China: Youth unemployment rate likely to remain stubbornly high

 

Back in October 2022, when most people (including ourselves) were unsure how long Covid-disruptions could last in China, we published a report titled “Structurally high youth unemployment to remain a drag on growth” (link), in which we argued that even after Covid-disruptions end, high youth unemployment rate would stay. Fast forward to today, indeed we see youth unemployment rate hitting an historical high despite China’s ongoing post- Covid recovery. We highlight the key conclusions to our earlier report here and interested audience can examine our original report for more details.

Youth (those aged 16-24 years old) have a higher marginal propensity to consume. For any given level of an overall unemployment rate, a higher youth unemployment rate thus proportionally has a greater adverse effect on consumption growth.

China’s high youth unemployment rate is not transitory but structural. Youth are an average more educated than older generations, but there is a mismatch in the skills that youth are taught with the skills that existing jobs require. The policy implication is that China might try to convince its youth to acquire different skills by further altering the education landscape, such as by encouraging greater attendance at vocational schools. But we would not expect such policies to have a significant impact. In our view, to absorb a more educated labor force, China will need to reply on the private sector to create more high-skill jobs in both services (finance, medical, accounting, etc.) and manufacturing (new energy, new materials, etc.).

 

In the medium term, we expect the structurally high youth unemployment to result in lower growth potential, given it reduces the effective labor input in the economy. It would also exert downward pressure on wage growth (as a decline in high-end wages due to a labor surplus will, on average, more than offset an increase in low-end wages due to a labor shortage). Based on our assessment of various factors such as the rates of technological progress and labor force shrinkage, we anticipate disposable income per capita growth to average around 4.2% in the next five years, a sharp decline relative to the 8-9% range prior to the pandemic. Such a decline in trend growth should therefore remain an ongoing headwind to household consumption growth.

 

Important Information

THIS IS NOT RESEARCH. PLEASE REFER TO THE IMPORTANT DISCLOSURES AND CONTACT YOUR CREDIT

SUISSE REPRESENTATIVE FOR MORE DETAILS. This report represents the views of the Investment Strategy Department of Credit Suisse and has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. It is not a product of the Credit Suisse Research Department and the view of the Investment Strategy Department may differ materially from the views of the Credit Suisse Research Department and other divisions at Credit Suisse, even if it references published research recommendations. Credit Suisse has a number of policies in place to promote the independence of Credit Suisse’s Research Departments from Credit Suisse’s Investment Strategy and other departments and to manage conflicts of interest, including policies relating to dealing ahead of the dissemination of investment research. These policies do not apply to the views of Investment Strategists contained in this report.

May 2023

Additional Important Information

This material has been prepared by the Investment Strategy Department personnel of Credit Suisse identified in this material as "Contributors" and not by Credit Suisse's Research Department. The information contained in this document has been provided as general market commentary only and does not constitute any form of personal advice, legal, tax or other regulated financial advice or service. It is intended only to provide observations and views of the Investment Strategy Department, which may be different from, or inconsistent with, the observations and views of Credit Suisse Research Department analysts, other Credit Suisse departments, or the proprietary positions of Credit Suisse. Observations and views expressed herein may be changed by the Investment Strategy Department at any time without notice. Credit Suisse accepts no liability for losses arising from the use or reliance on of this material. This material is not for distribution to retail clients and is directed exclusively at Credit Suisse’s institutional clients.

FOR IMPORTANT DISCLOSURES on companies covered in Credit Suisse Global Markets Division research reports, please see http://www.credit- suisse.com/researchdisclosures. To obtain a copy of the most recent Credit Suisse research on any company mentioned please contact your sales representative or go to http://www.credit-suisse.com/researchandanalytics.

This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view of a particular market. It is not investment research, or a research recommendation for regulatory purposes, as it does not constitute substantive research or analysis. This material is provided for informational purposes only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned.

The information provided is not intended to provide a sufficient basis on which to make an investment decision and is not a personal recommendation or investment advice. While it has been obtained from or based upon sources believed by the trader or sales personnel to be reliable, each of the trader or sales personnel and Credit Suisse does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising from the use or reliance on of this material.

Where distribution of this material is subject to the rules of the U.S. Commodity Futures Trading Commission (“CFTC”), it is a “solicitation” of derivatives business only as that term is used within CFTC Rule 1.71 and 23.605 promulgated under the U.S. Commodity Exchange Act (the “CFTC Rules”) where applicable, but is not a binding offer to buy/sell any financial instrument. The views of the author may differ from others at Credit Suisse Group (including Credit Suisse Research).

Credit Suisse is acting solely as an arm’s length contractual counterparty and not as a financial adviser (or in any other advisory capacity including tax, legal, accounting or otherwise) or in a fiduciary capacity. Any information provided does not constitute advice or a recommendation to enter into or conclude any transaction. Before entering into any transaction, you should ensure that you fully understand the potential risks and rewards and independently determine that it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers (including, without limitation, tax advisers, legal advisers and accountants) as you deem necessary.

Credit Suisse Securities (Europe) Limited ("CSSEL") and Credit Suisse International ("CSI") are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence ("AFSL") and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 ("Corporations Act") in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act) (hereinafter referred to as “Financial Services”). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act in respect of providing Financial Services. Credit Suisse Equities (Australia) Limited (ABN 35 068 232 708) ("CSEAL") is an AFSL holder in Australia (AFSL 237237). In Australia, this material may only be distributed to Wholesale investors as defined in the Corporations Act. CSEAL is not an authorised deposit taking institution and products described herein do not represent deposits or other liabilities of Credit Suisse AG, Sydney Branch. Credit Suisse AG, Sydney Branch does not guarantee any particular rate of return on, or the performance of any products described.

This material is distributed in the European Union by Credit Suisse Bank (Europe), S.A. regulated by the Comision Nacional del Mercado de Valores.

If this material is issued and distributed in the U.S., it is by Credit Suisse Securities (USA) LLC (“CSSU”), a member of NYSE, FINRA, SIPC and the NFA, and CSSU accepts responsibility for its contents. Clients should contact sales coverage and execute transactions through a Credit Suisse subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. Investment banking services in the United States are provided by Credit Suisse Securities (USA) LLC, an affiliate of Credit Suisse Group. CSSU is regulated by the United States Securities and Exchange Commission under United States laws, which differ from Australian laws. CSSU does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act in respect of providing Financial Services. Credit Suisse Asset Management LLC (CSAM) is authorised by the Securities and Exchange Commission under US laws, which differ from Australian laws. CSAM does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act in respect of providing Financial Services.

If this material is issued and distributed in Japan, it is issued and distributed in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association. This report has been prepared and issued for distribution in Japan to Credit Suisse's clients, including institutional investors.

This report may not be reproduced either in whole or in part, without the written permission of Credit Suisse. All trademarks, service marks and logos used in this document are trademarks or service marks or registered trademarks or service marks of Credit Suisse or its information providers. All material presented in this document, unless specifically indicated otherwise, is under copyright to Credit Suisse or its information providers. Copyright © 2023 Credit Suisse Group AG and/or its affiliates. All rights reserved.