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Will a job market scare push Beijing to act?

Sunday, 14 Jul 2013 | 10:47 PM ET
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The bizarre story of a U.S. businessman being held captive by his workers in a Beijing factory in a row over wages last month is among a series of signs recently that China's once tight labor market may be unraveling as policymakers tolerate slower growth.

Employment indicators like HSBC's purchasing manager's sub employment index for June also point to a fast rate of job shedding as news of job cuts, and social unrest make headlines in what is considered the workshop of the world.

Economists tell CNBC that a severe slowdown in China's job market is the major risk factor for the country's policymakers, and this could eventually lead them to step back from their reform stance and step in to boost economic growth if there are further signs of deterioration.

China's second quarter growth numbers showed a further slowing of the economy, with gross domestic product (GDP) coming in at 7.5 percent on the year. In the March quarter, China's GDP expanded 7.7 percent, slower than the 7.9 percent it hit in the fourth quarter of 2012.

Frederic Neumann, co-head of Asian economics research at HSBC, said people worried about a hard landing in China as "policymakers sit on their hands," should remember that joblessness is something the Communist Party of China takes very seriously.

"They're less worried about growth in itself, they're much more worried about the severity of the job market," Neumann said. "So, if there are signs that the job market buckles, they will step on the gas and try to lift growth again, because that's obviously the number one risk in China."

Louis Kuijs, chief China economist at RBS expects policymakers to step in the second half of the year to boost growth.

"In the first quarter, that data was still pretty good. There are signs that it's weakening now - both on the employment growth side, and on the wage growth side," Kuijs said. "They tell a picture that is consistent with some of the other labor market indicators and surveys that also point to a cooling down."

Both the official and HSBC employment sub-indexes part of the June PMI data showed that the pace of job cuts intensified last month in the manufacturing sector. Jobs were shed at the quickest rate since August last year as employment in the sector decreased for three consecutive months, the HSBC index showed.

(Read More: China: From Driver to Drag on Global Growth)

On the back of that, the country's biggest private shipbuilder China Rongsheng has been making headlines like "too big to fail" after the firm laid off 8,000 workers in recent months amid a global shipping downturn.

The struggling company's appeal for government aid last week, on top of state subsidies that it's been receiving since 2010 when it listed in Hong Kong, has sparked a debate on whether Beijing will protect the firm or let it go under along with its 20,000 workers as part of its pledge to implement economic reforms.

(Read More: Is Struggling Shipbuilder China Rongsheng Too Big to Fail?)

Jon Windham, head of regional industrials sector, Asia ex-Japan at Barclays said China Rongsheng has become a "poster child" in China's need for restructuring and it will be interesting to see how policymakers handle the firm.

"I think people are really looking at Rongsheng as a test case for Beijing's ability to prevent the local governments from playing favorites for their local companies," Windham said, referring to large enterprises that receive state patronage.

Eye on Job Market

Neumann says he wouldn't be surprised if there was some course of action in the third quarter by Beijing to support the labor market.

"I think that we're getting closer to a point where they are actually getting worried and will have to do something... We're going to get more announcements to help shore up the job market," Neumann said.

This week, Chinese Premier Li Keqiang said that Beijing would not let growth slip below a minimum level required to sustain the labor market, Chinese news agency Xinhua reported.

But it is clear authorities don't want to fuel rampant credit growth again in China and that means they might actually resort to fiscal measures rather than monetary ones, Neumann added.

Policymakers failed to make significant moves when a record liquidity crunch in China's money markets in late June led the short-term borrowing costs to spike close to 30 percent, showing that the central bank wanted to send a message to overstretched banks that it was determined to bring risky lending under control.

(Read More: Why Chin's Slowing Growth Could Be a Good Thing)

"Beijing, in particular, still has big fiscal reserves. It could roll out to spend on infrastructure for example to create jobs," Neumann said.

The government did step in in September last year in a bid to prop up the economy and approved over $150 billion in infrastructure spending, about one fourth of the total size of the stimulus package unveiled in 2008 to boost the economy.

- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

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