China’s labour market distress spreads at worst time for deflation fight
This will present some of the biggest challenges to policymakers as they try to end nine straight quarters of economy-wide price declines
[BEIJING] China’s labour market is deteriorating just as deflationary pressures showed initial signs of easing. This is threatening to reverse progress by emptying the pockets of consumers.
To the surprise of some economists, the distress is suddenly showing up in a range of government data sets to an extent unseen in months. None of the analysts surveyed by Bloomberg News had expected urban unemployment to tick up last month, when it rose to the highest level since February.
And private figures paint an even bleaker picture: a survey of 300 company executives by Cheung Kong Graduate School of Business found companies last month were the most pessimistic about future hiring since early 2020.
“The reality of unemployment is probably worse than what we see in official data,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group. “This means more downward pressure on wages, which will drive further deflation.”
With deflation at the factory gate finally turning the corner in August, a souring labour market will present some of the biggest challenges to policymakers as they try to end nine straight quarters of economy-wide price declines.
The moment is especially perilous as China is already coping with consumer malaise and a growth slowdown in exports that sustain tens of millions of jobs. Absent an easing of strain in the labour market, it’s likely Beijing will have to act to defuse the risks it poses to domestic consumption.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
“China needs to take bigger steps to break the negative loop” between the weak labour market and domestic demand, said Yeung. “It will take more than one or two months of policy stimulus” or a modest 10-basis point rate cut, he added.
Among the factors exacerbating the problem is a record avalanche of 12.2 million college graduates entering the jobs market this year, adding to a mismatch between an abundant supply of highly-educated workers and a shortage of white-collar openings.
As they left school during the summer months, the official youth unemployment rate spiked in August by more than a percentage point from July to 18.9 per cent, the maximum since the measure was revamped in 2023 to exclude students. In the backdrop, joblessness in 31 major cities rose to its worst in a year.
SEE ALSO
Other gauges tell a similar story. An index compiled by Goldman Sachs based on data from various purchasing managers’ index surveys weakened for the first time in four months in August.
National Bureau of Statistics spokesperson Fu Linghui addressed the employment situation during a briefing this month, describing it as maintaining a “stable” pattern and attributed the increase in the overall joblessness to the graduation season.
The issue of employment moved up the agenda for China’s leadership at the height of tensions with the US over trade earlier this year.
As part of an effort to stabilise the jobs market, the decision-making Politburo promised in April to increase the proportion of unemployment insurance funds that can be returned to firms hurt by the higher tariffs.
Later the same month, Vice-Minister of Human Resources and Social Security Yu Jiadong said the government will take steps to improve workers’ skills and prioritise youth employment.
The latest disappointing stretch could prolong the hardships felt by Chinese workers from the impact of the pandemic and a years-long property slump.
Worsening employment conditions are also a key obstacle for officials who want to boost consumer spending and avert a further descent into deflation in the form of a downward spiral in wages and corporate profits that threatens to cripple domestic demand for years to come.
Already, the average salary among private companies, which account for more than 80 per cent of jobs, grew only 1.7 per cent last year from 2023, the slowest pace on record. Other private data points to an even more severe decline in incomes as well as household sentiment regarding jobs.
Apart from a seasonal surge in college graduates, other factors have been at play over the past few months.
A ruling by China’s highest court that made it impossible for workers and their employers to waive social insurance contributions starting from September likely added pressure on private and smaller firms.
While it is unclear how strictly the decision has been enforced, it created huge uncertainty for employers because they could face substantially higher labour costs if officials take the rules seriously.
“China’s social security contributions are very high, and private companies have long avoided full payment,” Ernan Cui, a consumer analyst at the research firm Gavekal Dragonomics, said at an event in Beijing this month. “If it’s forced upon them, many private companies will surely have to lay off staff or reduce salaries, or even switch to flexible or contract workers.”
The adoption of artificial intelligence (AI) presents a more lasting challenge for the economy, bringing with it the threat of widespread job losses.
Already, increased automation among manufacturers has led to a rise in contract workers in the sector – as opposed to formal employees who enjoy better benefits and are more costly to fire, according to research by Zhang Dandan, a Peking University economist.
As the government shifted its focus to curbing overcapacity and price wars in recent months, a worsening jobs market is a reminder that efforts to rein in investment and production could in fact, hurt employment and consumption in the absence of measures to boost demand at home.
The country needs to create quality jobs for its youths or risk more entrenched weakness in consumption, according to Lynn Song, chief Greater China economist at ING Bank.
“There should also be ramped-up support to encourage hiring,” he said. “Prolonged unemployment in early stages risks a lost generation when it comes to future spending potential, which would certainly hinder efforts to move to a consumption-driven economy.”
Share with us your feedback on BT's products and services
