China's measures to contain COVID-19 caused an unprecedented economic contraction, with urban employment dropping by 6 per cent, or more than 26 million workers, in the first quarter of the year – the largest contraction in more than four decades.

With even more people 'employed, but not working', household disposable income has come under pressure, falling nearly 4 per cent in the first quarter. This will have a lasting effect on consumption unless unemployed workers receive help and get their jobs back soon. Beijing needs to act to help stabilise employment.

The lockdown saw China's growth contract by 6.8 per cent in the first quarter compared with the same period of 2019. Industrial production fell 8.4 per cent and retail sales plunged by 19 per cent. The job losses hit small and medium-sized enterprises, the self-employed and migrant workers particularly hard.

While state-owned enterprises tend to retain workers during downturns, small and medium-sized enterprises are mainly private and have cut headcounts. By April, only 76 per cent of SMEs were back in business compared with 99 per cent of larger companies. That means an estimated 56 million workers had not returned to work – many in locked-down retail or catering firms.

Unlike in countries such as the US and UK, mainland China has not implemented a wage-protection scheme for furloughed workers. This means most of the estimated 81 million Chinese, or 18 per cent of urban workers, who became 'employed, but not working', were not receiving income.

The fall in income coupled with restrictions on activities led to a sharp fall in consumption. And with the global economy slowing, much hinges on a domestic recovery. Without a rebound in activity, many companies, especially SMEs and export-oriented firms, risk bankruptcy and some temporary job losses may become permanent.

Meanwhile, China's 150 million self-employed population saw sharp drops in revenue and profits. Also, more than 50 million of the country's 291 million migrant workers have yet to return to the urban areas as demand for low-skilled labour shrank and they were unable or unwilling to return to their city jobs. And the record number of university graduates seeking jobs this year will increase job competition, putting downward pressure on wages.

In all, the reduced income affects consumption. We believe propping up domestic demand to support jobs thus remains a policy priority. Direct subsidies and consumption coupons can help low-income workers including migrants, but more important will be lifting demand through broad-based support, as well as targeted support for SMEs and the self-employed.

We believe more can be done to support these workers by:

  • Extending subsidies for self-employed workers. Three-month rental waivers from state-owned enterprise properties were announced in April but should continue longer, given we expect a gradual recovery, not a sharp rebound.
  • Migrant workers' city jobs are transitory, meaning they may not be eligible for unemployment insurance. The government should direct cash handouts to rural families, not as one-off sum, but in an ongoing manner with payments reflecting family size.
  • Unemployment benefits are generally borne by local governments but this penalises poorer provinces. Central government should contribute more to balance the burden.
  • Stronger fiscal and monetary responses are needed to re-invigorate domestic demand. That includes further corporate tax cuts and increased spending on infrastructure projects financed by special local-government bonds and special central-government bonds.
  • On the monetary side, further lending and deposit rate reductions should cut companies' credit costs and state-own banks should be incentivised to lend more to SMEs.

First published 28 April 2020.

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