China Labor Market Struggles Deepen, Clouding Economic Outlook

China’s Labor Market Slump Challenges Growth Target

China’s economy faces increasing headwinds as US tariffs continue to bite, raising concerns about Beijing achieving its 5% GDP growth target for 2025.

Key economic indicators for August signaled a potentially sharper loss of momentum. Unemployment increased to 5.3%, up from 5.2% in July. Crucially, youth unemployment rose to 18.9%, the highest since December 2023.

Weakening external demand and domestic price wars have squeezed margins. Narrower margins have forced companies across the private sector to cut jobs. The continued rise in unemployment may affect domestic demand, potentially slowing the transition to a consumption-led economy.

US Visa Policy Escalates Labor Market Strain

Deteriorating labor market conditions coincide with attempts by the US administration to deter US firms from hiring foreign talent. This weekend, President Trump announced a new $100,000 fee for H-1B visas, potentially impacting demand for skilled workers from China. The visa rule could be another blow for more than 12 million Chinese university graduates entering the job market.

Why Does the Labor Market Affect China’s Transition to a Consumption-Led Economy?

The impact of US tariffs on jobs has weighed on consumer sentiment. Consumer confidence dropped to 87.9 at the end of the first quarter, well below the 108.95 long-run average. Rising unemployment and waning consumer confidence have impacted private consumption.

Retail sales increased 3.4% year-on-year in August, down from 3.7% in July and 4.8% in June. Slower consumer spending, despite positive YoY numbers, undermined Beijing’s stimulus measures, aimed at boosting private consumption. With external demand for Chinese goods weakening for five consecutive months, domestic demand has become more crucial.

However, job cuts and housing sector woes suggest further slowing in consumer spending. These headwinds challenge Beijing’s ambitions to transition from an industry-led economy.

For private sector firms, weaker domestic and external demand raises the threat of intensifying competition. Firms could cut output prices further to boost sales, squeezing margins. Narrowing margins would potentially lead to more job cuts, a vicious cycle that policymakers would need to break.

PBoC Holds Steady on Rates Despite Growth Risks

Yet, Beijing appears unconcerned about the economic backdrop despite the ongoing effects of US tariffs. The People’s Bank of China (PBoC) kept the one-year and five-year loan prime rates (LPRs) at 3% and 3.5%, respectively, on Monday, September 22. Lower interest rates could boost demand for credit and spending.

According to CN Wire, Goldman Sachs’s economists reacted to comments from PBoC Governor Pan Gongsheng on Monday, September 22, stating:

“The PBoC is likely in no hurry to ease monetary policy, Goldman Sachs’s economic research team says, citing Gov. Pan Gongsheng’s remarks at a joint media briefing with major financial regulators on Monday. ‘His emphasis on balancing financial stability with growth support reinforces our view that policymakers are in no rush to ease and may act later if underlying growth momentum deteriorates,’ GS says in a research report.”

The PBoC may be waiting to see how US-China trade talks play out, with any lifting of tariffs likely to support Beijing’s growth target. On Friday, September 19, President Trump and Chinese President Xi Jinping reportedly had a productive call, discussing various issues ahead of the upcoming APEC Summit.

Ahead of Friday’s call, Trump ended $400 million in military aid for Taiwan. Some analysts viewed the move as a possible concession aimed at facilitating trade talks.

Mainland and Hong Kong Equities Rally

Rising concerns about the economy have tempered demand for Mainland-listed stocks. The CSI 300 and the Shanghai Composite Index are down 0.01% and 1.67%, respectively, month-to-date. By contrast, the Hang Seng Index has gained 4.3%.

Despite September’s pullback, the CSI 300 and the Shanghai Composite Index are up 14.3% and 13.2% year-to-date. While concerns persist about Beijing achieving its 5% GDP growth target, expectations of further policy measures continue to support Mainland equities.

In the absence of further policy support, Mainland and Hong Kong-listed stocks remain exposed to a sharp reversal. US-China trade talks, China’s housing market, cooling demand, and a deteriorating labor market remain key risks.

Still, further stimulus, targeting the housing sector and a US-China trade agreement could lift sentiment. Lower tariffs may revive external demand and ease margin pressures, potentially boosting job hires and domestic demand.

The Road Ahead: APEC Summit and Stimulus

The two-day APEC Summit in South Korea, set to take place on October 31 and November 1, could be pivotal. President Trump and President Xi will attend the summit, which could pave the way toward a trade deal. Nonetheless, anything short of removing US tariffs could pressure Beijing to provide additional policy support.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero commented on the Trump-Xi call and tariffs, stating:

“Even with a US-China deal, the global economy remains in a ‘tariff world’, with most duties unlikely to be lifted. Also noted that while Taiwan’s high-end chips still see demand, China’s ban on Nvidia GPUs could disrupt trade further. China is running a dual, government-driven economy, with strength in IT and semiconductors offset by a struggling real estate sector, which is too large to ignore for sustained growth.”

Meanwhile, private sector PMI data for September will provide further insights into China’s economy next week.

A sixth consecutive month of falling external demand, further job cuts, and softer output prices could pressure Mainland-listed stocks. Traders may look for Beijing to pledge support if demand weakens further. On the other hand, a pickup in demand and rising prices could ease concerns about Beijing meeting its 5% GDP target, lifting sentiment.

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