(Bloomberg) -- The Pearl River Delta industrial belt has served as one of China’s most important growth engines since the Communist Party opened the economy four decades ago, propelling its rise to become one of the world’s leading powers.
But now in Guangdong, a southern coastal province that alone would stand as one of Asia’s top five economies, the situation is getting dire in some labor-intensive sectors that are more China’s past than future. In the dank back-alleys of Dongguan, a metropolis with about as many people as New York City, small textile makers are struggling to survive. Thousands of migrant workers have already headed back to China’s poorer interior.
“You can see around here, nine out of ten textile workshops have already shut down,” the owner of one shop, who gave his surname as Long, said last week over the sound of whirring sewing machines. His ten remaining employees have seen their take-home pay cut in half due to long idle periods. “Their income levels have returned to what they were ten years ago,” Long’s wife said.
The widespread struggle to earn cash risks turning into a big political problem for Chinese President Xi Jinping. While the authoritarian state doesn’t hold democratic elections, it still faces strong internal pressures to deliver economic gains to the nation’s 1.4 billion people. And Xi in particular has zeroed in on income levels as a key source of its overall legitimacy to govern.
In a Dec. 31 speech, Xi said 2020 would mark a “milestone” as China finishes “building a moderately prosperous society.” As originally envisaged, that involved doubling per-capita income by 2020 from 2010 levels, doubling gross domestic product and eliminating poverty. Xi has called those goals “a solemn promise our party has made to the people and to the history.”
Already challenged by the long economic slowdown and the U.S.-China trade war, those goals are suddenly being pushed out of reach by the coronavirus pandemic. That reality is expected to be clear this week at the annual meeting of the legislature, the biggest political event of the year in China: Xi’s government may avoid giving a numerical growth target for the first time in decades as the world’s second-largest economy braces for its worst performance in the post-Mao era.
“This has put great pressure on Xi, who has personally advocated such goals under his watch,” said Gu Su, a professor of philosophy and law at Nanjing University. “Anybody with basic economic knowledge knows they’re not viable.”
Xi now faces a dilemma, Gu said: Ignoring the promise would be equivalent to saying that the Communist Party failed, while proclaiming victory would only rile up a seething middle class that is increasingly venting frustration online. Anger over the initial response earlier this year — amplified by the death of a doctor who was reprimanded for speaking out about the virus — propelled “I want freedom of speech” to become the top-trending hashtag on Weibo (NASDAQ:WB).
Communist Party officials have sounded the alarm. In a nationwide teleconference on May 9, Public Security Minister Zhao Kezhi said the government should prioritize risks to China’s “political security.” He called on law enforcement to pay particular attention to “destabilizing factors” stemming from the economic downturn and the pandemic.
While Xi has invested heavily in tools to quash political dissidents, the party has frequently seen local protests erupt over bread-and-butter issues such as labor disputes, investment fraud and environmental disasters. Recently pockets of unrest have emerged in and around Wuhan, the epicenter of the outbreak.
Accounting for migrant workers who couldn’t travel to cities, job losses may have exceeded 50 million and the real unemployment rate could have hit 12% in March, according to BNP Paribas (OTC:BNPQY). As many as 130 million people were either out of work or furloughed in the first quarter.
What’s worse, only a small fraction of those are actually claiming welfare benefits due to a cumbersome application process and a meager amount of funds available.
China hasn’t confronted unemployment on this scale since 1990, when layoffs at state-owned enterprises led to protests and a spike in violent crime. Back then, the country quickly recovered as a wave of globalization allowed it to tap into a booming U.S. economy that fed demand for Chinese goods.
The situation now is very different. Growth was already slowing as the government sought to reduce debt, and U.S. President Donald Trump targeted exporters in an unprecedented trade war.
Any hope of a recovery is partially dependent on how quickly other world leaders are able to contain the virus and restart their economies. Nearly 200 million jobs in China come from businesses connected to foreign trade, Minister of Commerce Zhong Shan wrote in a recent article — more than the entire working population of the U.S.
Now China’s most powerful leader in decades, Xi recognizes the risks facing him as he maneuvers to extend his time in power beyond 2022 after doing away with term limits. For months, he’s warned that the virus might pose a risk to “social stability” in China.
His strategy so far has boiled down to three major things: Pump money into creating jobs, censor any dissenting views and redirect the anger on the ground with an appeal to nationalism. A Politburo meeting Friday, in which Xi reviewed a draft of Premier Li Keqiang’s annual report to the National People’s Congress, discussed measures to ensure social stability and employment in the face of “grim and complex” economic challenges.
So far at least, the strategy appears to be working on the ground. Dozens of residents in Guangdong who spoke with Bloomberg reporters last week were more focused on paying the next bill than hinting at a revolution to come.
In the provincial capital of Guangzhou, small business fronts were plastered with signs posted by renters seeking to sublet commercial spaces or even sell their businesses altogether. In one area called the Yinggao Trade City, most business units sat shuttered as international buyers stayed away and overseas demand plummeted.
Diego Lee, the marketing director of Kumpaya Im&Export Agent Co. Ltd, said business has been “terrible” in recent months: “No one wants anything except masks.” Still, he doesn’t blame the government, especially given the performance of the U.S. and Europe in handling the virus.
“If you look at the world, China has dealt with this better than anyone,” he said. “You have to listen to all these parties, but we just have one and everyone has to do what it says. If you want to walk your dog and the government says no, then you can’t walk your dog. You’ve lost some freedom, but you’re safe.”
In Dongguan, migrant workers who lost their jobs almost overnight were feeling the brunt of the impact. One who gave his surname as Xie lost his job at a furniture maker along with about 300 others — roughly 75% of the company’s employees.
“The virus came and there was no way to ship products out of the country,” Xie said as he sheltered from the drizzle outside an employment agency near the city center. He planned to head back to his hometown in neighboring Hunan province once he could find 200 yuan ($30) to get home.
Like others around him, Xie said he’s received no policy support or subsidies from government during this period. Around him, the sense of desperation is growing — a far cry from the optimism surrounding China’s long-term plans to set up a high-tech export hub in the region.
A few doors down from Long’s textile workshop, an ecosystem of businesses were struggling to stay afloat. A man in his 60s surnamed Cai, whose company produces parts used in textile machines, said his business had already been reeling from the trade war before the pandemic hit. Now he’s on the brink of bankruptcy.
“I’m not making enough to get by,” Cai said. “I don’t know how much longer I can continue.”
©2020 Bloomberg L.P.
