April 16 (Bloomberg) -- Barely 26 years old, Zhang Xi has studied at an elite American university, worked for an investment bank in Hong Kong and an oil company in Beijing and now may launch an Internet startup with two friends.
Zhang, a foreign movie buff who quotes lines from “Forrest Gump” in fluent English, symbolizes a transformation of China’s labor force that is minting college graduates in a country better known for its factory workers.
“We just don’t want to sit on the side while all the big things are happening,” she says. “There are tons of choices in front of young people right now.”
Some of those choices may shake the global economy. Close to 7 million Chinese this year will graduate college, up from 1.1 million in 2001. By 2020, China’s college-educated talent pool is expected to number 195 million people -- more than the entire U.S. labor force that year.
The Chinese for more than a decade have been potent rivals to American and European manufacturers. China is giving Westerners something new to worry about: a generation of workers able to compete in higher-technology endeavors. The aim is to develop service industries and shift from producing simple exports -- often assembled from parts made elsewhere -- to making a larger share of more sophisticated products.
To be sure, the emergence of tens of millions of additional college-educated workers will challenge China as well as its trading partners. Too many Chinese universities offer sub-par educations and too many students fail to find jobs after graduation, potentially imperiling social stability.
Well-educated workers such as Zhang, who earned a master’s degree in finance at the Massachusetts Institute of Technology, are essential to the government’s plans to reorient the world’s second-largest economy. As Chinese companies grow more capable - - what economists call “moving up the value chain” -- they will encroach on markets now dominated by advanced economies.
“We’re going to have to compete with Chinese banks and Chinese insurance companies and Chinese software companies,” said William Overholt, president of the Fung Global Institute in Hong Kong. “We’re not used to thinking of China as a powerhouse in these areas.”
That change is already happening. More than half of China’s $4.2 trillion in trade last year involved significant value added by Chinese workers, while lower-value processing trade fell below one-third of the total, down from almost 39 percent in 2010, according to the Chinese Ministry of Commerce.
Yukon Huang, an economist who headed the World Bank’s China office from 1997 to 2004, says the proliferation of college graduates is lowering the cost of skilled labor and making China more competitive in a broader range of industries.
As rising factory wages push labor-intensive manufacturing to countries such as Vietnam or Bangladesh, Chinese manufacturers are taking on more complex -- and lucrative -- work, says Louis Kuijs, chief economist for China at Royal Bank of Scotland in Hong Kong.
“We see a lot of upgrading of the manufacturing sector where companies do things that they didn’t do before,” Kuijs said. “People talk about will it happen? Forget it -- it’s happening big time already.”
Reflecting that economic maturation, Chinese exports to the U.S. of industrial engines and related parts roughly doubled last year compared with 2007 before the financial crisis disrupted global trade, while toy shipments fell 11 percent, according to the U.S. Census Bureau.
China is advancing along a path blazed by countries such as South Korea, Huang said. Once derided for poor quality, South Korean companies such as automaker Hyundai Motor Co. and Samsung Electronics Co. now boast globally competitive products.
That’s only a hint of what’s ahead, according to Dan Breznitz, the Munk chair of innovation studies at the University of Toronto. Breznitz, co-author of “Run of the Red Queen: Government, Innovation, Globalization and Economic Growth in China,” says China soon will have a surplus of college graduates to devote to research on fields the West is neglecting, such as power grid improvements, and to innovate in the way many goods are produced.
“It’s not necessarily competing head to head,” Breznitz said. “They’re going to outflank us.”
If they do, it will be partly thanks to what globalized Chinese have learned at American universities. China sends roughly 200,000 university students to the U.S. each year, 10 times the number of Americans who study in China.
Luo Jiabei, 24, spent a semester at the University of Richmond in 2009. She grew up in a rural village in central China where more than a decade after the country’s economic opening every home still held a portrait of Mao Zedong.
In Hunan Province, with a population larger than France, she earned the second-highest score on the national college-entrance exam. Luo then studied finance at Tsinghua University, where she devoured the economic textbook of Harvard Professor Greg Mankiw, once a top adviser to President George W. Bush.
Today, she works as a consultant for the Boston Consulting Group in Beijing. Fluent in English and holding a master’s degree in accounting, Luo -- like most of her friends -- shunned China’ state-owned enterprises (SOEs) to work for multinationals such as PriceWaterhouseCoopers LLP, Morgan Stanley, Goldman Sachs Group Inc., and Google Inc.
“If you went to an SOE, it is guanxi, or relationships, that determine how you’re going to be promoted,” she says. “But in foreign companies like Boston Consulting Group it is your ability that counts.”
Some multinationals in China are leaning more heavily on local talent. Jin Zhang, a recruiter with Russell Reynolds Associates in Beijing, says “a large percentage” of country head positions and executive slots one level down are filled by Chinese candidates.
Though expatriates still occupy most of the top Asia-Pacific regional jobs, Chinese executives who have been educated and worked abroad are making inroads, says Zhang, who specializes in the energy, automotive and manufacturing sectors.
Coca-Cola Co. says it has “slightly increased” its use of Chinese professionals in recent years. Forty percent of the company’s China leadership team is Chinese as are almost all the unit’s managers, said spokesman Sharolyn Choy in Singapore.
Henkel AG, a maker of industrial and consumer chemicals based in Dusseldorf, Germany, says it’s tapping a “new talent pool” of Chinese students educated abroad. In September, the company opened the world’s largest adhesives factory in Shanghai.
“In the past year, more of our positions, from entry level to high-level positions, are being occupied by Chinese,” said Wilson Solano, a Shanghai-based Henkel spokesman.
Ultimately, the emergence of large numbers of highly educated Chinese workers will depress wages for many well-paid professionals in advanced economies, according to Richard Freeman, an economist at Harvard University.
“Look at what this big supply bump has done in China,” he said. “It’s had an adverse effect on the university wage. Some of it will spill over to us.”
A growing surplus of educated, ambitious young people could be a problem for China, too. There aren’t enough jobs for the college graduates the country already has. Unemployment among recent college graduates is much higher than for workers with less education or those with both a diploma and several years of experience.
“China’s got to have more qualified schools, vocational schools in particular, to raise the people’s skills and to broaden their vision so they’re qualified for jobs,” Liu Mingkang, the country’s former top banking regulator, said April 16 in Washington.
Though the Chinese government doesn’t release detailed data, 16.4 percent of college graduates age 25 or younger were unemployed in 2011, according to the China Household Finance Survey.
Li Gan, the survey director and an economics professor at Texas A&M University, says the situation is no different today. There are still too many new graduates and not enough with the right experience and skills.
Evan Guo, chief executive of recruitment website Zhaopin.com, said in December that 2014 “will be an even more difficult year for job seekers than 2013, a year that had already been considered the most difficult year for employment so far.”
If China’s higher education push only succeeds in adding more educated young people to the jobless line, it could trigger social instability, some economists say. Producing ever-larger numbers of college graduates may meet government educational targets while missing the market’s need for workers with varying skills.
“You have this climbing up the value chain, but it’s not fast enough,” says Zhiwei Zhang, chief economist for China at Nomura International in Hong Kong. “There is this labor market mismatch problem. So down the road, you’ll just probably have to have more college workers cooking hamburgers than working in office buildings.”
Roger Olesen, 70, spent 27 years on Wall Street with firms such as Merrill Lynch and UBS AG before retiring to a new life teaching Chinese college students. At Tsinghua University, one of the country’s top schools, Olesen teaches English and literature, including the Bible.
He has seen a steady improvement in the quality of his students over the past six years. No longer do his incoming freshmen seem naïve or provincial. Almost all, he says, would be good enough to work in New York or London.
“They’re smart and they’re tough,” said Olesen. “It’s going to be interesting to see what kind of impact they have.”
To contact the reporter on this story: David J. Lynch in Washington at email@example.com