Employment and Consumer Sentiment Crucial for Consumption Boost
Policy measures to lower social funding costs typically boost household income and spending. However, China’s real estate market, labor market conditions, and the US-China trade war have fueled uncertainties, impacting consumer demand.
China’s unemployment rate fell from 5.1% in April to 5% in May. However, youth unemployment (16-24, excluding students) paints a different picture. In May, the youth unemployment rate fell from 15.8% in April to 14.9%, remaining well above 14.2% in May 2024. This summer, a record 12.22 million students are expected to graduate, potentially impacting the labor market.
Considering another potential spike in youth unemployment, mirroring a surge during the pandemic, consumer sentiment could deteriorate further in the coming months. Weakening consumer sentiment could test the effectiveness of Beijing’s efforts to boost consumption.
Targeting youth unemployment remains a key focal point, with China’s government previously introducing subsidies for firms to hire fresh graduates and unemployed youth.
While Tuesday’s guidelines are significant, increasing domestic competition and price wars are another hurdle that companies face in expanding workforces. The US-China trade war has fueled domestic competition, underscoring the importance of a trade deal.
US-China Trade War Truce: Is China Breaking the Agreement?
In June, China and the US held talks in London, agreeing to stick to the terms of the 90-day truce. However, China would need to significantly increase export licenses for rare-earth magnet exports to demonstrate compliance and maintain goodwill under the truce.
The Kobeissi Letter commented on rare-earth magnet export trends, stating:
“China’s total export volumes of rare-earth magnets fell -74% year-over-year in May, the biggest monthly decline on record. This comes after a 45% drop seen in April. Total rare-earth magnet exports reached 1.2 million kilograms last month, the least since February. Furthermore, exports to the US dropped -93% to ~46,000 kilograms, following a -59% plunge in April. China mines ~69% of global rare-earth minerals and processes ~90% of global supply. China’s rare earth exports are a critical part of the trade war.”
An escalation in the US-China trade war and intensifying domestic price wars could affect Beijing’s efforts to boost household income, sentiment, and consumption.
Natixis Asia Pacific Chief Economist Alicia Garcia Herrero recently commented on the fragility of the trade war truce, stating:
“The risk is there for the London deal to fall apart. Because rare earths is a very granular issue and mistakes can be made.”
Hong Kong and Mainland China Markets Advance Despite Tariffs
The US-China trade war has failed to trigger a broad-based sell-off across the Hong Kong and Mainland markets. Despite the US restricting China’s access to tech, the Hang Seng TECH Index and the Roundhill China Dragons ETF are up 20.33% and 19.98% year-to-date (YTD), while the Nasdaq Composite Index has gained just 3.43%. Notably, the Roundhill Magnificent Seven ETF is up just 0.15% YTD.
Meanwhile, easing US-China trade tensions has bolstered demand for Mainland stocks. The CSI 300 and Shanghai Composite Index have gained 2.96% and 3.15% in June, trailing the Nasdaq Composite Index (+4.5%). Hong Kong’s Hang Seng Index leads the way marginally, rising 4.51%.
