CHina’s youth represent only a fraction of the country’s working-age population and an even smaller proportion of its labor force. Because many of the 16 to 24-year-olds are still going to school or studying and are therefore not looking for a job. In recent years, her job prospects have nonetheless attracted attention and aroused concern. According to figures released on May 16, China’s overall unemployment rate fell from 5.3% to 5.2% last month. This improvement was overshadowed by a rise in youth unemployment to 20.4%, the highest since the data began in 2018.
The intense attention given to issues like youth unemployment is a symptom of the emerging “trust trap” in China, argue bank Citigroup’s Xiangrong Yu and his colleagues. Although the country’s economic recovery largely beat expectations in the first three months of the year, investors appeared to be focused on its ‘weak spots’. These included weak imports, weak inflation, the manufacturing sector’s failure to match strength in the service sector – and unemployed youth. Foreign investors are angry in China as geopolitical tensions have increased: On May 17, the yuan slipped over seven points against the dollar. But “Even domestically, pessimism is widespread and persistent,” note economists at Citigroup.
This is evident in Chinese equity markets which have given back many of the gains from the initial reopening rally. And there are few pleasant surprises in economic data in the venerable bond markets: government bond yields are only slightly higher than in the depths of the Covid-19 pandemic. Although consumer confidence looks healthier than last year, it remains well below 2019 levels.
China’s uneven recovery has not improved sentiment so far. The danger now is that sentiment will weigh on China’s recovery. In April, for example, credit grew surprisingly slowly. Although retail sales were strong compared to April last year, when Shanghai and other major cities imposed the lockdown, they were weak compared to professional forecasts (see chart). Industrial production also fell short of analysts’ expectations.
According to Oxford Economics, a research firm, investment by state-owned companies was quite strong, but private company spending was just 0.4% higher in April than a year earlier. Part of the explanation for this disappointing growth can be found in the Chinese real estate market, where an incipient recovery now seems questionable. At government urging, developers have prioritized the completion of unfinished construction projects rather than investing in new ones. Housing starts fell by more than 20%, although completed living space increased by almost 19%.
The weakness in the housing market has prompted some economists to lower their growth forecasts for the year. Bank Nomura’s Ting Lu, for example, cut its value from 5.9% to 5.5%. “The recovery has stalled,” he explained, “due in part to Beijing’s inability to bolster consumer and business investor confidence.” As disappointment mounts, we see an increasing risk of a downward spiral.”
China may try to revive the recovery and confidence with more monetary easing. Inflation fell to just 0.1% in April, leaving plenty of room for stimulus measures. But with China’s official growth target for this year only 5%, the government may not come to the rescue. Foreign investors and Chinese consumers are not very confident in China’s recovery this year. The government’s unambitious growth target, set in March, also suggests it lacks confidence. ■
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