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China weathered the economic storm with college enrollment and household consumption

Yesterday we started looking at some of the strategies China has used to weather the first financial downturn. Today we’ll continue that by looking at two other strategies as well as their potential benefits and costs.

One of the major things that was supposed to happen after the economic downturn was that China was going to shift from being the world’s factory to a position higher up the production chain. The idea was that many of the factories on China’s east coast were shutting down, but increased domestic consumption and new college graduates would soon alleviate the slowdown.

Increased College Enrollment

When I arrived in 2007, my average class size at the rural college was 35, by the start of the 2009 school year that had jumped up to nearly 50. I didn’t need to read the papers to realize what was happening; college enrollment was being increased to absorb high school students who wouldn’t be able to find a job in the cities.

From 2005 college enrollment increased from 23 million to 31 million in 2010. University and junior college enrollment jumped 43% and graduate students had increased by 57%. Such a massive shift in just a few years meant an explosion in the number of private and public schools that were meant to train the next generation of Chinese scholars who would pull China’s economy up to the next level.

For the last few years, China’s colleges have succeeded in keeping the youth occupied.

But there was a major problem; as the college students began graduating they realized there were few jobs that actually required degrees. Students regularly discussed their disappointment in the fact that their high school educated friends were earning ~2,000rmb/month working in factories in Guangdong, but with a college degree they would be earning almost an identical amount. In fact many of them went on to low level sales positions, and a few ended up working in hotels.

Unemployment figures were also disguised (in rural areas unemployed migrant workers are simply reclassified as farmers). I knew of several colleges in 2009 that were struggling to place their graduates, but were facing tremendous pressure to report good employment rates. The practice they devised made it so a student would not be able to graduate until they had found a job. So even in the middle of the recession my campus claimed a nearly 100% employment rate, despite the fact that many of the students were no longer “graduating.”

This is an issue that still hasn’t been corrected. Just this weekend a friend was telling me that several of his graduate level classmates were disgusted with their new jobs that paid roughly 2,500rmb/month. They wondered what the point was of delaying their entrance into the job market by 6-7 years if there weren’t even jobs available (in this same time frame housing prices increased over 400% in some areas).

Now at some point, China will need a better educated workforce but as my friend said, “It seems very dangerous for the gov’t to have encouraged the creation of such a large pool of well educated and poorly paid scholars.” I share the concern that this is going to create an awaking in China similar to that seen in Occupy Wallstreet (which was buffeted by a similar demographic).

Domestic Consumption

One way of thinking about a country’s economy is by considering three major forces: government spending, household spending, and exports. With a Keynesian view of the economy, which China’s gov’t seems to endorse, when foreign exports drop like they did in 2008, gov’t spending and household spending need to increase to make up the difference.

Unfortunately, China’s gov’t made up almost the entire difference, and household spending (as a percentage of GDP) fell over 11% from where it was in 2000 to ~35%. This means that when foreign countries’ economies falter, China can’t rely on its own consumption to weather the storm. This is a major force behind China’s infrastructure projects, without the gov’t spending billions of dollars every year, the economy would come sputtering to a stop.

The gov’t has tried numerous subsidies to boost domestic demand on things like appliances and automobiles, which have worked to a large extent, but gov’t spending increases are outpacing these gains. The success of these projects can be seen in every traffic jam and polluted sky.

These gains however, were the easy gains. Now that many of China’s rural consumers have purchased household appliances like refrigerators, washing machines, and televisions, consumption will start to drop again as these subsidies expire.

One of the major limits on increasing household consumption is that China’s social security programs are still weak. Families realize it is necessary to save large portions of their salaries for unforeseen illnesses or losses. In the US there was much discussion of China’s personal savings rates, which many of us saw as a symbol of how out of control American spending was, but these same savings are also a limiting factor for China’s economic growth.

Conclusion

To me, it seems that these short-term solutions (including the one discussed yesterday) have helped China survive the economic crisis in 2008. If the rest of the world had taken similar steps, and the world economy was back on track, China would be in the perfect position to leap ahead. However, if the economy falters once again, China will be faced with massive local debt, infrastructure projects that have suffered from diminishing returns, a large educated but underemployed section of the population, and families that are still saving for a rainy day.

China survived one downturn, but in my opinion, it would be incredibly difficult for it to survive a double-dip recession without making drastic adjustments to the economy.

I am in no way “rooting” for China to falter, the losses in the countryside would undo many of the gains that I’ve worked for in the countryside. The destabilizing effect could also cause massive social upheavals that could have very ugly outcomes. 


4 Comments

  1. Nice and insightful account Tom,thanks

  2. C. says:

    I’m not so sure the conventional wisdom about savings rates in China are really wise. I think it’s a rational reaction to an economy dominated by SOEs and without a safety net. The corrollary to that is you’ll need to reduce the “Chinese characteristics” component of the macroeconomy in order to induce consumer spending.

  3. James says:

    In my time in China It seemed to me from the people I talked to, that the young people had low savings rates, the 20-somethings I knew spent most of their paychecks, even when they could have saved more.

    The 40-somethings saved as much as was comfortable for them, but those that I knew over 60, they saved everything beyond necessities.

    The 20-somethings that did save more, saved by order from above, or to help a relative.

  4. […] China weathered the economic storm with college enrollment and household consumption […]

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