Going Back To the Farm

Over the last 30 years, as its economy has raced ahead, China has witnessed the world's largest internal migration, with some 250 million farmers and others abandoning its impoverished heartland in search of factory work and a better life on the coast. Now, as the economy slows—exports for January plunged 17.5 percent compared to the same month last year—many of those factories (including nearly half of the toymakers in the Pearl River Delta) have shut down, and unemployment is thought to have hit 10 percent. That's sending threatening waves throughout Chinese society. Among the most worrisome effects: some 20 million migrant workers have returned home, flooding areas where able-bodied youngsters were recently a rarity.

Perhaps hardest hit is hardscrabble Henan province, whose population is thought to account for a full 10 percent of China's newly jobless. Local officials say some 2 million unemployed workers (out of a total population of 94 million) came home to stay during late January's Chinese New Year holiday, the traditional time for paying off—and laying off—workers. The real number is probably much higher, and it's sure to grow further as layoffs mount. Already it's producing great anxiety among Chinese officials, who have begun warning of civil unrest in unusually stark terms. The fear is that jobless workers—many of them young men—will band together and turn to violence or crime.

Avoiding those dangers by reabsorbing and redirecting these masses won't be easy. But if Henan is a guide, local governments are off to a good start, and may even manage to turn the infusion of new (or returning) blood to their advantage. Henan officials are working on a two-track strategy: first, finding jobs for as many returnees as possible, which generally means reexporting them by posting ads and hosting recruiters from elsewhere. Second, Henan is looking for ways to retain the best-qualified returnees in order to boost the province's depleted workforce and develop new businesses.

One way to do this is through massive infrastructure projects. Using its share of the national $586 billion stimulus package, the province hopes to create 650,000 new jobs in the next two years, according to Henan's labor bureau. Plans include a high-speed rail link between the provincial capital, Zhengzhou, and the tourist city of Luoyang. Henan's highway system will also be expanded.

Then there is a raft of more creative measures. One plan involves spending $219 million on government-backed low-interest microloans to laid-off migrants, in order to help them to open agricultural and food-related businesses in rural areas—capitalizing on skills they may have learned in the boomtowns. "Many returned peasants [worked] in sales and in management. As they've returned it's a good opportunity for them to … employ others," says Liu Tao, deputy director of the Henan labor bureau. Liu says even more money could be spent if there turn out to be worthy recipients.

The province has also doubled its skills-training program this year to target 2 million migrants, at a cost of $146 million, and will allow workers to claim training grants annually, rather than once only. And it's begun creating financial incentives for colleges to place their graduates, hoping to stimulate schools to strike up alliances with local firms. The province's 1,000 training colleges now only receive payment for teaching those students who find work. So far, the effort is proving effective: only 40,000 out of 680,000 trainees failed to land jobs last year.

Creative as they are, none of these efforts may prove up to the challenge of accommodating millions of unemployed new returnees. In addition to the direct problems caused by out-of-work migrants moving back home, rising unemployment is causing other hardships like a steep decline in remittances sent back to farming families, who can often barely survive on what they coax out of the ground. Henan officials estimate that remittances represent a third of farmers' household income. But migrants say that underestimates the truth; Gao Yang, a 28-year-old warehouse worker, says the real figure is more like 50 to 60 percent.

Government aid programs are also poorly publicized. Yang Xinguo, 55, was recently searching for work at an informal roadside labor exchange on Zhengzhou's Erma Road, a Dickensian place where down-on-their-luck locals show up seeking short-term jobs. Even these are in short supply. Yang used to work as a crane driver, and once ran a small electronics shop. He'd love to return to that work but had no idea that a new microcredit scheme that could help him do so existed. And such a program could make all the difference for a man like him; Yang says all he'd need to get going again is about $4,000.

Not everyone is convinced it can work. "Globally, programs [like Henan's lending scheme] don't have a very high success rate because even in the U.S., small and medium-sized businesses tend to go out of business rather rapidly," says Andy Rothman, China macroeconomic strategist at brokerage CLSA. But China has had a different experience. Mass layoffs of workers in loss-making and unwieldy state companies in the 1990s led to the creation of a wave of nimble small firms. These private companies have been responsible for 70 percent of new job creation in the last five years, and policymakers are hoping to reproduce this pattern now. To encourage it, Henan officials are extending lending through the creation of township banks, which will dish out loans under the guidance of the People's Bank of China (the equivalent of the Federal Reserve).

Still, they and other leaders face an uphill battle. Even if local production can be kick-started, Henan-made goods, while cheaper than those from the Pearl River Delta, will remain more expensive than Vietnamese or Indonesian products. That means success in kick-starting local manufacturing will ultimately depend on whether the state can stimulate local consumption. However, in the meantime it's important that the government be seen to be trying. Its efforts are "clearly the right thing to do right now, both because some of the firms will gain traction and because it will make the right impression on people," says Rothman. State-run programs won't solve all the problems, in other words. But they're a start, and they just might help avoid Beijing's worst nightmare: mounting public anger that bursts into the streets.