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China wants to create 11 million new jobs this year to cap the surveyed urban unemployment rate at around 5.5 per cent and registered unemployment rate within 4.5 per cent. Photo: AFP

China’s middle class stress over debt payments as unemployment hits two-year high

  • China’s unemployment rate jumped to 5.3 per cent in January and February from 4.9 per cent in December, the highest level in two years
  • Household debt, which includes mortgage and credit cards, now makes up 52 per cent of China’s gross domestic product

When Tan Jinqiao, a 27-year-old product manager with a Beijing-based fintech firm, was asked to leave his job in February, one of his first thoughts turned to making his car payment of almost half his monthly salary.

Tan is among the growing number of China’s middle class population that is facing rising unemployment and household debt as the nation’s economy is growing at its slowest rate in three decades amid the trade war with the United States that has weakened consumer and investment confidence.

Estimates of the size of China’s middle class vary, depending on the definition, but China’s national statistics agency puts the figure at nearly 400 million, less than a third of the population, by defining a middle-class household as one making a fairly low threshold of 25,000 yuan (US$3,722) to 250,000 (US$37,224) yuan a year.

The nation’s large technology firms such as e-commerce company JD.com, ride hailing app Didi and internet firm NetEase, which mainly focus on the consumer market, are among the first to have began redundancy and restructuring plans.

China's labour force has declined every year since its 2011 peak to 897.3 million in 2018, with 775.9 million people employed.Photo: AFP

China’s unemployment rate jumped to 5.3 per cent in January and February from 4.9 per cent in December, the highest level in two years.

China's rising unemployment adds to the economic woes of a shrinking labour force, which had declined every year since its 2011 peak to 897.3 million in 2018, with 775.9 million people employed.

That puts pressure on the government to create 11 million new jobs this year to cap the surveyed urban unemployment rate at around 5.5 per cent and registered unemployment rate within 4.5 per cent. The government expects the surveyed urban unemployment rate, which does not include rural or migrant workers, to rise further in 2019.

Last year, China’s State Council announced incentives to encourage firms to avoid lay-offs including offering 50 per cent unemployment insurance refunds for companies who avoided or kept redundancies to a minimum.

But there are many, like Tan, whose job security is not a given especially in the current economic climate. To boost efficiency and profits, private firms or listed companies often opt for restructuring to focus on revenue generating, cutting back on operations that do not generate cash.

And for Tan, who took out a two-year loan from an online lender with an annual interest rate of 10 per cent to fund the purchase of his Mercedes-Benz, the situation is dire as he now needs to be able to pay 6,500 yuan (US$968) a month in repayments. Tan previously made around 15,000 yuan (US$2,233) a month before tax, of which 2,000 yuan a month was taken up by rent.

“I sent my CV to any potential employer. If there is one day I don’t get a call from headhunters, I get anxious,” he said.

Despite China’s deleveraging campaign, which has cut the growth of corporate and public debt, household borrowing has seen rapid expansion since 2008, according to a study by Natixis. Household debt, which includes mortgage and credit cards, now makes up 52 per cent of China’s gross domestic product (GDP), significantly faster growth than that of both the corporate and government sectors.

“From an international perspective, the growth rate of China’s household debt has surpassed the average growth rate of emerging markets and even the level is higher and already similar to that of the Euro area, which is 58 per cent of GDP, but lower than that of the US, 78 per cent of GDP,” according to the Natixis study published in March.

Apart from mortgages, another source of household debt is credit cards, which surged from 5.1 per cent of GDP in 2016 to 7.5 per cent of GDP in 2018, Natixis said, higher than that of the US before the 2008 global financial crisis. China’s credit card delinquency or overdue ratio has also increased.

“Because of credit tightening in the last year, delinquency has also grown. People had high expectations of their income growth so they borrow and leverage to consume, whether it’s to have a holiday or buy a new home,” said former shadow banker Joe Zhang, who is now running his own distressed debt business to collect and repackage credit card delinquency from banks and to sell to investors.

People had high expectations of their income growth so they borrow and leverage to consume, whether it’s to have a holiday or buy a new home.
Joe Zhang, former shadow banker

While China’s household debt is growing, there is little protection for individuals like Tan who are potentially unable to meet their repayments, unlike those in the United States where an individual can file for personal bankruptcy to reorganise their finances.

“There is no provision in the law that allows a human being to declare personal bankruptcy in China,” said Zhang. “So the debt stay with you until you die. Companies can file for bankruptcy, individuals can’t.”

Zhang added that while not being able to file bankruptcy is not as big as problem for individuals, it may soon turn into a bigger social problem as household debt continues to balloon.

“Young people are already finding out they are trapped. I don’t think the Chinese legislation now can give people a second chance. Bankruptcy is unpleasant, we can debate the pros and cons, but it gives people a second chance,” he said.

Tan’s biggest fear is that if he defaults on a payment it would tarnish his record, making it difficult for him to make purchases using credit again in future

“[The car] is my biggest asset, I’d like to keep it as much as I can,” said Tan, who is using his own savings to meet his repayment demands every month. “I’ll just have to find a job fast.”

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