Beijing Wants Young Chinese Workers to Love Capitalism Again

first time since the mid nine seventies. While the numbers have changed of it since then, growth in the US is looking a bit slower and China slightly stronger, but it was a reminder that China's entering a challenging new phase in its economic development, one that's been made even more challenging by COVID and arguably by the increasing power

of President Xi jing Ping. We're going to spend most of today's podcast on that subject, talking to Chief economist Tom Ulick about the deep seated weaknesses and China's system that have come to the surface in the past two years, and hearing from the graduates entering the Chinese labor market who are reading Carl Marks and insisting they do not

in fact want to be capitalists. But first, they just wanted to share with you a few minutes of a conversation I had this week with Rachel Reeves, the Shadow Chancellor for the UK opposition Labor Party. They might wonder why on earth I would bother to share this with you when all the action in the UK surely has been in the battle to dethrone and now replace Prime

Minister Boris Johnson. But at a time of high inflation on both sides of the Atlantic, the question of what is a reasonable pay rise for workers, it's pretty fundamental, and as you're here, it is not an easy one for politicians to answer. Can I just start by asking you what seems to be quite a sort of basic question that only, certainly only center left party needs to answer in the environment that we find ourselves, Which is

what's the higher priority for you? Taming inflation which hurts households poorer households the worst, or restoring public services and giving teachers and doctors and others a decent pay rise. What do you think has to come first? Right now? We've obviously got to address the cost of living crisis, which is why since the start of the year I've been arguing for a winfull tax to put money in the pockets of people who are struggling with those higher bills.

And that is the immediate priority because people can't wait for that help with their energy bills, with the rising food prices, with the rising price of petrol to fill up their car. But then everything else really, whether it is better wages of public sector workers, more investments in our public services, or improving people's living standards, it all comes down to economic growth. When you have low growth, it means you don't have the money to invest in

public services. You always have to raise taxes anytime you want to do anything because you're not getting those proceeds of growth. And so ultimately, everything you want to do, whether it is improving our public service, is improving living standards, or lifting all parts of the country to to to to share in prosperity, has got to come through a plan for growth. But growth is really important. But right now, what would be a reasonable pay rise for teachers and

indeed ordinary workers across the country. What do you think would be a sensible to be a responsible course for you as chancellor to support the pay review? Bodies at the moment are in negotiations and it wouldn't be right whether you're in government or in opposition, to cut across that process. And I don't intend to do so. But the truth is you're not going to be able to improve public services, including the wages being paid to public

service who certainly deserve a pay rise. But you're not going to be able to get any of those things on a sustainable basis unless you're growing the economy. And that is the truth of it, which is why my focus is on how we can get growth and productivity off the floor so we can then bring in the tax revenues to invest in the public services that you speak about. Is coming back to this because you're you're you're an economist, and it's quite important to sort of

work out what we think about this inflation. The higher cost of imported food and energy has made us poorer as a nation. It's a hit to all of our standard of living, a permanent hit, and all you can hope to do is at the margin, affect the short term distribution of that hit um and certainly potentially affect the timing of that hit, because you can you can kick the can down the road if you like, with with matching wage increases, but at their cost potentially of

setting off another round of inflation. Do you accept that there's been a permanent hit to our living standards, whatever we managed to do about growth in the next five or six years with an amazing new plan, and what's the responsible way to respond to that. So you're absolutely right that this has a hit and it's up to them governments how they respond and ensure under my plans that it would be the lower income people who are struggling most of the rising cost of living would get

the most help. So I think that's what you best can do distribute distributionally. The Governor of the Bank of England has specifically said he's he's certainly nervous about wage it growth that's going beyond five percent and across the economy because anything above say three and a half percent, would clearly be inflation. What do you think he's right in making that. Let's look at where the wage growth

is happening. So wage growth in the top one percent is twenty times higher than wage growth for the bottom ten percent, and four or five times higher than for those in the middle and wage growth in the private sector is running at something like four or five times

higher than wage growth in the public sector. So I don't think the Bank of England have suggested this, but I think the government would quite like to suggest this that somehow ordinary working people and particularly those in the public sector, are somehow responsible for this inflation shock and and and and a sustained on as the higher inflation is just a fallacy and the people who are getting the biggest pay rises are those the top of the

income distribution who are at least affected by the rise of inflation. So if restraint is needed anywhere, is his restraint at the top. The public has been very supportive to date of Ukraine and are very muscular support of Ukraine. If the polls started to suggest that with another round of massive energy price rises that the public was actually starting to blame the war for these cost soaring prices and was actually starting to sort of wane in its

support for Ukraine. With that effect, in any way what you thought was the right thing to do for the British government. I think that the biggest risk is if Vladimir Putin thinks that his behavior and his aggression in Ukraine and elsewhere goes unchecked. That's what happened unfortunately after his invasion in Crimea. We can't let it happen again because he won't stop at Ukraine. We all know that I don't think that the the support of the British people

will buy him. I think the support given not just by politicians but even more so the whole country for Ukraine has been an amazing out pouring. But ultimately, and when it comes to the sort of defense and security realities, the most important thing is Vladimoputin knows that he can't get away with this because of that would put us in greater danger in the future. Okay, so I probably do seem to have ended up with Ladimir Putin instead of long term growth, But thank you very much, Rachel Reason.

Now we hear a lot about the struggles of jen z in the US and Europe, young people starting out who might struggle to have the same quality of life as their parents. Now we don't hear so much about the young people now entering the workforce in China. But it turns out they are making very different early career choices than their parents did, choices which could tell us a lot about the future of China's economy. Here's Bloomberg's senior China economy reporter Tom Hancock in Hong Kong. This

is a live job fair on quite show. A Chinese video platform similar to TikTok that's generally used by young people to share amusing short videos. What you're hearing is a recruiter responding to job seekers in a live stream chat. She got this key information from them, like age and gender, and tosses back potential job opportunities based on their situation.

There are about a hundred people in the chat, and the hiring agency told us that many of them are students looking for jobs over the summer brick but there are barely any matches. China's young generation is the best educated in the country's history, and that was expected to help them land better jobs and push China's economy to a more innovative future. But instead, an estimated fourteen million

Chinese young people are currently jobless. Making things worse, More than twelve million fresh graduates will flood the labor market this year. Because of the pandemic and Beijing's hardline approach to controlling it, China's youth jobless rate is likely to be pushed to that's about double what it was before the pandemic. To find out how young people are coping, we spoke to graduate students across China. Many are anxious

about their future and are lowering their expectations. They're seeking safety in public sector jobs rather than positions in private companies, which are generally paid higher wages. Anyway, concerning this is shut Chun. He's a empty two year old visual art major who's been unsuccessfully job hunting for months. His dream job a state owned enterprise managed by the central government up under COVID. Jobs at many private companies are not secure.

State owned companies are much more stable in comparison. That's what I wanted to be with them. In addition, state owned companies also have better subsidies and benefits in terms of housing and data expenses than private firms. Choose preference for state owned companies is widespread. In a recent survey, nearly forty of graduates said state owned enterprises with their top choice. That's up from just in seen. On the other hand, interest in private and international companies took a dive.

Only thirty percent said those are their top priority. Shape at a T five fashion fashion meet, Kay Low a postgraduate with a master's degree in law from ching Hwa University, basically China's equivalent of m I T. After doing internships at a law firm, an Internet giant, a securities brokerage, and the court. K eventually had a change of heart. She took an offer to work in the government. Was actually, when I first started my graduate program, I was averse

two jobs that are quote unquote within the system. I thought civil servants jobs were really boring and you could almost predict what you'll be doing in the next to five decades. But over the past or three years, I've gone through a lot and changed a lot. The pandemic has made everyone prioritize stability in jobs. Civil servants are among the most stable jobs, and that's definitely one of

my considerations. China's Communist Party and President ce Jim Ping might be relieved that unemployed youth are trying to join the government rather than overthrow it, but she did express his concerns at a rare appearance at a university last month. According to state media, see caution the students that to get rich and famous overnight is unrealistic. He asked the students to be down to earth and to be willing

to lower their expectations. However, preference for the public sector is not just about market forces, it's also about ideology. Speaking of her previous internship at a law firm. Case said the job felt meaningless because she felt she was just quote working for some capitalists the whole. After I read Marks, I became increasingly opposed to capitalists pursuit of wealth. I chose to become a civil servant at the end, because that way I will at least get a sense

of self accomplishment. I will be serving the people and contributing to my mother land. But as a result of this shift, competition for jobs has become a lot more fierce. For some positions, there are as many as two hundred applicants for a single government post. That's an acceptance rate of zero point five. On top of all that, applicants in general are overqualified. A study published last year found that half of job seekers have a bachelor's degree, but

only twenty of jobs require them. But even with high unemployment, manufacturers still say they're having trouble recruiting. Here's Lou Fung, a professor of economics at Peaking University. A lot of people of the in their age will go toward the future actress, but not I think these young people would. They have the higher education already, they just don't want to do the acting and the manufacturing sector. The actually they still need a lot of info eats, but the

salary they can offer enough that attractive enough. So that is that some of deferation of the match problem. It is it is huge in this catch. To make things worse, China's rapid urbanization has helped to widen the mismatch in the labor market. In the past decades, China's two d and eighty million migrant workers acted as a shock absorber for the economy. They returned to their homes to do agricultural labor when the economy slowed, and came back to

the cities when the markets needed them. But now there's a shift of attitude. Younger migrants, who are less likely to be university educated, tend to stay put when the economy slows because a lot of them even now erased in the rural area. So even they don't have an urban hospital respiration, they regarded themselves as urban people. That means the constraints or the government has changed in a substantial in this regard. It's more tough than the past.

Beijing knows that the state sector isn't large enough to solve the unemployment problem. It needs private companies to start hiring again, but the private sector will only really get hiring if growth returns. That depends mainly on China's ability to avoid further COVID lockdowns this year. In addition, the private sector's confidence has been bruised by the slump in China's real estate industry, the almost complete closure of private

tutoring businesses, and a regulatory crackdown on tech sector. It's clear that China's unemployment problem isn't going to be solved anytime soon. In the meantime, China's young people are lowering their pay expectations and seeking jobs in state owned companies, which are generally less innovative than the private sector. As a result, there could be a negative impact on the world's second largest economy for decades to come. In Hong Kong.

I'm Tom Hancock for Bloomberg News. So I thought that piece gave us an opportunity to talk to our chief economist, Tom Orlick, who spent eleven years thinking and writing about China's economy while living in Beijing. That and the fact that the paperback edition of his book on that subject

is just about to come out in the US. So Tom, we can get to the book, plug and the big economic challenges facing China in just a minute, But first I just wanted what your reaction was to that evidence in that piece that China's graduates are turning to Marx but also very much to the public sector for work. I mean, as an economist, it doesn't sound like good news for the flexibility of the economy if they're not wanting to go to the private sector, especially given that

the state owned enterprises can be the least productive. I think that's right, Stephanie. Let's be clear, there's nothing wrong with wanting to go into the public sector. Here in America. Many of the best and brightest want to make a career at the Treasury or the Federal Reserve or other bits of the US government because they want to make a contribution. I think what's troubling in the report we just heard from Tom Hancock is that in China it's

something more than that. Right, It's not just the desire to make a contribution, it's also the entrenched view that the state sector in the public sector is stable and the private sector is risky, unstable and not a good place to build a career. And I think what that speaks to is some of the structural costs of the big policies which She Jinping has introduced in the last

two years. COVID zero, Well, it's easy enough to deal with COVID zero if you're a massive state owned enterprise, much harder to deal with an on off economy if you're a small business, let alone a startup. And of course, the common Prosperity agenda she's attempts to engineer a more equal society has ended up hammering the outlook for big

private companies like Ali, Baba and ten Cents. Now, if you put those pieces together and you listen to Tom's report, it's clear that young people are starting to get the message they want to go to the state sector, not the private sector. That's bad news for China's productivity growth,

bad news for China's long term development prospects. People listening might wonder why you'd singled out a career at the treasury as a productive example of the state sector, and perhaps need to know that you used to work in the UK Treasury, and I indeed spent some time in the U s Treasury, But that that aside, what you just said sort of takes us back to something which I think we have talked about before, which is when we looked at the end of the first year of

the COVID pandemic in China looked really good. It was the only economy that had managed to grow it's it's strategy of of locking down the disease looked quite robust. It now clearly looks much less clever. But how's our view of China more broadly evolved in these two years. So I think COVID nineteen is primarily a human tragedy, but it is also a stress test for governance, financial and economic systems. As you mentioned, If we looked at China at the end of one, Chinese performance through the

COVID stress test was looking remarkably robust. From where we are in the middle of two, the picture looks, I think, much less positive. Or Macron has tested China's COVID zero strategy and exposed some of the big problems there, with Shanghai, Beijing other big Chinese cities spending big chunks of the

year under lockdown. A Chinese economy which has ground to a halt for substantial periods of time has also revealed some of the weaknesses which have been hiding in plain sight, things like the real estate sector, where we've had sales drying up, prices stagnating, and as a consequence, real estate developers getting into huge trouble in their capacity to repay their debts. And of course China's international standing has taken

a beating as well. I'm sure many stephonomics listeners have seen that Pew survey which shows unfavorable views of China rocketing up here in the United States, in Europe and also in Asia as well. And for a country that which does so much of its business overseas, growing by exporting, growing by learning technologies, or if we're being less charitable, stealing technologies from the rest of the world, that rocketing up in unfavorable views of China, that's bad news for

long term growth as well. It often looks sort of tempting to have very centralized control of the country, especially if it's if most of the leavers are in the hands of one man. Uh, it's attractive to think, oh, you can pull leavers and you can get things done and be effective short term, but long term we like to think anyway, there's a an effect of lowering standards, reducing the quality of government is that what we're is that what we're seeing that kind of negative effect on governance.

So one of the concerns about Shijin Ping is that he's going to break China's governance system. Dong Xiao Ping, China's great reformer, is noted for opening up the economy, but the other thing he did was reform China's governance system and introduce the two term limit for leaders. That two term limit limit was observed by Um Hujin Tao and by jangs the men Um very likely is not

going to be observed by Hijin Ping. And the concern that brings is that, well, if we look around the world at countries which have a single party system and a leader who's in charge for too long, UM, that can come at some really really serious costs in terms of governance quality. That's what happened in China under Chairman Mao,

That's what happened in Russia under Vladimir Putin Um. Now, if we think about China's COVID zero strategy and the kind of debate over when that is going to end, the message you hear most consistently from China watches is well COVID zero can't end until Shi Jinping has secured his third term as President of China and General Secretary

of the Communist Party. And what that suggests to me is that some of that dictator decline in government standards is already with us, and a matter of huge national importance, touching the lives of all of China's one point four billion people, is being settled not entirely in the national interest, but rather in the interests of sort of rather narrow political decision. We've had years of thinking the big risk we had to worry about with China was going to

come from the financial sector. The bubble in the property market, debts in the bankings to them. But it sounds like that's just a symptom potentially of a broken growth model. Is that overstating it. I'm not sure that growth model is broken quite yet, Stephanie. China's GDP per capita is still around a third of the level in the United States. And what that means is that the growth model for

China doesn't have to be around innovation. It can, for the foreseeable future, be about learning, copying, stealing foreign technologies. And if that's your growth model, then you don't actually need the same kind of liberty and individual choice and dynamism that you have when you're trying to push back

the technology frontier. So I don't think the growth model is broken, um, but I do think that the COVID crisis is exposing some of the cracks, some of the cracks and governance, some of the stresses in the financial sector and the real estate sector. And you talked about China's sort of decline in sort of public opinion polls. That's more than reflected I think in elite opinion in

Europe and the US. You know, every gathering that I am in of of policy makers or foreign policy thinkers is all the talk is of a return to a new Cold War between the US and China, or potentially the US and Europe and China. We had years in the old Cold War of overestimating the strength of the Soviet Union. Do you think we're under or overestimating China's economic power? So, look, there are pards. There are persistent

concerns about the quality of China's economic data. In particular, there are persistent and in my view, well founded concerns that GDP is smooth and massaged of political purposes. And if we stripped that out of the calculation on how big China's economy is, and we stacked them up against the United States, well, what it would tell us is that China is still further behind, is still some way behind the United States, and is catching up more slowly

than the official data suggest. So on that basis, yes, I think there is a possibility that we are overstating

China's economic strength. At the same time, if we think about China's longer term trajectory, we're talking about an economy of one point four billion people, an economy where GDP per capita is still a third of the level in the United States, which means very substantial room to grow productivity, not by innovating or doing anything particularly complicated or fancy, just by absorbing the technologies which are already being used here in the US and in Japan and in career

and in Europe. And if we think about Beijing, well, Beijing does a bunch of stuff that we don't really like, does a bunch of stuff we don't really like in Hong Kong, a bunch of stuff we don't really like in Shinjiang. But one thing they demonstrably do really really well is developed the economy. Um, So I think the kind of the short answer to your question is, are

we underestimating China's economic strength? Well, yes and no. The longer answer is we might well be overestimating how big their economy is right now, but it would be a big mistake for us to underestimate how big they will likely become in the next ten or twenty years. We've run out of time. But I just had one final question, which is where can I go for a smart and super readable introduction to China's economic challenges and how it

may yet overcome them. Well, I'm delighted to ask that question, Stephanie. The second edition of my book, China, The Bubble That Never Pop is being published by Oxford University Press later in August. Um, if you rush out and buy it immediately, you may get it before the bubble pops and my main conclusions are disapproved, And we should say it has been well reviewed by many major media organizations that are not Bloomberg. Thank you very much, Tom Marlick. So that's

it for this episode of Stephonomics. Will be back next week. In the meantime, do please rate the show if you like it. And check out the Bloomberg News website for more economic news and views on the global economy. You can also follow at economics on Twitter. This episode was produced by Summer Saddi and Young Young. The story from China was reported by You, Jane Lowe and Tom Hancock. Special thanks also to Tom Warlick, Labor Party Shadow Chances,

Rachael Reeves, and the Resolution Foundation in London. Mike Sasson is the executive producer of Stephanomics. M