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Are Job Losses the Next Big Risk for China?

Monday, 15 Oct 2012 | 11:43 PM ET
Job seekers read recruitment newspapers at a job fair in Shanghai, China.
Bloomberg | Getty Images
Job seekers read recruitment newspapers at a job fair in Shanghai, China.

Recent economic data such as stronger-than-expected exports and benign inflation in September are the latest signs that China's slowdown may be nearing an end, reducing pressure on the government to implement more stimulus measures to shore up the world's second-biggest economy.

However, some observers are now concerned about a less-cited economic indicator — employment — and warn that job losses may be looming if authorities refrain from necessary fiscal policies to protect the workforce.

As many as 100 million jobs in the export sector, one of the weakest links in the Chinese economy, could be at risk if external demand continues to fall and the government continues to show a tolerance to slightly slower growth, economists at Citi, Shen Minggao and Ding Shuang, said in a report published last week.

The state has so far stuck to its "go-slow" policy and opted for "selective policy supports, " Shen and Ding said. The result is a rising unemployment rate , with manufacturing — a key source of job creation in the recent decade — the hardest hit. "The export weakness may have already caused job losses, " they said. "Unless the export growth can recover in the near term, which is unlikely, it's possible that a portion of the 80 to 100 million jobs in the export sector could be at risk."

China's exports supported an estimated 200 million jobs and generated 31 percent of gross domestic product in 2011, according to World Bank data. But the job numbers could see a decline as exports growth wane, Citi warns.

Already, exports growth in the nine months of this year stands at 7.1 percent, compared to a 20 percent expansion in 2011, and 31 percent in 2010. According to Ding and Shuang, 10 percent in exports growth is the magic number needed for stable job growth in China.

Slowing economic growth is also exacerbating the problem. The government is targeting a full-year growth of 7.5 percent, compared to the actual growth of 9.2 percent in 2011. Citi estimates that every one percentage point drop in nominal GDP growth wipes 0.74 percentage points off jobs growth. (Read More: Is China in Danger of Missing Its 2012 Growth Target? )

What's worse, the private sector seeing profit margins being squeezed will need to lay off workers, and it's a trend happening not just in the export sector but also in the heavy equipment, steel and coal in industries, said Patrick Chovanec, associate professor at the School of Economics and Management, Tsinghua University in Beijing.

"Companies in these are other sectors are facing a big cash crunch, running up inventories and selling on credit, which they can only do for so long before they have start slashing operating expenses. So it's possible that more job cuts are on the way, " Chovanec told CNBC.

Indeed, profit growth in the private sector has been falling steadily since 2010, with year-to-date growth in 2012 at 15.1 percent year-on-year, Citi said. The equivalent figure in 2009 was 16.7 percent year-on-year. This could imply that job growth in the private sector is almost flat, Ding and Shuang said.

"If the current economic downturn cannot be altered, there is a good chance that the unemployment rate could start to rise in coming quarters, " the economists said. "Weak exports, squeezed margin and deflationary risk are the key drivers of job losses. Inevitably, it may take another stimulus for the government to unwind job losses once they occur."

By CNBC's Jean Chua