China: Yuan Tumbles After Chinese Economic Data Dump; Youth Jobless Rate Hits Record High
An ugly night of data from China tonight suggests the ‘re-opening’ is not gathering pace:
- China May Retail Sales disappointed, rising 12.7% Y/Y; Est. 13.7% – which is a flashing red indicator. Given the boost from the Golden Week holiday, May retail sales rising just 0.4% from April speaks to how consumer sentiment has yet to show any significant improvement.
- China May Industrial Output slowed to a 3.5% rise Y/Y; Est. 3.5%
- China Jan.-May Fixed Investment rose less than expected, up 4% Y/Y; Est. 4.4%
- China Jan.-May Property investment tumbled 7.2% from a year earlier with the value of new home sales by the 100 biggest developers falling 14.3% in May.
And finally, and perhaps most problematically, the jobless rate for 16-to-24 year olds hits 20.8% in May, another all-time high that is four times the national rate which stands at 5.2%. As Goldman noted, both cyclical and structural factors have contributed to the elevated youth unemployment rate in China.
On the cyclical front, the correlation between the unemployment rate and the services sector output gap is much stronger for the 16-24 age group compared with the 25-59 year-olds. NBS’s labour survey shows that services industries such as hotel and catering, education, and information technology sectors tend to hire more young workers.
The services sector slackening before reopening therefore contributed to the high youth unemployment rate. The improvement in service sector activity growth in Q1 should lower the youth unemployment rate in Q2 by 3pp based on our estimate. While the improvement in service activity growth implies rising demand for young workers, this increase in demand could be more than offset by strong supply seasonality.
As we enter the graduation season, the youth unemployment rate could rise by 3-4pp and peak in summertime (usually in July or August) before starting to decline from the end of Q3, if we look at the seasonal pattern in 2018 and 2019 (prior to Covid).
Structural imbalance is another reason behind the high youth unemployment rate. Despite the fact that a rising share of unemployed persons aged 16-24 years old have higher education, there appears to be a misalignment of academic disciplines with business requirements.
Ken Wong, Asia equity portfolio specialist at Eastspring Investments, said youth unemployment seems to be the big one: “It impacts the consumption story and youth unemployment will probably continue to go up a bit more with fresh grads entering the workforce.”
The National Bureau of Statistics desperately tried to put some lipstick on this pig: “The global environment is complex and grim, the domestic economy faces grave pressure of structural adjustment, and the economic recovery’s foundation is not yet solid.”
There is one silver- lining – the apparent oil demand rose 17.11% from a year ago in May. Critically, all of this puts more pressure on Beijing to unleash more stimulus (broader stimulus) and is sending the yuan lower.
Steven Leung, UOB Kay Hian executive director, says the data suggests more support will be needed from Beijing: “China has to announce more policies to aid the economy. Among the speculated supportive policies, markets are betting Beijing will roll out more policies to help the consumption sector given the big miss in retail sales. Those policies should be effective given Chinese citizens’ huge savings.”
Incidentally, China cuts its MLF rate by 10bps earlier this evening, the same as all the other secondary rate cuts.
