Every day Xu Yongan sets up a table outside his fading apartment, where he and other retired steel workers, ringed by half-empty bottles of beer, play endless rounds of the ancient Chinese game of mah-jong.
Two years ago, when he learnt his employer was looking to scale down, Mr Xu accepted an early retirement package worth Rmb4,000 ($600) a month for 35 years.
“Why continue working when you are guaranteed a monthly income?” the 55-year-old asks.
Mr Xu is one of about 10,000 workers let go in Ma’anshan, a steel town in Anhui province, as China scales back its state-owned enterprises and upgrades its manufacturing sector. Across the country 1.8m coal and steel workers are to be banished from the payroll by the end of this year as part of the biggest wave of redundancies since the late 1990s.
That poses a daunting challenge for China’s leaders as they prepare for President Xi Jinping’s second five-year term. As they steer the economy away from heavy industry, they will have to contend with the dangers of rising unemployment and straining social welfare systems.
“The conflict between the central interest in fiscal balance and the local interest in labour-market and social stability has not gone away,” Ernan Cui, an analyst at Beijing research group Gavekal Dragonomics, wrote in a recent research note.
Local leaders, wary of social unrest, have pushed for unneeded workers to be given neibu tuiyang, or early retirement, in which companies cover living expenses and social welfare payments until retirement age. China’s retirement threshold is one of the world’s lowest — men can receive state pension benefits from the age of 60, women from 55 — putting additional pressure on social welfare funds.
China has set aside Rmb100bn ($15bn) to fund labour retraining efforts and early retirement programmes to ease the burden of capacity cuts. However, that will be far less than needed to plug the growing deficit in the national pension system, which went from a Rmb60bn surplus in 2013 to a Rmb180bn deficit in 2015. China’s total liabilities are on track to reach $122tn by 2050 if the problem is not addressed, according to the Chinese Academy of Social Sciences.
Ma’anshan, nestled along the banks of the Yangtze river, exemplifies the cost of China’s economic restructuring. A city with deep revolutionary ties (Mao Zedong led Communist troops through the surrounding mountains in 1934), it was built from scratch in 1956 to facilitate national steel production.
The local state group, Maanshan Iron and Steel (Masteel), was both employer and benefactor. Throughout the 1980s and 1990s it provided about 85 per cent of the city’s tax revenues and contributed 20 per cent of total industrial revenues in the local province.
At its peak the company employed roughly 90,000 of the city’s 2m people — and it treated them generously. Meals in its canteens were free, as was hospital treatment, while primary schools were provided for workers’ children. Until 2007, employees were even allocated company apartments.
“The pay was not the highest but there were many benefits — free housing and healthcare,” says Deng Weimin, who is spending his retirement running a small restaurant beside his former office. “You were proud to be a Masteel worker.”
Today the company employs only 32,000 workers and has shed most of its benefits. While many public schools and the local hospital still bear the Masteel name, the state now picks up the tab.
Masteel is still responsible for 20,200 pensions worth about Rmb550m a year that are managed by the local government, according to its 2016 annual report. As capacity cuts bit, it spent another Rmb348m on early retirement programmes last year. More than 70 per cent of Masteel’s liabilities that came due last year were pension-related. Masteel declined to comment.
The problems do not faze city residents, who have retained an ironclad belief in state assistance. Ma’anshan has weathered almost three decades of efforts to reform China’s notoriously inefficient and bloated industrial sector; in 1993 it was one of the first SOEs to restructure as a joint-stock company and go public.
“The state will not let anyone be completely let go,” says Zhang Lijuan, a former Masteel worker. “I heard Masteel’s bosses put up a fight, and Anhui leaders will provide funds to Masteel to cover retirement pensions.”
The Anhui branch of China’s state-run labour union says it has funded job counselling to 30,800 laid-off workers and last year found new jobs for more than 100,000.
Provincial leaders have good reason to mollify laid-off workers. In 2015 hundreds of Masteel workers took to the streets in the provincial capital of Hefei after the company closed its plant there, which had employed 4,800 people.
“Local authorities are trying to handle downsizing lay-offs with more finesse this time,” says Geoffrey Crothall of China Labour Bulletin, a Hong Kong-based campaign group. “That’s partly because they don’t want to see more of the kind of massive demonstrations over the past few years at major enterprises.”
Industrial workforce cuts are part of larger efforts to transform Anhui province, one of China’s poorest, into a high-tech manufacturing hub. Cheaper labour costs and government subsidies have already begun to attract multinationals. In May, Volkswagen’s Chinese joint venture formalised plans to build a production base in Hefei, while ecommerce powerhouse JD.com agreed to set up a big data industrial centre.
Yet few of the workers employed there will be former industrial workers, most of whom have opted for early retirement rather than seek new jobs.
“It will be very difficult to retrain workers, most of whom are above the age of 40,” says Dan Wang, an economist with the Economist Intelligence Unit. “They will have to settle for more low-skill jobs.”
Younger Masteel workers say they have found flexible work with on-demand mobile apps such as food delivery service Meituan and ride-hailing service Didi Chuxing as the steel company cuts hours for existing employees.
“I like it because I have greater control over my working hours,” says Zhang Liang, a welder turned delivery driver. “It is not as stable as my old job, though.”
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.