China's costly industry layoffs

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For the Financial Times in Delhi, this is FT News. And I'm Jill Schlesinger.

As President Xi Jinping begins his second term, China has embarked on a major shake up of its state owned enterprises. Across the country, nearly 1.8 million workers in the steel and coal sectors will go off the payrolls. But the move poses major challenges for the authorities, as compensating people for early retirement involves a huge cost to the Exchequer. For more on the story, I'm joined by the FT's Emily Chang in Beijing.

Hello, Emily. Cutting back 1.8 million jobs is a massive exercise. Tell us why has Beijing decided to do it.

Their most recent layoffs, which is about 1.8 million workers spread over the course of two years, are part of a hard set of choices that Beijing has had to make. China wants to move away from top down economic planning, which favours heavy industry, and move towards a high tech, services led economy that can sustain steady economic growth for another decade. The problem is that China's practised Soviet-style economic planning for decades, and its industrial sectors are dominated by these really inefficient state owned enterprises, or SOEs, which have very low profit margins and eat up state capital.

They are often also highly polluting, where China is trying to become a more environmentally friendly country. So in general, these sectors don't represent the innovative, high tech kind of services led economic growth in manufacturing that state planners now envision. And so they're beginning to slim these SOEs down and merge them, particularly in the coal and steel sectors.

What are the major challenges of this move?

In many ways, this is a problem that economic policy makers have been struggling with for close to three decades now. How can China transition from a centrally planned economy to a more market oriented one without making potentially hundreds of millions of people redundant, which could, in turn, spark potentially violent unrest? The answer is that the state has to provide for these workers, either by extending these early retirement benefits for them, or ideally, retraining them for a new job.

The financial burden of pensions is spread unequally among provinces. It will disproportionally affect industry heavy regions in China's Northeast, who unfortunately have struggled economically over the years, even as southern provinces like Guangdong, [INAUDIBLE] have flourished, where exports led growth and manufacturing, and now, increasingly, tech has boomed. So these Northeastern provinces are probably the most ill-equipped to provide for laid off workers, even though they have the highest financial responsibility to do so.

You've been talking to workers who face redundancy. Tell us about the mood.

I was expecting a really grim place when I went to Maanshan, which is the city that was built specifically to support this steel company that I profiled, Masteel. And in some ways, it is a grim place. It's surrounded by these bare mountains that contain iron ore, and the old smelting facilities are really quite hellish. But there's a new shopping mall there that contains stores like Sephora and Starbucks. And there are new hotels and apartments going up around the city. So it looked really livable.

Surprisingly, people actually are relatively upbeat when you ask them about Masteel's prospects and what that means for them. And I think it's a kind of optimism that comes from being resigned for years that Masteel's days are limited. So people know that they're going to have to look for opportunities elsewhere.

A lot of the workers I talked to who were born into families that worked for Masteel for at least a generation before them, they're used to dim prospects. What they're most interested in is stability. As long as they get their retirement benefits and have an apartment for life that the company has given them, they're satisfied. One of the workers I talked to told me that, as long as he gets retirement benefits, why bother continue working? And I think it's interesting to note that I found him for this interview playing cards and drinking beer at around 3 PM with about 10 other retired steel workers outside this apartment compound where a lot of company given apartments are.

In China, children often work and care for parents as well. So many workers had children who had migrated for work and sent money back to them. That's an interesting demographic trend that has helped cushion the decline of SOEs.

It's also important to keep in mind this is not the first time that [INAUDIBLE] has experienced efforts to turn around what pretty much was a sinking ship from the beginning. The state has been trying to reform Masteel for decades. It was one of the first SOE's to restructure and become a strange corporate entity called a joint stock company so it can list on the Hong Kong stock exchange in 1993. And Masteel has been trimming workers since the 1990s. It's shrunk from about 90,000 workers at its peak to the current 32,000.

You also have to remember that the Communist Party draws its legitimacy from supporting the working class. You know, communism in general draws its roots from Karl Marx's first cry, "To the workers of the world, unite." So the Chinese Communist Party knows this and knows that it has to at least give people the impression that things will be all right. And people I talked to really do believe that the state will provide for them, as it has for decades.

How are the authorities handling it? Are those made redundant likely to get jobs in the new sectors?

China has set aside a 100 billion [? RNB ?] fund, so that's equivalent to about $15 billion US, to give provinces, which need help paying for early retirement programmes and to help retrain workers. The problem is that the fund, however sizable, is actually not big enough to address the forecasted deficit in the state pension fund. Shockingly, the state run Academy of Social Sciences here in China actually forecast the pension deficit to balloon to $108 to $122 trillion US by 2015, if the fund is managed as it is now. It's a massive figure.

The state has made a big show of retraining workers for new jobs. However, most of the workers being laid off are poorly educated. They're too old to successfully adapt to changing economic demands. And this is a sentiment that is echoed, not only by the workers themselves, but is also recognised by policymakers.

When I was reporting the story, I could find very few instances where workers had actually received labour retraining, even if they were well before retirement age. And those who had been retrained primarily are being just absorbed into other government agencies or state owned enterprises. I did talk to a few younger Masteel workers who are now working as delivery guys for on demand mobile apps like Didi, the ride hailing service or food delivery apps that are really popular now. And of course, these jobs are more precarious. They're demand driven, so it's not always a full time gig, and they don't have benefits that working at a state owned enterprise would bring. The shift does show how technology is creating new jobs in China, even though that may give rise to working conditions that completely challenge historical ways of life.

What does this major reform mean for President Xi?

So I'm going to sound like pretty much every businessman, policymaker, or official right now in China, and cite President Xi Jinping's Party Congress work report. But in his speech at October's Party Congress, which is this big important meeting for the Communist Party here in China, President Xi Jinping mentioned that he wanted quality growth and not growth for growth's sake. That's been interpreted by a lot of people here as meaning that they should focus on creating real economic growth, making products and services with real value, and being harsher in cutting out underperforming areas.

That's not a new or revolutionary idea, of course. But it does indicate that President Xi knows China's economic inconsistencies are a big problem. And it also indicates that there is going to be political will behind actually solving them this time around. You also see President Xi and those around him emphasising the importance of entrepreneurship and innovation. Because they know that they're going to have to create new sectors for growth and future employers that can suck up young, talented people who are no longer looking to state owned enterprises for jobs.

Thanks, Emily. This FT News broadcast was presented and produced by me, Jill Schlesinger, in Delhi. Goodbye for now.

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