Most Chinese companies have resumed operations as the spread of coronavirus is contained. But with domestic demand still depressed and foreign economies slowing, economic activity will remain challenged and likely cause China's workers to face lay-offs or wage reductions.

We estimate there may be job losses of 15.8 million due to COVID-19, which could raise the urban unemployment rate to 8.3 per cent. Job prospects are a particular concern for the 8.7 million students due to graduate from Chinese universities this year.

The urban unemployment rate rose from 5.2 per cent to 6.2 per cent between January and February, implying up to 5 million urban jobs were lost, but we think the loss could be nearly 16 million by mid-year – though a second-half economic rebound could see about 8 million workers absorbed back into the labour market by December.

China's manufacturing sector employed 121 million people or 16 per cent of the labour force in 2018 but the services sector is larger. The retail, hotel and catering industries, which have been especially hard hit by COVID-19, employed 134 million workers or 18 per cent of the workforce. The services sector is more sensitive to changes in growth and we expect it to account for 13.6 million of the lost jobs.

The urban labour supply is due to rise by around 14.8 million this year. In the absence of COVID-19, the increase in jobs would roughly equal the new labour supply but this year there will be a shortfall because of the pandemic.

Some 2.1 million of the new labour supply will be migrant workers from rural areas. The 291 million migrant workforce has gradually switched from manufacturing to service jobs such as retail and catering. While these service jobs have been hard hit, migrant workers have high flexibility to find other employment and move between low-skilled jobs or return to agriculture.

But migrant workers are no longer the primary driver of new labour supply. There will be 8.74 million new university graduates this year and they are far less flexible. They have specialised skills and want higher-paid urban jobs.

This year's number of graduates will be a 400,000 increase from last year, but demand for new graduates is shrinking with some employers cutting recruitment completely.

Applications for post-graduate education have soared to 3.41 million compared with 1.25 million in 2015, suggesting many may want to delay entering the job market – though we estimate less than 1 million will finally enrol. This means most new graduates will be entering a challenging job market.

Engineering a jobs recovery should be the top policy goal for Beijing. The government needs to scale up both fiscal and monetary stimulus, but also make revitalising small- and medium-sized enterprises the main focus of these measures. We expect to see:

  • More policy loans to SMEs with preferential interest rates to help prevent a liquidity contraction and defaults
  • More corporate tax cuts through larger and more permanent reductions in social-security levies to lower costs
  • Regulatory ‘carrots and sticks' to guide state banks to increase lending to SMEs plus lower targeted reserve requirement ratios for lenders
  • Wider coverage of credit guarantees, and implementation on a national level, to reduce the need for collateral and lower the cost of borrowing for SMEs
  • More aggressive broad-based monetary easing to lift domestic demand through lower borrowing rates and lower deposit rates
  • Higher infrastructure spending, using the proceeds of special local-government bonds and issuing special central-government bonds

We estimate that a stronger policy response to lift economic activity could boost job absorption in the second-half of the year to 10.3 million, representing a 65 per cent rehiring rate, with 72 per cent rehired in the services sector.

First published 15 April 2020.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

Disclosure and disclaimer

More, collapsed
Why this isn't another Global Financial Crisis
Though a deeper plunge, the prior crisis has prepared us
Join the conversation?

Join our Linkedin group to get an unparalleled view of macro and microeconomic events and trends from a bank that is a leader in both developed and emerging markets.