China's Mass Unemployment Wave Begins: Six Million Workers To Get Pink Slips

China's Mass Unemployment Wave Begins: Six Million Workers To Get Pink Slips

Submitted by Tyler Durden on 03/01/2016 11:44 -0500

Back in November, just as the world's attention was focusing on China for long-overdue reasons including a slowing economy, debt at well over 300% of GDP, an artificially high exchange rate whose devaluation is causing market shockwaves around the globe, a reflating housing bubble, a burst stock market bubble and non-performing loans, as high as 20%, when we pointed out the one "most under-reported" risk virtually nobody was talking about: Chinese employment.

... one risk, perhaps the biggest one, which has so far flown deep under the radar, is also the biggest one - which may explain why so few have noticed it - namely social discontent, resulting from a breakdown in recent "agreeable" labor conditions, wage cuts and rising unemployment, leading to labor strikes and in some cases, violence.

We then pointed out a disturbing indicator: the number of labor strikes in China, as a result of deteriorating labor conditions, sliding wages and surging unemployment, had become exponential.

 
Since then the media's attention did shift to this biggest, if no longer-underreported risk if not in the international arena then certainly to the domestic "growth" story: the imminent surge in unemployment as China's slowing economy is finally "passed down" to the worker level.
We received the first evidence overnight, when in the Markit report confirming China PMI deteriorating manufacturing, it also noted that "staff numbers declined at the sharpest rate since January 2009 during February. Companies that recorded lower headcounts widely commented on company downsizing policies as part of cost-cutting initiatives, along with the non-replacement of voluntary leavers. Despite lower employment, manufacturers were able to work through outstanding business during February. Though marginal, it was the first reduction in the level of work-in-hand since April 2015."
In other words, a labor bloodbath.
Today, Reuters finally peels away the first layer of just how bad China's mass layoff wave will be when it reports that China aims to lay off 5-6 million state workers over the next two to three years as part of efforts to curb industrial overcapacity and pollution.
This admission, the first of many, will cost China.
As Reuters adds, "China's leadership, obsessed with maintaining stability and making sure redundancies do not lead to unrest, will spend nearly 150 billion yuan ($23 billion) to cover layoffs in just the coal and steel sectors in the next 2-3 years."
That number, coming from the government, is laughably lower that what our own estimate of how much it would cost China to preserve the peace, a number which will likely be in the CNY11+ trillion range.
Needless to say, the overall figure is likely to rise as closures spread to other industries and even more funding will be required to handle the debt left behind by "zombie" state firms.

The term refers to companies that have shut down some of their operations but keep staff on their rolls since local governments are worried about the social and economic impact of bankruptcies and unemployment. Shutting down "zombie firms" has been identified as one of the government's priorities this year, with China's Premier Li Keqiang promising in December that they would soon "go under the knife".

As forecast here all throughout 2015, it was just a matter of time before China had no choice but to unleash the mass pink slips, and that is about to happen: "the government plans to lay off five million workers in industries suffering from a supply glut, one source with ties to the leadership said."
A second source with leadership ties put the number of layoffs at six million. Both sources requested anonymity because they were not authorized to speak to media about the politically sensitive subject for fear of sparking social unrest.
Putting this number in context, the hugely inefficient state sector employed around 37 million people in 2013 and accounts for about 40 percent of the country's industrial output and nearly half of its bank lending.
According to Reuters, this would be China's most significant nationwide retrenchment since the restructuring of state-owned enterprises from 1998 to 2003 led to around 28 million redundancies and cost the central government about 73.1 billion yuan ($11.2 billion) in resettlement funds.
There are two big problems with this low-balled estimate. The first is that as China aims to cut capacity gluts in as many as seven sectors, including cement, glassmaking and shipbuilding, the downstream labor effects will be massive, and they will impact not only the public sector but all the countless workers in the private sector that service them.
According to some of the more bearish sellside estimates, as many as 20-30 million workers in both the public and private sectors will lose their jobs as a result of the massive overcapacity retrenchment that China will undergo in decades. Even that number may be a low estimate if the worst case scenarios about Chinese bad loans materializes.
The second problem is more nuanced.
The Ministry of Finance said in January it would also collect 46 billion yuan from surcharges on coal-fired power over the coming three years in order to resettle workers. In addition, an assortment of local government matching funds will also be made available.
However, the funds currently being offered will do little to resolve the problems of debts held by zombie firms, which could overwhelm local banks if they are not handled correctly.
"They have proposed this dedicated fund only to pay the workers, but there is no money for the bad debts, and if the bad debts are too big the banks will have problems and there will be panic," said Xu Zhongbo, head of Beijing Metal Consulting, who advises Chinese steel mills.
In other words, China is about to unleash a war on two fronts resulting from its slowing economy, one dealing with soaring NPLs, which as a reminder is the basis of Kyle Bass' bearish thesis on China and why he and many others think China will need massive devaluation in the coming year; the second will be dealing with the social fallout from the imminent mass layoff wave.
How any of this will happen is not clear:

Factories shut down would have to repay bank loans to avoid saddling state banks with a mountain of non-performing loans, the sources said. "Triangular debt", or money owed by firms to other enterprises, would also have to be resolved, they added.
 
Although China has promised to help local banks transfer the bad debts of zombie steel mills to asset management firms, local governments are not expected to gain access to the worker lay-off funds until the zombie firms have actually been shut down and debt issues settled.

As for the 150 billion yuan earmarked to provide "social unemployment insurance", one thing is certain - almost none if any of these funds designed to appears the newly unemployed, will actually reach the broader population.
Ultimately, Beijing's attempt to centrally plan a transition into a regime with "unemployment claims" will fail, unleashing what China's riot police has been preparing for ever since 2014, something we profiled in "Chinese riot police train for a "working class insurrection."
Consider the photos below a preview of what China is about to unleash domestically as it begins handing out the mass pink slips.
[url=http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/China insurrection 1.jpg][/url]
[url=http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/China insurrection 2.jpg][/url]
[url=http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/China insurrection 6.jpg][/url]
[url=http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/China insurrection 7.jpg][/url]
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