China: Trouble and Strikes

Regardless of the underlying issues of economic and strategic competition, the immediate dynamics of the US-China trade/investment/IP face-off look like poker: who will blink first? In this game, the immediate economic hit suffered by both China and the US matters less than the political pressures they generate. Crucially, if, for example, manufacturing companies find themselves unable to maintain payrolls, or are late in paying wages, will this pose a challenge to 'weiwen' (trans: maintaining social stabilty) policies?

Getting a handle on this requires two things: first, an indicator of the degree of disruption being felt in the industrial economy; and second, a measurement of the social/political response.

I track momentum shifts in the industrial economy by measuring movements vs 5yr seasonalized trends in exports (both Rmb and volume), industrial production, and electricity production. In May, industrial production growth slowed to 5% yoy with a monthly movt 0.5SDs below trend; electricity production slowed to just 0.2% yoy, with a 0.6SD deflection below trend, and exports managed a 0.8% yoy gain with a 0.5SDs deflection above trend. It is not easy to see beyond the dramatic volatility which always plagues China's 1Q data, but the overall message is that so far the industrial economy is weathering the storm no worse than one might expect.

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In assessing the likely political fall-out, I have used data from the China Labour Bulletin, and in particular its database of strikes. Historically, Guangdong has been the most province with most reported strikes (1,415 strikes recorded since 2014), but other provinces with a track record for relative labour militancy are (in order): Jiangsu, Henan, Shandong, Sichuan, Shaanxi, and Zhejiang. These provinces, and Shanghai (peaceable - only 235 strikes since 2014) are the ones I have totalled to provide a proxy for overall strike activity.

Strikes are always costly things of last resort, and we can assume that both management and labour will make great efforts to avoid them. If so, then rather like bankruptcies, one would expect to see them only after problems have persisted for a long time. Consequently, I've compared the incidence of strikes with 12ma movements of my industrial momentum indicator.

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I draw two conclusions from this chart:

First, there is absolutely no sign of any upsurge in labour militancy yet. In fact, during Jan-May, this database counted only 299 strikes, down from 375 in the same period last year. Moreover, not only is the number of strikes falling, but it is doing so from a historically low base.

Whatever political pressures Xi Jinping may feel from US-China relations, pressure from labour markets is not yet one of them.

Second, the experience of 2014-2015 nevertheless tends to confirm that China can expect an outbreak of labour militancy if the breakdown in US-China relations only if it involves heavy costs to China's industrial economy over an extended period (say, 18 months minimum).