China doing to remedy this situation?
The One-Child Policy
China’s one-child policy was created in 1979 as a means to control their growing population. With China expecting a quarter of their population to be over age 65 before 2050, there is a growing concern for a labor shortage in the decade(s) to come. As a reaction to this, China recently ended their one-child policy, now allowing couples to have two children (fines will still apply for families having more than two children). This was a first step in China’s five-year development plan created in hopes of replenishing the nation’s workforce.
The Restrictive Hukou System
The Hukou system is a legal resident/household registration system that identifies a person with an area. These permits also include information on a person’s extended family, date of birth and life events. Historically, this system was in direct relation with the land, which served as a population management tool to family and clan.
The modern household registration system is more of a national collection used for confirmation and registration of citizens’ birth, death, kinship, legal address, and more in order to protect civil rights in employment, education, social welfare and other aspects of individual-based population management systems. The Hukou is divided into agricultural and non-agricultural household types, which played a positive role at the beginning of the country’s founding. Today, with more communication between urban and rural areas, the system has aroused more extensive controversy and criticism.
The Hukou has long been a topic of controversy within China since it designates where a person is required to work and live. Land is very important to the people of China, and the Hukou allows a person all rights to their property without government interference. On the other hand, it can also be detrimental to its people, since the Hukou limits economic opportunity by not providing social entitlements such as health care, education, social security, unemployment and so on to people who work outside their authorized domain. A little over half of China’s residents live in cities, and with technology becoming more predominant, it is easier for police to enforce the Hukou by checking a national database, and deporting residents back to their designated Hukou domain.
Earlier this year, China passed limited Hukou reform in hopes of ramping up China’s domestic economy. These reforms include:
- Combining rural and urban Hukou holders to eliminate any distinction between the two. Unfortunately, the reform is not as positive as it sounds, since government benefits will still be determined by the city the Hukou it is registered in. This will, however, allow for more rural Hukou holders to freely relocate to other small rural cities, but not to the mega-cities along China’s eastern coast.
- Easing restrictions on the number of citizens who can claim a Hukou which allows citizens to continue to move and work freely in these new smaller rural cities but also be eligible for social security benefits equal to the residents born into the city. It will not allow the rural Hukou placeholders to move to the larger cities with populations above three million.
- Cracking down on Chinese citizens who are maintaining a permanent residence overseas while still maintaining an illegally registered Hukou. It is mandatory by law for all emigrants to cancel their Hukou upon becoming a permanent resident in another country. Violators could potentially face allegations of corruption and possibly deportation upon their return to China to conduct business or visit relatives.
The Chinese government is hoping this new reform will motivate an estimated 100 million rural residents to migrate to new cities being developed, boosting China’s local property market by offering affordable real estate.
Potential Reforms on the Horizon
In addition to reforms to the one-child policy and the Hukou system, China is considering the following initiatives to address its laborer shortage:
- Investing in education to create better quality products
- Raising the retirement age (currently age 55) so people can work longer – the downside is there would still not be a sufficient number of workers to address the predicted ten year gap
- Provide higher investments in mechanized farming, which would free more people to work in other occupations
China’s GDP growth rate is the slowest it’s been in five years, which is placing mounting pressure on policy makers to remain focused on revamping the economy. A revamped economy would boost growth and address China’s shrinking workforce issue and weakening property market issues. Companies and investors must recognize that the future of China may not play the same role in upholding global growth as they have in the past, while also paying attention to the changes made in attempt to remedy this.