In China, economic and political problems tend to be hand in hand. The unemployment in the economic field will impact the legality of the government and will further bring negative influence upon the social stability.

As the global financial crisis began to spread to the tangible economy, China's leaders began to pay more attention to the increasing unemployment rate in China, which was caused by the bankruptcies of the enterprises. They have considered the
employment as one of their primo political task.

On November 17, the Ministry of Human Resources and Social Security of the PRC (hereafter MOHRSS) issued a note
saying that China's central and local governments must take measures to enhance the unemployment adjustment and give the unemployment forewarning. On October 20, the Minister of Human Resources and Social Security Yin Weimin convened a press conference and published two measures: first, the local governments of all levels were required to adjust the enterprises' minimum wage criteria in the near future; second, the local governments of all levels were required to make a disposable decrease in the rates of medical insurance, work-related injury insurance and unemployment insurance in the areas having relatively larger balance of the insurance fund. It could help reduce the burden of enterprises and individuals.

Yin Weimin also attenuated that the two measures mentioned above were taken especially for the period in which the enterprises were in difficulty. He said: "If we want to keep the situation of employment stable, we must maintain the existence and development of the enterprises."

According to the media reports, many factories in the Pearl River Delta Areas closed down and the phenomenon began to spread to the other provinces in China. Many off-farm workers had to return to their hometowns in advance. Meanwhile, the college students, who will graduate next year, began to be busy looking for jobs. It was said that the number of college graduates in China will be beyond 6 million. Against the general background of economic depression, the employment situation they will face is grimmer than ever before.

Prof. Hu Xingdou, an expert in farmers' employment problem in China, thought that the unemployment problem in China would impact the social stability. "Presently China has two primo tasks. The first one is to keep the economic growth for ensuring the social employment and the second one is to keep the social stability."

Hit to "Made in China"

Yin Weimin once said that China could keep its employment situation stable in the first three quarters of 2008. According to the statistics, the unemployment rate in the urban areas in China was 4.0% by the end of the third quarter of 2008.

However, at the beginning of the fourth quarter, the international financial crisis began to hit the tangible economy of China. Many enterprises in the southeastern coastal areas of China had stopped their production or even gone bankruptcy. Yin Weimin said by the end of this year the registered unemployment rate would reach 4.5%.

According to the report from Agence France-Presse (AFP), with the bankruptcies of the export processing enterprises in the Pearl River Delta Areas and Yangtze River Delta Areas, the railway stations of Guangzhou, Hefei, Chongqing, Wuhan and the like had many passengers in the middle of November, most of whom were the off-farm workers who returned to their hometowns in advance. However, previously such a flow of off-farm workers only came out when the spring festival approached.

According to an insider from the gross-roots labor department, most of the off-farm workers who returned to the hometowns in advance came from the labor-intensive enterprises of textiles, electrics, shoemaking and toys.

Though Yin Weimin denied that many off-farm workers returned to hometowns in advance, he admitted that a part of labor-intensive small- and medium-sized enterprises (SMEs) had been closed or would be closed, resulting in the unemployment of a part of off-farm workers.

The statistics from relevant state authorities showed that 67 thousand SMEs were closed in the first half year of 2008. More than 10 thousand textile enterprises, which are the representatives of the labor-intensive enterprises in China, had been closed or gone bankruptcy. About two thirds of the survivals might be restructured.

It was generally believed that the unemployment wave in China, which was driven by the bankruptcies of enterprises and factories, was mainly attributed to the hit from the international financial tsunami. However, He Qinglian, a famous economist said: "The phenomenon of depression of China's economy started from last year. We all know that last year the toys were boycotted in the USA because many of them were detected to contain lead. Then the European Union took the same action against toys made in China. This resulted in the bankruptcies of many toy enterprises."

In these two years, there were a series of safety problems of "made in China", like toothpaste, toys and household appliances. This year the milk with melamine once again hit China's manufacturing industry, which is, according to He Qinglian, the pillar industry of China.

Unemployment: Political Problem

Early in 2001, an expert said that the greatest challenge to China in the 21st century would be unemployment. In 2006, When President Hu visited Washington D.C., he said to the US president George W. Bush that unemployment was the greatest challenge that China had to meet.

This year is the 30th anniversary of China's reform and opening up. The unemployment problem, which concerns the economic development and social stability, has been becoming more and more serious since 30 years before. With the deepening of the reform and opening up, the planned economy system has been gradually changing into the market economy system. Along with this process is the worsening of the unemployment problem.

We all know that China has the largest population in the world. The annual increase of population is 16 million. The spike in birthrate in the past several years now has become the employment stress. The competition in the socialist market economy system has created the environment for the enterprises in which the fittest survives. This also brings about the unemployment problem. In addition, the 3-Year Disburden Plan of the state-owned enterprises, which was started in 1999, caused a huge amount of laid-off workers.

Prof. Kevin O'Brien from the USA said that the serious unemployment might result in frequent demonstrations. In China, it was reported that in November at least three cities' taxi drivers had struck for demonstration.

China's central government has shown its attention and care to this problem by requiring the juristic and law-enforcement authorities to clear the accumulative cases, to correct the improper judgments and to punish the corrupted officials severely.

David Dollar, chief representative of the World Bank in China said: "Now the largest challenge the Chinese leaders have to face is the millions of people having no jobs. If the growth rate of GDP in China decreases to below 8%, its population of unemployment will continue to enlarge."

IMA, an international market evaluation company located in Australia promoted the evaluation coefficient of the political risk in China from low level to middle level, in consideration of the potential threat to the social security caused by the unemployment. At the same time, Meng Jianzhu, Minister of Public Security of China told the public security authorities of all levels in China to have clear understanding of the impact and blow from the present economic situation on the social stability.

However, Cao Siyuan, President of Siyuan Research Center of Social Science, thought that presently China's economic growth rate was just slowed down a little, and only the export and construction enterprises were influenced. Therefore, it was too early to promote the coefficient of political risk in China.

Game between Central and Local Governments

With the deterioration of the unemployment problem in China, the leaders like Hu Jintao, Wen Jiabao showed their worries and anxiety. They went to Shandong, Zhejiang, Jiangsu and Guangdong to have surveys and investigations. Yin Weimin also visited Guangzhou, Zhuhai and some other places for his investigations.

Guangdong Province in South China is one of the main manufacturing bases in China. It was the first province in China influenced by the international financial tsunami. According to reports from some Chinese media, more than 50 thousand enterprises in China had been closed since the beginning of this year. However, Liu Huanquan, Director of Guangdong Administration Bureau of SMEs, said on November 16 that there were only 7148 enterprises going bankruptcy in Guangdong from this January to September. Unfortunately, many scholars and entrepreneurs suspected whether the number was correct.

In the middle of November, Guangdong Provincial Party Secretary Wang Yang said that the enterprises going bankruptcy were “eliminated by the market because of their behindhand productive force". In Wang Yang's opinion, the closures of the enterprises were attributed to the disciple of market economy.

Though Wang Yang expressed that the government would make proper placements for the laid-off workers, he also said: "The government can not do what the market economy doesn't allow it to do. That means Guangdong government has no willing to rescue the enterprises in difficulty." Wang Yang believed that this financial tsunami was an opportunity for Guangdong to realize the upgrade and shift of the traditional industries and to develop modern ones. In his opinion, this financial tsunami could give Guangdong an unprecedented opportunity to use the force of the market to eliminate those labor-intensive enterprises with high pollution and energy consumption in the Pearl River Delta Areas. "We are just in the period of the adjustment. The pain is necessary."

But leaders of China's central government obviously didn't agree with Guangdong's position. On November 14, Chinese Premier Wen Jiabao made an investigation in Guangdong and required Guangdong Provincial Government to give more support to the SMEs. This is an apparent case showing the contradictions between China's central and local governments.

Obviously, if too many SMEs in the Pearl River Delta Areas go bankruptcy during the financial crisis, the unemployment problem will become worse and worse. This may result in the social turmoil. In addition, most of the off-farm workers in the Pearl River Delta Areas come from the inland provinces and cities of China. So the turmoil can easily spread to those provinces and cities, which may upgrade to a nationwide turbulence. When the economy is under depression, the primo consideration of China's central government is certainly how to keep the social stability.

However, this time Guangdong government seemed not obedient to the central government. On November 20, Wang Yang said in a Working Conference of Guangdong Special Economic Zone: "Guangdong has always been on its own way in the 30 years of reform and opening up. Now it should continue that way. We should stick to the spirit of 'who dare win' and never give up innovative ideas in the reforms. We should continue our pattern."

A lot of experts criticized Guangdong's attitude toward the problems of SMEs. Ding Li, Head of the Scientific Research Department, Guangdong Academy of Social Science, pointed out that it was not a proper opportunity for Guangdong to conduct the industrial upgrade and shift. Guangdong's economic pattern is the outer-driven economy which mainly depends on the foreign capital. That means its industrial shift and upgrade doesn't depend on itself but on the transfer of international capital brought by the globalization of economy. However, the spread of the financial crisis has made it harder for the international capital to transfer than before. If there is no new capital entering Guangdong and the old one has been eliminated by the market, the industries in Guangdong may suffer from lack of capital.

Wu Jinglian, a famous economist in China severely criticized Guangdong Provincial Government for its wrong understanding of industrial upgrade which resulted in the wave of closures of enterprises in Guangdong. According to Wu Jinglian, Guangdong Provincial Government misunderstood the concept of the industrial upgrade and misused the administration ways to force some kinds of enterprises away. This was the basic reason of the closures of so many enterprises, especially the SMEs. Wu Jinglian pointed out what was needed to deal with the crisis was the combination of monetary and financial policies to stabilize the situation. Meanwhile, the government should give more support to the SMEs to keep the employment rate increasing or at least to prevent it from dropping. Then the government should encourage but not force the enterprises to seek higher added value.

Wu Jinglian said that he had gone to Guangdong and acknowledged that many officials in Guangdong thought the labor-intensive industries were low-class and capital-intensive industries were high-class. They believed that the industrial upgrade was to force the labor-intensive enterprises away with administration ways to give out space for those capital-intensive ones. However, the actual meaning of industrial upgrade is to enlarge and increase the added value. The closures of export enterprises showed that the enterprises had too little added value in the supply chain of the production chain and their profit bases were very weak. So they were easy to collapse when the storm came. Guangdong Provincial Government’s purpose of encouraging industrial upgrade was right, but it should have a correct understanding of this and adopt the proper ways.

In 1998, there were a lot of laid-off workers in China because of the reforms of the state-owned enterprises. The Chinese central government took many measures to give support to the SMEs to absorb those laid-off workers. The experts said that this time the central government should take similar measures to encourage the development of SMEs. This is the best way for China to deal with the threat from the unemployment.