Forecast on the coming year in China

We’re now starting the year of the Pig in China. It’s supposed to be a sign of prosperity, but the past months are not leading to such expectations. Growth is at its lowest for many years, while it has been the key indicator for the country. It has consequences on the social point of view, and not all are obvious.

The first manifestation of changes occur last year already. Workers’ turnover is dropping in China, because unemployment is actually starting to be a problem while it was not before. It’s seen in the wages too, are they have mostly stabilized. Turnover was usually more than 10% a month in the former years, but we now frequently find rates lower than 5%. All the same, the almost full change in the workforce (only the management was steadier) in factories between before and after the Chinese new year is something of the past. Hence, the customary “reboot” difficulties should be much smaller and shorter in 2019. Workers coming back to the same position allows quick start of the operation. That’s obviously the positive outcome.

But, on the other hand, as orders weren’t really high at the end of 2018, companies are less expected to hire workers in preparation of commands to come. So the lower turnover will also go with a diminution of the staff in the factories. Consequently, by spring, the working time is likely to intensify in Chinese production units. Recruiting temporary workers is more plausible too. That’s definitely something to look at in the coming audits although it won’t be possible to actually prove it before several months.

Until recently, the domestic consumption was compensating for the increase in productivity and reduction of purchase from abroad on cheap goods in terms of manpower requirements. But the rise of unemployment could stop this dynamic as it could slow the domestic consumption, leading to fewer orders and fewer needs for workers in factories. The Chinese government has decided on January 1st to finally start to request the full payment of social insurances and taxes. It was previously managed separately and the basis for taxes and social insurance could be different, allowing some companies to pay it at a lower rate than normal. Moreover, the local authorities are asking more and more for a full social insurance coverage while in the past years partial coverage was basically considered as acceptable. Therefore, the labor costs will tend to rise, and illegal practices, informal sector especially are likely to boom accordingly to compensate. Outsourcing to the informal sector is then anticipated increasing and should be checked more in the coming month. We remind here that subcontracting to the informal sector is always an important risk as those factories are built on the concept of not following the legal rules hence the social ones. Working time, wages and even age of workers can be unlawful.

The quick growth and lack of workforce have greatly helped the impressive improvement in working conditions in Chinese factories in the past years. But the current turn could on the contrary temper with social practices and should then be closely monitored.

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