The latest HSBC/Markit Economics flash PMI for China paints a slightly odd picture.
Okay, so overall it’s positive – the index is 49.5 for July compared to 48.2 in June. The best number in five months, although it’s also the ninth month of below-trend growth.
Most segments of the index were improved, in that they were either slowing at a reduced rate, or had turned from contractionary to expansionary.
The exception was employment, which was quite a contrast to the others.
We may be missing something here but the rising unemployment was also accompanying wage growth, something that is counterintuitive to say the least. What’s more it was also accompanied by subdued inflation.
Here are the thoughts of Nikolaus Keis at Unicredit:
However, the 40 month low in the employment sub-index should ring alarm bells in Beijing, prompting the authorities to further step up their efforts. Creating enough jobs for millions of new graduates and rural migrant worker is crucial for the government, especially in the run-up to the political generational change starting this autumn. On the monetary front, we expect additional RRR cuts totaling 150bp for the remainder of this year (with the next step imminent) and possibly another key rate cut. On the fiscal front, the authorities will accentuate stimuli by pushing ahead with the already announced public investment projects, structural tax cuts and consumption incentives. All this should safeguard a soft landing and further reduce economic downside risks. We therefore see no need to change our growth forecasts: Economic activity will bottom out over the summer, followed by a moderate recovery thereafter when the bulk of the step-up in macro accommodation will be felt.
So how can you have an improving economic picture amid a job slowdown?
The idea that it’s never been harder to find a job in China’s industrial heartland is something we’ve definitely heard discussed before. Yet, what if this phenomenon can be explained by the idea that high wage demand (in China’s more developed regions) is driving companies towards automation or ‘inshoring’ — that is, moving production to the less-developed inland territories, where wages are still low?
An automation boom could, in particular, explain the current PMI picture. Not only does automation hit the number of jobs available, it leads to subdued inflation because the cost of labour goes to zero — and, well, robots just don’t have spending power. Average wages, meanwhile, rise because those jobs that do remain become more managerial in nature and are thus higher paid.
Most importantly, overall output rises rather than contracts.
By Izabella Kaminska and Kate Mackenzie
China’s job market under stress – FT
As Chinese Wages Rise, Machines Replace Migrant Workers – Bloomberg
China Goes Automatic – The Financialist