The number of people now in China in flexible employment is about 320 million workers this year. So this accounts for about 44% of China's workforce. That sounds to me like a very lopsided, very imbalanced economy that potentially could engender social stability issues.
Welcome to China Decode. I'm Alice Han, and I'm James Kynge. In today's episode of China Decode, we're discussing economic indicators from unemployment to inflation raising flags. Tencent could buy Manus back from Meta, and why Gen Z is moving to smaller cities across China looking for a different lifestyle. That's all coming up. But first, let's do a quick check-in with how the Chinese markets are starting the week. Markets were down, with the Shanghai Composite falling around 2.06% and the Shenzhen Component dropping 3.48%, partially attributed to risk-off sentiment surrounding escalating US-Iran tensions. The Hang Seng Index was up slightly at 0.16%.
All right, let's get right into it. We'll start with the broader economic situation in China right now, as it's facing a bit of an uphill battle. China's Ministry of Human Resources and Social Security released its 15th Five-Year Plan just a few days ago, and for the first time in decades, it didn't set a numerical target for urban job creation over the next five years. This marks the first time since at least the 1990s that a headline number for new urban jobs has been left out of the country's medium-term economic plan. It's being blamed in part on the uncertainty being created by the AI boom in China. The official target for new urban jobs over the past five years was just over 55 million. That's slightly higher than the target that was set in the late 1990s at about 40 million. But it's fitting given that this is a country that really is driven by targets—economic, social, and political targets. So the fact that we have had this change to the way that they think about the urban employment market, i.e., basically getting rid of this target, suggests, I think, a lot of what we've discussed previously, which is uncertainty about the job market, uncertainty about demographics, uncertainty about how AI could displace a lot of the jobs, especially the gig economy jobs, but not just gig economy—also increasingly white-collar jobs, as we've seen elsewhere in the West. And I think that in general we're starting to see a public consternation globally about the AI implications for the labor force. And the way that it manifests in China is quite interesting to me, because on the one hand you have the government trying to proactively set up guardrails, whether it's through the court rulings or through some of the policy statements they made recently about how companies should not be displacing jobs on the grounds of AI disruption. But on the flip side, you know, you still see, I think, in general a lot more enthusiasm for AI by the general public compared to, say, America and Europe. How do you see this decision to take away the target, and do you think, you know, do you agree rather with my intuition that it has a lot to do with uncertainty about how AI is going to pan out for the labor market?
Absolutely agree, Alice, and I think it's a really important topic. I'm really glad that we're focusing on this one today. I would say that if there's one area in which the wheels might come off China's extraordinary economic advances over the past few decades, it has to be employment. And what you've already explained—the spreading adoption of artificial intelligence over the past year and the older adoption of factory automation over probably the last decade or 15 years—I think this makes China a guinea pig for the rest of the world to watch. I don't say that in any pejorative way about China. What I mean is that China is simply moving ahead so quickly on all of these topics that it now becomes an experiment for what happens to employment and social stability when you have hyper-rapid AI adoption and automation adoption throughout the economy. I did witness some aspects of this when I was last in China a few months ago. The first thing is I took a train journey from Shenzhen, right in the south of China, to Beijing—24 hours on the train. Of course, I got to chat to a lot of fellow passengers, and I have to say I think every single one of them voiced this concern about AI taking away people's jobs. So it came over to me really in a really concrete way in that regard. And then reading around the subject, doing a bit of research for today, a couple of examples really stood out to me. The first is an example of embodied AI, which is physical AI—so AI being used to power machines, robots, and things like that. And in this regard, I would go to the example of the Xiaomi car factory in Beijing, which has 100% automation on its production lines. That means that not a single person is on those production lines. There are people in the factory doing things like quality control, checking that the machines are not breaking down, etc. But not a single human being is actually making those cars. And those production lines produce a new car every 76 seconds. 700 robots are employed. This has got to be probably, I think, one of the most advanced factories in the world. So that's one example. Another would be the robot expo that I went to in southern Beijing. And when I got there, I found robots able to do just about everything. There were scores of these robots: robot surgeons, robot shop assistants, robot waiters, robot basketball players, robot bartenders, robot wise people like encyclopedias—you could ask them any question under the sun—robot vacuum cleaners, etc., etc., etc. So the Chinese job market is being pinched by AI taking away, as you just mentioned, a lot of white-collar jobs, and then you've got a lot of blue-collar jobs which are going to this embodied AI, where you've got effectively robots taking away the jobs of the blue-collar workers. And this comes on the back of about a decade of the most intensive automation drive in China's factories that we've seen anywhere in the world. And so all of this leads to one of the most stunning statistics that I think I've read about China in a very long time, and that is that at the moment the number of people in flexible employment—so another word for that would be the gig economy—the number of people now in China in flexible employment is about 320 million workers this year. That is an increase from about 280 million workers in the gig economy last year. So this accounts for about 44% of China's workforce, which to me is just an incredible number. This does seem to be a really big issue. How do you perceive all of this? How do you put this in China's context?
I mean, I agree with everything you've said in terms of the labor market side of things. I think another dimension of it that we haven't touched yet is the demography dimension and the uncertainty about how quickly not just the labor force will shrink but the population itself. And if you think about that level of uncertainty, then it becomes clear that the government also is unsure how many new jobs they can try to target in the next Five-Year Plan, because it remains to be seen how quickly the population is shrinking. Now, China has one of the lowest replacement rates now, about one, in the world. I think only really South Korea is slightly lower than this at around 0.75, 0.8. So this could move quite quickly and again throw a lot of uncertainty into the future projection models of job growth, right? So if I think about it as these twin problems—the demographic challenge, the AI displacement challenge—it makes sense that the government is deciding, hey, we're not going to issue targets. We're going to see how this actually plays out over time. But it's very clear in all the anecdotes that you've just raised, as well as the stats, James, that China is in a way more exposed than some of the other countries that we're familiar with in the West, because it has a huge portion of the labor market that is in this flexible gig employment situation, right? You just said 44%—that's a huge amount. That's, you know, much larger than Europe, the UK, and the US. On the flip side, this is an argument that I've heard: household debt levels are pretty low in China. The cost of living is much lower in China. Now even rental prices, you know, have been cut substantially because of the property bust that really started in 2021. So there is an argument that if the government can try to cushion the blow to the labor market through, you know, more support for the social security system, more buffering through some kind of a universal basic income to support everyday citizens, then maybe they can try to weather the storm. But I think that the biggest takeaway for me in this decision to cut targets—and remember, this is a political system that loves targets—is that it just doesn't—Beijing doesn't really know what the future pathway is for jobs, for population growth, for fertility.
Right. Absolutely, Alice. I think Beijing is hurtling into an unknown future and an untested future in this regard. Far be it from me to sort of be overly pessimistic about the abilities of China's economic planners. You know, we've got at least four decades of this Chinese economic miracle that burnishes those people's reputation. They've been proved right again and again and again, even when the commentary in the West has been pointing out various problems. But on this topic, honestly, I am, you know, concerned that China may be hurtling ahead too fast into this uncertain future. 320 million people in the gig economy—that sounds to me like a very lopsided, very imbalanced economy that potentially could engender social stability issues.
That number that you decided—that's just a little bit under the total US population, just so that people get a sense of the scale. 320 million compared to 350 million US population. That's a huge amount of people. But James, one question I do have for you, and this is going back to China in the 1990s. You know, when China was going through, in a way, its own kind of technological economic cycle, and that was really, you know, trying to get rid of the overcapacity and overbuild in the state-owned enterprise sector. You know, I remember Julie talked about capturing the big and letting go of the small. And you had, you know, hundreds of millions of SOE workers in the industrial sectors losing their jobs. There was the introduction of the iron rice bowl, basically creating subsidies for employment, housing, and other benefits. Don't you think that in this AI revolution, if something of the same in the same vein were to happen, that the government in China would be a lot more responsive, just compared, you know, compared to the US or Europe, just as they have been historically in, say, the 1990s?
Well, I mean, actually, I think it's a really good analogy that you've drawn, because at the time of smashing the iron rice bowl and letting go of tens of millions of state-owned enterprise workers around the end of the 1990s, early 2000s—I mean, that was a huge social experiment as well as an economic reform program. And a lot of people in China were unsure whether that would work. And of course it worked tremendously well in terms of building up the efficiency of Chinese industry. But it was very bruising for, as I said, tens of millions of state-owned enterprise workers who were let go, or their factories were sold for, like, I remember in some cases a single renminbi—they were just put on the chopping block and sold off. So what we may be going into now is, in some senses, an equivalent of that. We're going into potentially a bruising period of economic reform in which China pushes automation and AI at the expense of the interests of the workers. So from that perspective, I would draw that analogy. We just don't know how it's going to pan out. As I said previously, at the time around the turn of the millennium, a lot of commentators were saying this isn't going to work. China's social stability is going to be impinged upon. But, you know, with hindsight, it obviously did work, certainly from an economic efficiency perspective. Therefore, I don't want to gain this—I don't want to say this is going to bring the Chinese economy down. But I certainly think that a lot of gig economy workers in China now are leading very tough lives.
Yeah. And I think you're right because the scale is slightly different. The 1990s are around 35 million SOE workers that were laid off and, you know, had their benefits, pensions, housing subsidies as part of the iron rice bowl smashed, as you say. But then, as you know, you fast forward a couple of years, you go into 2001, China joins WTO, you see a big boost in China being a manufacturer to the rest of the world. You also then see a big boost in the property sector, which becomes a bubble—a problematic bubble—for the next two decades. The big question is: will AI be enough of a productivity growth boost as the property sector and manufacturing were in the early 2000s to help transition this workforce into a new growth trajectory, into new jobs? Right? That is, I think, the trillion-dollar question that we don't yet know. But I think it's helpful to think about the 90s in the sense that we know historically we have been through a similar period of labor disruption and dislocation. In that instance, you did have strong leadership in Beijing that said that the SOEs and the employees had to basically, you know, carry the burden of that cost. But they were lucky in terms of the timing too, because then there was obviously WTO and the property sector boom.
But at the time—I mean, I was a reporter in China. I used to go to a lot of those factories where all of the workers had been laid off and the buildings had been sold for a few renminbi. And there were demonstrations in a lot of places in northern China, and these demonstrations would go on for weeks, sometimes months. It was a period of social instability. And some of the stories that you heard from these state-owned enterprise factory workers who'd spent their whole life, as you said, in the iron rice bowl—you know, working for a pittance of a wage because the trade-off was that their health care and their pension, etc., would be taken care of—and suddenly their iron rice bowl was smashed and they had no way to support their family or their grandkids or anything like that. Some of those stories were heart-rending in the extreme. So, you know, the idea, I think, that the outside world sometimes has of China as a sort of managed communist state has always been vastly wrong, because a lot of people in China have had to sacrifice masses and live very difficult lives to build what we see now. And China has, you know, in many cases not been communist in the sense of taking care of its workers in any way at all. It's been much less communist than the societies that we have built up in the West at the moment. And right now, with 320 million gig workers, I think that's just the latest example of the real nature of the Chinese economy—how hard-scrabble it is, how difficult it is for a lot of people to get by.
We'll be back with more after a quick break. Stay with us.
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Welcome back. Looking more closely at one particular AI company in China now. Tencent Holdings is in discussions to become the largest shareholder in Manus, a Chinese-founded agentic AI startup that builds general-purpose AI agents. Now, you'll remember that in December of last year, US company Meta announced plans to acquire Manus for roughly $2 billion US to bolster its agentic AI efforts. But Beijing rejected this on regulatory national security grounds and ordered the deal be unwound. Tencent was already among Manus's early-round investors. Now, James, this is again another story that shows how tech companies are increasingly victim to geopolitical conflict and the nationalization of technology issues. So in this case, Beijing got ahead of Washington in trying to block this, because remember, Washington was also upset with the idea that, you know, this US company Meta would be spending $2 billion on effectively a Chinese AI company. But Beijing has gone ahead and said actually this is not in line with our regulations when it comes to, you know, purchasing Chinese technology IP. And so effectively they have strong-armed the Manus founders. So the two founders are now stuck in mainland China. This is supposed to be a shot across the bow for any companies that are looking to do in Singapore and hopefully be treated as non-Chinese Chinese companies. But the bigger story here that has just emerged is the Tencent story. Now Tencent seems to be really keen to get into agentic AI. Thus far, I think it hasn't really been a leader in the space, hence the desire to increase its shareholding within Manus. Now, Manus reached a recurring annual revenue of $500 million earlier this year. Just for a sense of size, Tencent's revenue last year was $100 billion. So Manus is still very early stage, but there are interesting use cases that Tencent is pushing to try to put the embedded AI engine inside the WeChat app, which services about 1.4 billion people. This could be, you know, a huge upgrade to WeChat, which hasn't really changed that much in my use of it over the last couple of years. So I'm very excited to see how that space shifts. But there seems to be a lot of synergies between these two companies. It completely makes sense to me that Tencent wants to get in on the Manus action. Do you think that moving forward we're just going to have to see what we've discussed previously, this iron curtain when it comes to foreign stakes in Chinese companies, that effectively Beijing and Washington are both going to draw the line and not allow foreign ownership or stakeholds in their homegrown AI talent?
