Market Extra: As China exports slow, government might face growing labor unrest, researcher says

While President Donald Trump must prepare for a reelection contest next year, Chinese President Xi Jinping faces no such referendum.

But this lack of electoral accountability doesn’t mean that Xi won’t be made to feel the anger of Chinese citizens over the effects the U.S.-China trade standoff, according to new research that maps the relationship between the Chinese export sector and incidents of labor unrest.

“What we find is that when China has been facing a slowdown in exports, even before the trade wars, we found that slowdown leads to an increased occurrence of labor unrest,” Filipe Campante, professor of international economics at Johns Hopkins University, told MarketWatch.

Along with David Chor of Dartmouth, and Binjing Li of the National University of Singapore, Campante published his findings on the relationship between the Chinese export machine and growing incidents of public protests by suffering Chinese workers in a new working paper with the National Bureau of Economic Research.

The economists compiled data on public labor demonstrations from the China Labor Bulletin, a Hong Kong-based nongovernment organization that promotes workers rights in China, and compared that with data on Chinese export growth between 2012 and 2015, a year when the Chinese economy was slumping as a result of actions to reign in debt growth.

China Labor Bulletin

Locations of labor unrest from 2012-2015

Due not only to rising tariffs in the U.S., but a generally weakening global economy, the Chinese economy is entering into yet another period of either slowing export growth or outright contraction.

“China’s economy has bigger problems than just trade with the United States,” wrote Carl Weinberg, chief international economist at High Frequency Economics, in a recent note to clients. “China’s exports to the world outside the United States — representing 85% of its exports—are fading just as fast as exports to the United States.”

FactSet

The latest data on Chinese exports showed year-over-year growth of 0.5% in May, though analysts argued the increase was the result of exporters frontloading sales to avoid newly threatened U.S. tariffs. Exports had faded 3.3% in April, year-over-year.

Campante said renewed weakness in exports should lead to a ramping up of labor incidents in 2019, and an aggressive response from the Chinese government to contain the protests.

Sluggish economic data is affecting Chinese investor sentiment as the Shanghai Composite SHCOMP, -0.99%  lost 3.6% over the past three months, while the Shenzhen Composite index 399106, -1.81% has fallen 7%. That’s compared with a 2.7% advance for the S&P 500 index SPX, -0.25% and a 1.4% rise for the Dow Jones Industrial Average DJIA, -0.14% over the same period.

Aaron Halegua, lawyer and research fellow at NYU Law School’s U.S.-Asia Law Institute, told MarketWatch that labor actions are typically the result of Chinese employers not paying their workers what they are owed, or underpaying into local social insurance programs.

Chinese workers, he said, have a high tolerance for employers holding wages in arrears, but that tensions boil over during serious downturns.

“Employees don’t normally want to rock the boat,” he said. “But actions are prompted when it seems there’s nothing to lose, like the factory being closed or relocated and people are being laid off. Then you see a lot of protests and strikes and actions.”

How this expected increase in worker unrest will effect U.S.-China trade negotiations remains to be seen, as the Chinese government response to such incidents “is pretty sophisticated,” Campante said.

His research shows that in Chinese localities that see rising unrest, there is a more active government response, including both carrots, like increased social spending, and sticks, like increased policing. China’s central government also monitors the situation closely, and has been more likely to replace local officials that saw excess unrest, relative to what would be expected given economic conditions on the ground.

“The interest at the central government level in political stability is hard to understate,” Halegua said.

Whether that means that the Chinese government will be more willing to give in to U.S. demands in trade negotiations, however, remains to be seen.

“Economic pain puts stress on the political system,” according to Campante, but economic pain that derives from the trade war may be another animal, given Chinese propaganda aimed at whipping up patriotic solidarity. “The impact might be different, because it’s Trump’s fault.”

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