The first thing they teach you in China-watcher school is that social stability is everything. That was certainly the case during the Asian financial crisis of the late 1990s, the mild global recession of the early 2000s, the Global Financial Crisis of 2008-09, and the Covid-related collapse of 2020. And it is very much the case today. In each of those earlier instances, Chinese policymakers moved aggressively to temper mounting unemployment to preserve social stability. That reaction is all the more evident today.

There is an important difference between then and now. The earlier threats arose largely from external shocks that China was able to cushion successfully, mainly through aggressive, pro-active fiscal policy stimulus focused on infrastructure spending. The current threat is more homegrown, an internal shock arising from a confluence of unforced policy errors — especially zero-Covid pandemic mitigation, regulatory pressures on private sector Internet platform companies, and an overly aggressive deleveraging campaign that has put property developers under acute pressure. Against a backdrop of deteriorating global growth prospects amid worrisome inflation and interest rate risks, Chinese policymakers have sounded the alarm more vocally than at any point in the past 25 years.

Stressing a recently adapted 33-point action plan… Li and the State Council he heads, have left little doubt about the severity of the problems that China faces.

With good reason. As China’s economy screeched to a virtual standstill in the second quarter of 2022, labor market warning signs look increasingly ominous. The 31-city composite unemployment rate surged to 6.7% in April, up 1.6 percentage points in the first four months of this year and well in excess of the 5.9% high hit in May 2020, during the first wave of COVID. Moreover, a quarterly gauge of labor supply and demand imbalances hit 1.57 in the first quarter of 2022, fully 33% above the 2010-21 average and bound to rise sharply further in the spring period when the economy hit the skids.

A demographic breakdown of rising Chinese joblessness is particularly telling. Joblessness for the prime adult cohort in the 25- to 59-year-old grouping rose to 5.3% in April, more than 15% higher than a year earlier. This is a direct outgrowth of rolling lockdowns from zero-Covid policy straitjackets, which started out in Shenzhen, Shenyang, and Jilin before then afflicting Shanghai with a vengeance; with the combined 46.5 million population of these four cities fully 5.5 times that of Wuhan’s 8.5 million, it is hardly surprising that the toll of the latest variant of Covid on the Chinese labor market has been far more acute than the original strain. While Chinese authorities have begun to relax the recent draconian mobility restrictions on Shanghai, the high rate of Omicron transmissibility underscores the risks of more lockdowns to come. Shanghai is not Wuhan. Yet conflating Omicron with the Alpha strain effectively turns China’s Covid mitigation strategy into a highly reactive whack-a-mole approach.

Moreover, there can be no mistaking the acute pressures bearing down on China’s 292 million migrant workers. The average age of migrant workers is 42, which places them in the prime-age cohort that is accounting for approximately 75% of China’s surging joblessness in 2022. This is the marginal segment of the Chinese workforce that is typically on the leading edge of supply-chain production adjustments. Li Keqiang’s warnings of acute pressures on migrant workers is strikingly reminiscent of a similar message of concern presciently expressed by former Premier Wen Jiabao in the early stages of the Global Financial Crisis in 2008-09.

A second source of pressures, concentrated in the younger cohort of the Chinese workforce, may be even more problematic over time. The unemployment rate for 16 to 24 years olds rose to 18.2% in April, fully 34% higher than a year earlier and five percentage points above that recorded during the first Covid shock of early 2020. This appears to be less an outgrowth of temporary Covid-related disruptions and more a result of the acute regulatory pressures bearing down on China’s heretofore dynamic private sector, especially its so-called Internet platform companies that had become an increasingly important source of hiring for new college graduates. Recent regulatory backtracking on these actions by senior Chinese officials is a tacit admission of the significance of this linkage in exacerbating the cyclical surge in unemployment.

…the quality of Xi Jinping’s approach to leadership looks all the more problematic in light of systemic impairments to China’s labor market.

An extraordinary nationwide videoconference on May 25 led by Premier Li Keqiang, purportedly addressing some 100,000 senior officials in over 2,800 municipalities across China, underscored the depths of concerns in official Chinese policy circles. Stressing a recently adapted 33-point action plan — laced with China’s classic attempts to micro-manage a major macro shortfall of economic growth through a shotgun-like support to infrastructure, small businesses, energy and grain markets, supply chains, along with selective tax rebates and more enlightened dynamic zero-Covid actions — Li and the State Council he heads, have left little doubt about the severity of the problems that China faces. Yet it remains to be seen if these actions will make much of a difference to the most severe labor market shock in a generation. With the employment and job satisfaction components of the government’s consumer confidence index having plunged in March and April to levels that were fully forty points below those recorded in the depths of the first Covid shock of early 2020, meaningful policy traction will be exceedingly difficult to achieve. 

Of course, this is the last thing that Xi Jinping wants heading into the all-important 20^th Party Congress slated for later this year. Long choreographed as a euphoric celebration of Xi’s ascendancy to an unprecedented third five-year term as Party and State leader, severe labor market distress casts the sagging Chinese economy in a much dimmer light. Xi is far from an innocent bystander in this ominous shift. Driven by the ideological purity of Xi Jinping Thought and the rigidity of authoritarian edicts, the more flexible macro-analytical Deng Xiaoping approach has been effectively jettisoned at precisely the time when China needs it the most. 

Xi’s third term is not in doubt. But in the context of his unflinching commitment to zero-Covid policies, restrictions on the most dynamic segments of the private sector, and an ill-fated partnership gambit with Russia, the quality of Xi Jinping’s approach to leadership looks all the more problematic in light of systemic impairments to China’s labor market. Apparently, social stability imperatives aren’t what they used to be in China.

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