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Cover Photo: ©PopTika/Shutterstock
China Economic Update - December 2022

Acknowledgements
The December 2022 issue of the China Economic Update was prepared by a team comprising Ibrahim
Chowdhury (Task Team Leader), Yusha Li (co-Task Team Leader), Jun Ge, Dewen Wang, Elitza Mileva,
Maria Ana Lugo, Kate Mandeville, Jingyu Li, Zhenyang Xu, Linghui Zhu, Shreya Chatterjee, Yixing
Zhang, Yi Yan, Abayomi Alawode, Veronica Montalva Talledo, Samuel Hill, Fang Yang and Ekaterine
Vashakmadze. Guidance and thoughtful comments from Mara Warwick, Aaditya Mattoo, Hassan Zaman,
Daniel Dulitzky, Sebastian Eckardt, and Aparnaa Somanathan are gratefully acknowledged. The team
would like to thank Tianshu Chen, Ying Yu, Luoyi Zhou, Xiaoting Li, Lin Yang, Li Mingjie, and Yu Shang
for support in the production and dissemination of this report. The team is grateful to Barbara Yuill for
editing the report. The findings, interpretations, and conclusions expressed in this report do not necessarily
reflect the views of the Executive Directors of the World Bank or the Chinese government. Questions and
feedback can be addressed to Tianshu Chen (tchen@worldbank.org).

2
China Economic Update - December 2022

Table of Contents
Executive Summary .................................................................................................................................... 7
I. Recent Economic Developments................................................................................................... 12
Economic activity in China has tracked the ups and downs of the pandemic ............................................ 12
Export activity has slowed amid growing external headwinds ................................................................... 15
The current account surplus has widened amid weak domestic demand .................................................... 16
Unemployment remains a concern due to frequent COVID-19 outbreaks ................................................. 18
Weak consumer and housing demand have contributed to low inflation ................................................... 18
China’s CO₂ emissions increased sharply ................................................................................................... 19
Housing market weakness persists .............................................................................................................. 20
Fiscal pressures have constrained stimulus efforts ..................................................................................... 21
Despite modest policy easing credit demand remains subdued .................................................................. 24
Fiscal expansion has contributed to a rise in debt ....................................................................................... 25
While the banking sector generally remains sound, some rural banks are more vulnerable ...................... 26
II. Outlook, Risks, and Policy Implications ...................................................................................... 28
Global outlook ............................................................................................................................................ 28
China outlook .............................................................................................................................................. 28
Risks ......................................................................................................................................................... 31
Policy implications...................................................................................................................................... 31
III. Youth Unemployment—An Emerging Challenge ...................................................................... 34
China is facing high youth unemployment ................................................................................................. 34
Factors contributing to China’s youth unemployment ................................................................................ 35
Policy implications...................................................................................................................................... 38

Figures
Figure 1. The China Economic Update at a glance .................................................................................... 10
Figure 2. Growth improved following the sharp slowdown earlier in the year but is decelerating again in
Q4 due to widespread COVID-19 outbreaks .............................................................................................. 13
Figure 3. Policy stringency and household income and spending .............................................................. 14
Figure 4. Per capita disposable income by quintile..................................................................................... 15
Figure 5. Slowing trade activity .................................................................................................................. 16
Figure 6. External imbalances have reemerged .......................................................................................... 17
Figure 7. Labor market has not fully recovered .......................................................................................... 18
Figure 8. Disinflation pressure emerges ..................................................................................................... 19
Figure 9. Carbon emissions rose sharply in the third quarter ..................................................................... 20
Figure 10. Housing market has yet to recover ............................................................................................ 21
Figure 11. Fiscal shortfall ........................................................................................................................... 22
Figure 12. Fiscal spending multiplier estimates.......................................................................................... 23
Figure 13. Household credit demand has weakened substantially .............................................................. 25
Figure 14. Debt has risen to a new high ...................................................................................................... 26
Figure 15. The banking sector appears sound, with rural banks remaining most at risk ............................ 27
Figure 16. China will face a difficult global environment in 2023 ............................................................. 28
Figure 17. Poverty reduction will continue, albeit slower than in previous years ...................................... 30
Figure 18. Youth unemployment rate and international comparison .......................................................... 34
Figure 19. College graduates and employment index ................................................................................. 36
Figure 20. Labor market mismatch by industry and by occupation ............................................................ 38

3
China Economic Update - December 2022

Table
Table 1. China selected economic indicators .............................................................................................. 30
Table 2. International experience of youth employment programs ............................................................ 38

Box
Box 1. Lower-income urban households have been affected more by the pandemic ................................. 14
Box 2. China’s fiscal spending multiplier during the pandemic ................................................................. 23
Box 3. China’s unemployment monitoring system ..................................................................................... 35

4
China Economic Update - December 2022

List of Abbreviations
ASEAN Association of Southeast Asian Nations
CAR Capital adequacy ratio
CFETS China Foreign Exchange Trade System
CIER China Institute for Employment Research
COVID-19, COVID Coronavirus Disease 2019
CO2 Carbon Dioxide
CPI Consumer Price Index
EU European Union
FDI Foreign Direct Investment
FX Foreign Exchange
G20 Group of 20
G-7 Group of Seven
GDP Gross Domestic Product
H1 First Half Year
H2 Second Half Year
HP filter Hodrick-Prescott filter
ICT Information And Communication Technology
IP Royalties Intellectual Property Royalties
ILO International Labour Organization
LGFV Local Government Financing Vehicle
LPR Loan Prime Rate
MLF Medium-term Lending Facility
MoF Ministry of Finance
NBS China National Bureau of Statistics
NPL Non-performing Loan
OECD Organisation for Economic Co-operation and Development
PBC People’s Bank of China
POE Private-Owned Enterprise
PPI Producer Price Index
PPP Purchasing Power Parity
PSL Pledged Supplementary Lending
q/q Quarter-on-Quarter
Q1 First Quarter
Q2 Second Quarter
Q3 Third Quarter
Q4 Fourth Quarter
RHS Right hand side
RMB Renminbi
RRR Reserve Requirement Ratio
sa Seasonally Adjusted
SAFE State Administration of Foreign Exchange
SHIBOR Shanghai Interbank Offered Rate
SLF Standing Lending Facility
SME Small and Medium-sized Enterprise

5
China Economic Update - December 2022

SML Special mention loan
SOE State-Owned Enterprise
SPRF Special-Purpose Refinancing
TVET Technical and vocational education and training
TMLF Targeted Medium-Term Lending Facility
UN United Nations
UNICEF United Nations International Children's Emergency Fund
USD US Dollar
VAR Vector Auto-Regression
VAT Value-added Tax
WBG World Bank Group
y/y Year-on-Year
ytd Year-to-Date
3mma Three-month Moving Average
12mma Twelve-month Moving Average

6
China Economic Update - December 2022

Executive Summary
Activity in China continues to track the ups and downs of the pandemic—outbreaks and growth
slowdowns have been followed by uneven recoveries. After a downturn caused by the COVID-19
outbreaks and stringent public health measures in April and May, activity picked up in the third
quarter as infections receded. GDP expanded by 3.9 percent y/y in Q3, from 0.4 percent in Q2.
High frequency indicators suggest another growth slowdown in the fourth quarter amid a return of
high COVID-19 cases. Despite fiscal and monetary policy support, real GDP growth is expected
to slow to 2.7 percent in 2022—1.6 percentage points lower than projected in the June China
Economic Update.

In 2023 growth is projected to recover to 4.3 percent but remain below the potential rate. China
has been moving quickly toward reopening since November 2022, with public health measures
being eased rapidly. During the initial stage of reopening COVID infections will rise sharply and
might lead to voluntary reduction in social interactions, which will weigh on consumer demand
and may lead to continued disruption even after restrictions are lifted. These impacts of the initial
exit wave are expected to be concentrated in the first quarter of next year followed by a rebound
in subsequent quarters, as the economy transitions to living with COVID, consumer confidence
improves and pent-up demand is released. Investment growth would also pick up, supported by
continued infrastructure spending and improved investor sentiment. Meanwhile, external demand
is expected to wane in line with weaker global demand growth. Amid the domestic demand
recovery, consumer inflation is expected to moderately pick up as the economy reopens.

This baseline scenario is subject to significant risks. Recurrent COVID-19 outbreaks and renewed
mobility restrictions to slow the spread of the virus could lead to longer-than-expected activity
disruption, delaying the return to potential growth to 2024. Beyond the short term, these downside
risks could also exacerbate the potential long-term consequences of the pandemic, resulting from
more than three years of underinvestment by the private sector and labor force scarring from
prolonged unemployment or underemployment. Persistent stress in the real estate sector could also
have wider macroeconomic and financial spillovers. Risks related to climate change are growing,
as demonstrated by this year’s extreme weather patterns and the resulting disruption to economic
activity. Externally, risks emanate from highly uncertain global growth prospects, sharper-than-
expected tightening in financial conditions, potential trade fragmentation and heightened
geopolitical tensions.

Confronted with the most widespread outbreaks since the beginning of the pandemic, the
continued evolution of China’s public health policies will be crucial, both to mitigate public health
risks but also to minimize further economic disruption. Completing a primary series and first
booster of the COVID-19 vaccine offers substantial protection against severe disease. In China,
69 percent of the over 60-year-olds had received a booster dose as of mid-November 2022, but the
vaccination rate was just 66 percent for over 80-year-olds (latest data November 28, 2022). Strong
efforts to encourage the uptake of all recommended vaccine doses, particularly for those at higher
risk, such as the elderly and those with chronic diseases, could limit the impact of the rise in
7
China Economic Update - December 2022

infections and hospitalizations. In addition, increased access to effective COVID-19 treatments,
changes to how cases are managed to preserve hospital capacity for severe cases and vigorous
public outreach and communication could help enable a safer and less disruptive reopening.

Continued macroeconomic policy support is warranted, as the economy is expected to remain well
below potential and the global environment is weakening. China has adequate fiscal policy space,
especially at the central level, which could be deployed to bolster a stronger recovery. Directing
these fiscal efforts toward social spending and green investment rather than traditional
infrastructure would not only support short-term demand but also contribute to more inclusive and
sustainable growth in the medium term. While continued monetary policy accommodation could
also support the economic reopening, high household and corporate debt, in particular in the real
estate sector, and the growing monetary policy divergence with other major economies constrain
the central bank’s room to maneuver.

Deeper structural reforms, put on hold by the pandemic, will have to be restarted to reverse the
decline in potential growth and successfully achieve long-term development objectives. Reform
priorities include creating a level playing field for the private sector by ensuring a predictable
regulatory environment and reducing the implicit lending bias in favor of state-owned enterprises,
allowing greater labor mobility by reforming the hukou (household registration) system,
encouraging rebalancing toward consumption by strengthening social security, reducing
inequalities in access to quality healthcare and education, and catalyzing the transition toward
greener growth through more market-based instruments and investment in climate-smart
infrastructure. Such reforms will raise productivity and lead to a more balanced, consumption-
driven, and environmentally sustainable growth. Policymakers have in recent months reiterated
their commitment to improving the enabling environment for businesses, providing support to
develop domestic innovation capacity, and further opening China’s market to foreign trade and
investment. Following through on those reform commitments will be crucial as China confronts a
complex economic transition toward more innovation-driven, greener, and inclusive growth.

China Economic Outlook 2020 2021 2022f 2023f 2024f
Real GDP growth (%) 2.2 8.1 2.7 4.3 5.0
Consumer Price Index (CPI) (% change, average) 2.5 0.9 2.0 2.3 2.4
Current account balance (% of GDP) 1.7 1.8 2.3 1.5 1.3
Augmented fiscal balance (% of GDP) * -8.5 -4.4 -7.4 -5.7 -4.2
Sources: World Bank.
Notes: f = forecast. * World Bank staff calculations. The augmented fiscal balance (narrow definition) adds up the
General Public Budget (excluding adjustment from the Stabilization Fund), the Government Fund Budget, the State
Capital Operation Budget, and the Social Security Fund Budget. The primary balance is the difference between
revenue and non-interest expenditures.

Focus Chapter: Youth Unemployment—An Emerging Challenge

Youth unemployment in China has risen, due to both short-term and structural factors. Youth
unemployment rose disproportionately during the pandemic, standing at almost 18 percent in

8
China Economic Update - December 2022

October this year. Pandemic-related mobility restrictions have dampened job creation, in particular
in the services sector—the largest employer of recent graduates. This decline in labor demand
coincided with a spike in the number of graduates. Looking at longer-term trends, China will need
a higher skilled workforce as it transitions to higher quality growth and high income, but the quality
and relevance of higher education do not always match the requirements of the labor market.

The government’s policy response has largely relied on short-term support and could be
complemented with more structural measures. To ease the adverse impact of the pandemic on the
labor market, policymakers introduced employment subsidies and public works programs.
International experience suggests that these measures can be effective in supporting labor demand
during downturns, but they tend to be costly and typically generate small long-term impacts. To
address the structural challenges, efforts will have to be made to strengthen the skillset of the youth
through better coordination across training institutions, government agencies and employers, and
through work-based learning opportunities such as apprenticeships. In addition, labor market
mobility could be improved by pooling unemployment insurance funds at the national level to
support coverage expansion, facilitate portability of benefits, and diversify labor market risks.
Lastly, strengthening both labor market statistics and the monitoring and evaluation system of
labor market programs could help improve evidence-based decision-making.

9
China Economic Update - December 2022

Figure 1. The China Economic Update at a glance

Activity has tracked the ups and downs of the pandemic … and aggregate demand has remained subdued
A. GDP growth B. GDP demand components
(y/y percent; q/q percent, seasonally adjusted) (Contribution to growth, percentage points)
Y/Y Q/Q SA (RHS) Consumption Investment
20 20 9 Net exports GDP growth

15 15
7
10 10
5
5 5
3
0 0

1
-5 -5

-10 -10 -1
Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 2015-19 2020 2021 2022H1 2022Q3

COVID-related measures continue to weigh on … and export activity has slowed recently amid
consumer and investor confidence… growing external headwinds
C. Retail sales and private investment growth D. Goods export growth
(y/y percent) (Contribution to growth, percentage points)
Private Investment Retail sales ASEAN EU+UK United States
40 Asia: A3 Others Total
40
30
35
20 30
25
10 20

0 15
10
-10 5
0
-20
-5
-30 -10
Oct-19 Oct-20 Oct-21 Oct-22 2020 Jan-22 Mar-22 May-22 Jul-22 Sep-22

As domestic demand remains weak, the current account … and inflation is subdued
surplus has widened
E. Current account balance F. CPI
(Percent of GDP) (y/y percent)
Goods trade balance Service trade balance 4 Pork Non-pork food
5 Net income from abroad Current account balance Services Non-food goods
Core CPI CPI
4 3
3

2 2

1
1
0

-1
0
-2

-3 -1
2017-2019 2020 2021 2022Q1 2022Q2 2022Q3 2019 2020 2021 2022H1 2022Q3 Oct-22

10
China Economic Update - December 2022

Carbon emissions have increased, mostly driven by the Despite policy support, the property market downturn
power sector persists
G. Carbon emissions by sector H. Housing sales and starts
(Contribution to growth, percentage points) (y/y percent, 12mma)
25 Power Industry Transport Housing starts Housing sales
Residential Total 100
20
70
15

10 40

5
10
0
-20
-5

-10 -50
2020Q1 2020Q3 2021Q1 2021Q3 2022Q1 2022Q3 Oct-08 Oct-10 Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 Oct-22
Fiscal expansion has been on par with 2020 Monetary policy has turned slightly more
accommodative
I. Fiscal deficit J. Policy and market rates
(Percent of GDP) (Percent)
2018 2019 2020 7-day SLF 1-year MLF
2021 2022 Excess reserve deposit rate 1-year LPR
2 7-day repo for bank Overnight SHIBOR
7-day reverse repo rate 7-day repo
4
0

3
-2

-4 2

-6 1

-8 0
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Nov-20 May-21 Nov-21 May-22 Nov-22

Youth unemployment has risen during the pandemic More than 60 percent of unemployed youth are new
entrants into the urban labor market
K. Surveyed unemployment rate L. Reasons for unemployment by age in 2020
(Percent) (Percent)
Overall Youth:16-24 Prime Age:25-59 Never worked Resignation Last job completed Others
20
100

15 80

60
10
40

5
20

0 0
Jan-18 Aug-18 Mar-19 Oct-19 May-20 Dec-20 Jul-21 Feb-22 Sep-22 16-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59
Source: China National Bureau of Statistics (NBS); State Administration of Foreign Exchange (SAFE); Wind
Information Database; People’s Bank of China (PBC); Carbon Monitor; Ministry of Finance (MoF); World Bank.
Note: Figure H. 12mma refers to 12-month moving average. Figure I. Fiscal deficit adds up deficit from General
Public Budget and the Government Fund Budget. Figure J. LPR = Loan prime rate; SLF = Standing lending facility;
MLF = Medium-term lending facility; SHIBOR = Shanghai interbank offered rate.
11
China Economic Update - December 2022

I. Recent Economic Developments
Economic activity in China has tracked the ups and downs of the pandemic
COVID-19 outbreaks and growth slowdowns have been followed by uneven recoveries. After
a downturn caused by COVID-19 outbreaks and stringent public health measures in April and
May, economic activity picked up in the third quarter as the cases again receded. Aided by
supportive fiscal and monetary policy and resilient external demand, GDP expanded by 3.9 percent
year-on-year (y/y) in Q3, from 0.4 percent in Q2 (Figure 2.A). However, recent high frequency
indicators suggest a renewed slowdown in the fourth quarter, with rising COVID-related
disruptions across many provinces. As of end-November, 170 cities accounting for 72 percent of
China’s GDP were affected by COVID-19 outbreaks (Figure 2.B and C).

Growth in the third quarter of 2022 was broad-based across demand components.
Consumption contributed 2.1 percentage points y/y to Q3, up from 0.8 percentage points in H1,
thanks to an increase in household disposable income (Figure 2.D). Meanwhile, the growth
contribution of gross capital formation remained broadly unchanged at 0.8 percentage points.
Manufacturing investment on the back of a robust export performance and stimulus-led
infrastructure investment supported growth, while real estate investment continued to contract.
Despite a challenging global environment, the growth contribution from net exports improved to
1.1 percentage points in Q3 compared to 0.9 percentage points in H1, thanks to resilient exports
and subdued imports.

Nevertheless, domestic demand remains below potential, as recurrent COVID-19 outbreaks
and related restrictions continue to weigh on consumer and investor confidence. On the
demand side, both consumption and investment growth remain below pre-pandemic levels amid
high COVID-related uncertainty. Recurring mobility restrictions, precautionary saving, and a
negative wealth effect from the housing slump have held back services consumption. Retail sales
also remain weak across a wide range of consumption goods. Meanwhile, weak investor
confidence has suppressed private investment (Figure 2.E).

On the production side, industry expanded at a faster pace than services. The industrial sector
contributed 1.9 percentage points to third-quarter growth, up from 1.2 percentage points in the first
half of the year (Figure 2.F). Although the growth contribution of services increased to 1.7
percentage points in Q3, from 1.0 percentage points in the second quarter, retail, catering and real
estate services were subdued as consumers remained cautious given the high uncertainty. The
contribution from the agricultural sector remained roughly unchanged at 0.3 percentage points in
Q3.

12
China Economic Update - December 2022

Figure 2. Growth improved following the sharp slowdown earlier in the year but is decelerating
again in Q4 due to widespread COVID-19 outbreaks

A. GDP growth B. New domestic cases and cities affected
(y/y percent; q/q percent, seasonally adjusted) (Cases; Number of cities)
Y/Y Q/Q SA (RHS) New cases
20 20 50000 Number of cities with new cases in the past week (RHS) 200

15 15 Shanghai in
40000 lockdown 150
10 10
30000
5 5 100
20000
0 0
50
-5 -5 10000

-10 -10 0 0
Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22

C. GDP impacted by COVID outbreaks D. GDP demand components
(Percent of national GDP) (Contribution to growth, percentage points)
Consumption Investment
GDP of cities with new cases in the past week
80 9 Net exports GDP growth
Shanghai in
70 lockdown
60 7

50
5
40
30 3

20
1
10
0 -1
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 2015-19 2020 2021 2022H1 2022Q3
E. Retail sales and private investment growth F. GDP sectoral decomposition
(y/y percent) (Contribution to growth, percentage points)
Private Investment Retail sales Agriculture Industry
40 Services GDP growth
10
30
8
20

10 6

0
4
-10

-20 2

-30
0
Oct-19 Oct-20 Oct-21 Oct-22
2015-19 2020 2021 2022H1 2022Q3
Source: NBS; World Bank.
Note: Figure A. RHS = right hand side; y/y growth of nominal private investment and nominal retail sales are
reported in Figure E.

13
China Economic Update - December 2022

Box 1. Lower-income urban households have been affected more by the pandemic

Over the past three years, the evolution of household disposable income and spending has been
affected by the COVID-19 containment strategy, with spending falling more sharply and
recovering more slowly than income. Household employment, income, and spending growth suffered
when stricter public health measures were implemented to control the pandemic (Figure 3.A and B).
Conversely, the recovery was fast when restrictions were relaxed. Consumer spending fell more sharply
than income, and its recovery, relative to the fall, was more subdued than that of income. As a result, the
12-month-average savings rate in urban areas reached 32.3 percent in 2022Q3, from a pre-pandemic
average of around 30 percent (Figure 3.C), likely reflecting precautionary behavior as well as restrictions
on face-to-face services.

During slowdowns, the contraction was more significant among urban households than rural ones
(Figure 3.D). The largest declines in spending were in activities that required face-to-face interactions
(such as entertainment or transportation), which represent a greater share of the urban households’ budget
compared to rural ones. Given higher dependence on jobs in services, business income and wage falls
were more severe and long-lasting in urban areas. In addition, transfer income played more of a buffer
role for rural households than for urban ones.

Figure 3. Policy stringency and household income and spending

A. Per capita disposable income, per capita B. Urban unemployment and Oxford Stringency
expenditure, and Oxford Stringency index index
(y/y percent; index) (Percent and index, quarterly averages)
25 Per capita disposable income, yoy % 80 Urban unemployment rate
Per capita expenditure, yoy % 6.0 Oxford stringency index (RHS) 80
20 Oxford stringency index (RHS)
15 75
75
10 5.5
5 70 70
0
5.0
-5 65 65
-10
-15 60 4.5 60
Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22
C. 12-month-average savings rate D. Per capita disposable income and per capita
(Percent) expenditure by area
(y/y percent; index)
National Income - urban Income - rural
30
45 Urban 80 Expenditure - urban Expenditure - rural
Rural
Oxford stringency index (RHS) 20
37.3
35 33.9
10
32.3 70
30.1 0
25
-10
17.0 16.0
15 60 -20
Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22
Source: NBS; World Bank.
Note: The Oxford Stringency Index is a composite measure of nine government response metrics, including
school closures, workplace closures, cancellation of public events, restrictions on public gatherings, public
transport closures, stay-at-home requirements, public information campaigns, restrictions on internal movements,

14
China Economic Update - December 2022

and international travel controls. The index takes values between 0 and 100, with higher values indicating greater
stringency.

Disposable income growth since early 2020
Figure 4. Per capita disposable income by
was disproportionally lower for low-income
quintile
households. Despite household income losses (Average annual growth between 2019 and 2021,
at several points in time because of the percent)
pandemic, between 2019 and 2021, incomes 8 Rural Urban
still grew at an average annual rate of 4.2 7
percent in urban areas and 6.8 percent in rural 6
areas. However, income growth was slower for 5
households in the poorest quintile than for 4
wealthier households in both urban and rural 3
areas (Figure 4). For urban households, incomes 2
of the poorest quintile fell by 1.9 percent in the 1
first year of the pandemic, and while they 0
Poorest Quintile 2 Quintile 3 Quintile 4 Richest
recovered in 2021 as economic activity quintile quintile
resumed, the two-year annualized growth was 2 Source: NBS; World Bank.
percentage points lower than for all other urban Note: Quintiles are defined for urban and rural
quintiles. For rural households, the relatively households separately.
strong two-year growth in disposable incomes also benefited the wealthiest households more than the
poorer ones, growing 2.5 percentage points more than the former. The regressive growth of disposable
income in 2019-21 contrasts with the changes in the pre-pandemic year of 2018-19, where the disposable
income of urban households grew similarly across quintiles (around 5 percent), and the incomes of the
poorest rural households grew six times faster than that of the wealthiest rural quintiles. The unequal
impact of the pandemic found in China within urban and rural areas is consistent with findings in other
countries (World Bank 2022a).

Export activity has slowed amid growing external headwinds

China’s export growth momentum has slowed in recent months on weaker external demand.
Although exports recovered swiftly from the severe COVID-related disruptions earlier in the year
as supply chains normalized, export momentum started to slow in the second half of the year
against the backdrop of weaker global demand. The growth rate of G-7 countries, China’s main
trading partners, moderated from 4.1 to 1.8 percent y/y during the first three quarters of 2022,
which weighed on China’s export performance (Figure 5.A). China’s export growth in US dollar
terms steadily decelerated and contracted by 0.3 percent y/y in October, despite higher export
prices in US dollar terms.

Meanwhile, import growth remained sluggish throughout the year, owing to subdued
domestic demand. Imports expanded by only 3.5 percent in US dollar terms in the first 10 months
of 2022, down from 31.4 percent in the same period last year (Figure 5.B). Excluding price effects,
imports in volume terms contracted, reflecting weak domestic demand amid recurrent COVID-19
outbreaks and ongoing stress in the real estate sector.

15
China Economic Update - December 2022

Following a robust first half of the year, China’s services trade experienced a broad-based
slowdown, reflecting both a high base in 2021H2 as well as weakening demand. After a sharp
expansion of nearly 27 percent y/y in 2022H1, services export growth has decelerated in recent
months (Figure 5.C). Exports of transport services plunged partly due to weaker merchandise
exports and partly on last year’s high base. Meanwhile, growth in services imports also plummeted
from the highs observed in the first half of the year, driven by base effects from last year and
subdued domestic demand (Figure 5.D).

Figure 5. Slowing trade activity

A. Goods export growth B. Goods import growth
(Contribution to growth, percentage points) (Contribution to growth, percentage points)
ASEAN EU+UK United States ASEAN EU+UK United States
40 Asia: A3 Others Total 35 Asia: A3 Others Total
30
30 25
20
20 15
10
10
5
0 0
-5
-10 -10

C. Service export growth D. Service import growth
(Contribution to growth, percentage points) (Contribution to growth, percentage points)
60 Transport 45 Transport
Tourism Tourism
Financial & commerical Financial & commerical
45 IP Royalties 30
IP Royalties
ICT ICT
30 Others 15 Others
Total

15 0

0 -15

-15 -30

Source: China General Administration of Customs; SAFE; World Bank.

The current account surplus has widened amid weak domestic demand

China’s current account surplus surged in the first three quarters. With goods import growth
decelerating faster than export growth, China reported a record high (in US dollar terms)
merchandise trade surplus of US$ 521.6 billion (4.0 percent of GDP) in the first nine months of
2022, up by 37.3 percent from the same period last year. The strong trade balance more than offset
the services and income account deficits. As a result, the current account registered a surplus of
2.4 percent of GDP in the first three quarters of 2022, up from 1.6 percent of GDP in the same
period last year (Figure 6.A).

16
China Economic Update - December 2022

China has experienced large portfolio outflows this year, driven by widening interest rate
differentials with the US, higher uncertainty, and geopolitical concerns. Portfolio investments
recorded net outflows of 1.8 percent of GDP in 2022H1, driven predominantly by outflows from
the bond market. Rising net errors and omissions also signaled significant unrecorded capital
outflows of US$ 46 billion (1.0 percent of GDP) in the second quarter (Figure 6.B). Amid
heightened global uncertainty, net Foreign Direct Investment inflows slowed to 0.9 percent of
GDP in 2022H1 compared to 1.5 percent in the same period last year. However, China’s overall
external position remained firm, with foreign exchange reserves at US$ 3.1 trillion (the equivalent
of 13 months of imports) at the end of October (Figure 6.C).

After steady appreciation in H2 2020 and 2021, the renminbi (RMB) remained broadly flat
in trade-weighted terms, but weakened sharply this year against the US dollar, prompting
policy measures to prevent disorderly depreciation. Capital outflows and broad-based US
dollar strength led to a weakening of the RMB by 14 percent against the US dollar in the first 10
months of this year despite the large current account surplus. The RMB remained more stable in
trade-weighted terms (Figure 6.D). To slow the pace of depreciation, the People’s Bank of China
(PBC) reinstated a 20 percent reserve requirement on bank FX forward sales. In October, the PBC
eased macro-prudential restrictions on cross-border borrowing by domestic firms. The move was
aimed at facilitating capital inflows and alleviating downside pressure on the RMB.

Figure 6. External imbalances have reemerged

A. Current account balance B. Net capital outflows
(Percent of GDP) (Percent of GDP)
Goods trade balance Service trade balance Current account Financial and capital account
6 Net income from abroad Current account balance 3 Net error and omisssions Reserve accumulation

2
4

1
2
0
0
-1

-2
-2

-4 -3
2017-2019 2020 2021 2022Q1 2022Q2 2022Q3 2017-2019 2020 2021 2022Q1 2022Q2
C. Foreign reserve accumulation D. Exchange rate
(Billion USD) (Index, December 31, 2020 = 1)
5000 Foreign reserves held by PBC 1.2 Onshore RMB-CFETS basket index
Onshore RMB-USD index
4000
1.1

3000
1.0
2000

0.9
1000

0 0.8
Oct-07 Apr-10 Oct-12 Apr-15 Oct-17 Apr-20 Oct-22 Mar-20 Nov-20 Jul-21 Mar-22 Nov-22
Source: SAFE; China Foreign Exchange Trade System (CFETS); Wind Information Database; World Bank.
17
China Economic Update - December 2022

Unemployment remains a concern due to frequent COVID-19 outbreaks
China’s labor market has not fully recovered from the sharp deterioration earlier in the
year. The surveyed urban unemployment rate increased from 5.1 percent at the start of this year
to 6.1 percent in April, when the economy faced disruptions caused by large COVID-19 outbreaks
(Figure 7.A). The labor market improved slightly in subsequent months as economic activity
picked up, but broader COVID-19 flare-ups in recent months have again led to an uptick in
unemployment.

Of particular concern is the sharper increase in the youth unemployment rate compared to
previous years. Youth unemployment is typically seasonally high in June-July, when university
graduates enter the labor force, and declines in the following months as graduates find jobs (see
also Part III). Youth unemployment reached almost 20 percent in July 2022, an all-time high
(Figure 7.A). More worryingly, the rate eased only moderately to around 18 percent in September,
far above the pre-pandemic (2018-19) September average of 12.1 percent. Youth unemployment
is also about four times higher than prime-age (age 25-59) unemployment (see also Section III).
The government set a target of creating 11 million urban jobs (in gross terms) in 2022, the same
as in 2021. While the economy generated about 10 million jobs in the first nine months, the net
increase in urban jobs is significantly lower than before the pandemic due to higher job losses
(Figure 7.B).

Figure 7. Labor market has not fully recovered

A. Surveyed urban unemployment rate B. New job target and net job creation
(Percent) (Million)
Overall Youth:16-24 Prime Age:25-59
16 New Jobs Target Actual New Jobs Net Increase
20
14

12
15
10

8
10
6

5 4

0 0
Jan-18 Aug-18 Mar-19 Oct-19 May-20 Dec-20 Jul-21 Feb-22 Sep-22 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: NBS; Ministry of Human Resources and Social Security; World Bank.
Note: Actual new jobs in 2022 are the accumulative volume from January to September; net increase in 2022 is
an estimate made by the World Bank staff.

Weak consumer and housing demand have contributed to low inflation
Subdued domestic demand has kept China’s consumer price inflation low. Core inflation
remained below 1 percent y/y through most of the year and eased to 0.6 percent in October.
Headline inflation ticked up from 1.7 percent in 2022H1 to 2.1 percent in October, owing mainly
to higher pork prices (Figure 8.A). Despite the modest pick-up, headline CPI inflation has
18
China Economic Update - December 2022

remained below the official target of 3.0 percent and far below the levels observed in other
countries. This can be explained by the limited pass-through of international energy prices to
China’s domestic prices, due to administered consumer energy prices and long-term fixed-price
contracts for enterprises. International grain prices have not had a notable effect on domestic food
prices either, as food security concerns have made self-sufficiency in grain production a priority
for China. The self-sufficiency ratio for grain is as high as 93 percent.

Producer price inflation has trended down for most of this year on high base effects and, in
the case of metal prices, due to the slump in the housing market. PPI inflation averaged 7.8
percent y/y in the first half of 2022 and fell rapidly in the second half (Figure 8.B). The sharp drop
in PPI inflation was driven primarily by a high base due to high global commodity prices last year.
PPI disinflation has extended into metal prices, as housing construction remains very weak. Lower
global commodity prices in 2022Q3, together with an increased domestic supply of coal, also
contributed to lower producer price inflation.

Figure 8. Disinflation pressure emerges

A. CPI B. PPI
(y/y percent) (y/y percent)
4 Pork Non-pork food 10 Oil Commodity ex-oil Non-commodity PPI
Services Non-food goods
Core CPI CPI 8
3

6
2
4

1 2

0
0
-2

-1 -4
2019 2020 2021 2022H1 2022Q3 Oct-22 2019 2020 2021 2022H1 2022Q3 Oct-22
Source: NBS; World Bank.

China’s CO₂ emissions increased sharply

After contracting in the first half of 2022, China’s carbon emissions are estimated to have
increased sharply. Carbon dioxide (CO₂) emissions contracted by 4.3 percent y/y in the first half
of 2022 (Figure 9.A). The decline was driven by China’s ongoing real estate slump, relatively
weak industrial and transport activity due to the large COVID-19 outbreaks and stringent
containment measures, as well as stronger growth in renewable energy. In contrast, CO₂ emissions
increased by 5.5 percent y/y in the third quarter, as economic activity temporarily improved.
Higher CO₂ emissions were driven by the power sector. Droughts in some parts of the country
reduced hydro-power output, which was replaced by increased coal-fired power generation.
Record heatwaves led to higher electricity demand for cooling. In contrast, emissions from
industry continued to contract, reflecting the continued weakness in the real estate sector (Figure
9.B).

19
China Economic Update - December 2022

Figure 9. Carbon emissions rose sharply in the third quarter

A. Carbon emissions and GDP growth B. Carbon emissions by sector
(y/y percent) (Contribution to growth, percentage points)
Carbon emission growth GDP growth Power Industry Transport
25
25 Residential Total
20
20
15 15
10 10
5 5
0 0
-5 -5
-10 -10

-15 -15
2020Q1 2020Q3 2021Q1 2021Q3 2022Q1 2022Q3 2020Q1 2020Q3 2021Q1 2021Q3 2022Q1 2022Q3
Source: Carbon Monitor; World Bank.

Housing market weakness persists
The weakness in the housing market has persisted longer than in previous downturns. The
current housing downcycle, which began in the last quarter of 2020, has entered its ninth quarter.
Regulatory tightening, intended to curtail excessive leverage, led to a rapid slowdown in credit to
the property sector, constraining investments, land purchases, and construction starts. In addition,
high COVID-related uncertainty and concerns over unfinished presold homes have weighed on
the demand for real estate (Figure 10.A).

Policies to support housing demand have had a limited impact so far. The authorities have
lowered the 5-year loan prime rate, offered tax breaks for some home buyers, and eased home-
purchase restrictions (Figure 10.C). Both home sales and prices have continued to fall (Figure 10.A
and B), and prices are now back to levels last seen at the start of 2021.

In November, financial regulators introduced additional measures to support the real estate
sector (Figure 10.D). The new measures formalized previous window guidance to increase bank
financing to the sector, but also introduced a new one-year moratorium on developer loans
maturing in the next six months and extended the transition period for banks to comply with
property sector exposure caps.

20
China Economic Update - December 2022

Figure 10. Housing market has yet to recover

A. Housing sales and starts B. Housing prices
(y/y percent, 12mma) (y/y percent)
Housing starts Housing sales 14 Newly constructed Second-hand
100 12
10
70 8
6
40 4
2
10 0
-2
-20 -4
-6
-50 -8
Oct-08 Oct-10 Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 Oct-22 Apr-12 Oct-13 Apr-15 Oct-16 Apr-18 Oct-19 Apr-21 Oct-22
C. Mortgage rates D. Net financing for developers
(Percent) (Billion RMB)
First-time buyers Second-time buyers Net financing
16 120
14

12 80
10

8 40
6

4 0

0 -40
Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 Aug-21 Aug-22 Oct-13 Apr-15 Oct-16 Apr-18 Oct-19 Apr-21 Oct-22
Source: NBS; Wind Information Database; World Bank.
Note: Figure A. 12mma refers to 12-month moving average. “Second-time buyers” in Figure C refers to buyers
who already purchased one residential property and are subject to stricter regulation by local policy. Figure D. Net
financing (in the domestic bond market) refers to the difference between total issuance and payment.

Fiscal pressures have constrained stimulus efforts

To help stabilize economic growth, China has pursued expansionary fiscal policies. The
consolidated General Public Budget and Government Fund Budget registered a deficit of 5.4
percent of GDP in the first 10 months of 2022, compared to a deficit of 3.2 percent of GDP during
the same period last year (Figure 11.A). This broadly aligns with this year’s consolidated deficit
target of 6.2 percent of GDP. Policy stimulus has focused on corporate support measures such as
tax cuts and rebates, and infrastructure investment, with relatively limited fiscal transfers to
households.

Following relatively slow growth in 2021, spending accelerated significantly and was front-
loaded this year. Growth in the consolidated fiscal expenditure increased by 7.4 percent y/y in
the first 10 months, the bulk of which was infrastructure investment. Health spending increased by
12.6 percent in the first three quarters of this year, up from 2.3 percent during the same period last

21
China Economic Update - December 2022

year, mainly due to efforts to contain more frequent COVID-19 outbreaks. Growth in social
security spending also accelerated moderately against the backdrop of difficult labor market
conditions.

Revenue out-turns deteriorated due to lower tax collection and land sales. The consolidated
fiscal revenues contracted by 9.4 percent y/y in the first 10 months of 2022, owing to weaker tax
revenues on the back of sizable tax cuts and rebates and subdued economic activity (Figure 11.B).
Tax revenues improved in 2022Q3 with the completion of VAT refunds. Non-tax revenues
(excluding land sales) increased, due to PBC’s profit transfer, the sale or lease of mining and other
state-owned assets, and intensified efforts to collect fees and penalties. In contrast, revenues from
the sale of land-use rights contracted sharply, by 25.9 percent y/y in the first 10 months of the year,
reflecting the lasting weakness in the real estate sector (Figure 11.C).

Sharply lower public land sales and tax cuts amid increasing spending needs have eroded
the fiscal position of many local governments. Declining fiscal revenues and a smaller fiscal
multiplier have severely reduced local governments’ capacity to support the economy (see Box 2).
In the first 10 months of 2022, China's 31 provinces reported a gap of RMB 11.7 trillion (13.4
percent of GDP) between fiscal revenue and expenditure in the combined General Public Budgets
and Government Fund Budgets of subnational governments. This marks the largest fiscal shortfall
since 2013, when the government first released these data. The shortfall in revenues has only been
partly compensated by an increase in central transfers to local governments. Local governments
front-loaded the issuance of special bonds to fill the financing gap this year (Figure 11.D), but the
annual bond quota proved insufficient. The financing constraints of local governments prompted
policymakers in Beijing to roll out additional measures, including an increase in the local
government special bond quota of RMB 500 billion (US$ 74.5 billion) on top of the original annual
quota of RMB 3.65 trillion (US$ 529.8 billion) and another RMB 300 billion in policy bank
support to finance infrastructure projects.

Figure 11. Fiscal shortfall

A. Consolidated fiscal deficit B. Growth in consolidated fiscal revenues and
(Percent of GDP) expenditures
(y/y percent, ytd)
2018 2019 2020 Fiscal revenues Fiscal expenditures
2021 2022 40
2

30
0
20
-2
10

-4
0

-6 -10

-8 -20
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Oct-19 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22

22
China Economic Update - December 2022

C. Land sale revenue D. Net financing from government bond issuance
(y/y percent, ytd) (Percent of GDP)
Land sale revenue Treasury bond Local government general bond
70 5 Local government special bond

50
4

30
3
10
2
-10

-30 1

-50 0
Oct-19 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Sep-19 Sep-20 Sep-21 Sep-22

Source: Ministry of Finance (MoF); World Bank.
Note: Consolidated fiscal balance adds up the General Public Budget and Government Fund Budget.

Box 2. China’s fiscal spending multiplier during the pandemic

Recent empirical studies have shown that fiscal multipliers declined during the pandemic. Kinda
et al. (2022), using impulse response functions based on a sample of 91 countries, find that uncertainty
reduced contemporaneous fiscal multipliers, but the multipliers increased as economies reopened. A rise
in uncertainty could dampen the stimulative effect of fiscal policy as economic agents postpone hiring
and investment decisions and also consumption. Guerrieri et al. (2022), using a theoretical model, find
lower fiscal multipliers (below one) in presence of COVID-19-type shocks that lead to a shutdown of
specific sectors in the economy.

This box assesses how China’s fiscal spending Figure 12. Fiscal spending multiplier
multiplier has evolved during and before the estimates
pandemic. We estimate China’s fiscal spending 1
0.89
multiplier with a structural VAR model identified
by sign restrictions, a method widely used in the 0.8
0.68
literature (see, for example, Uhlig 2005 and Dedola
and Neri 2007). Our model has four monthly 0.6
variables included in the following order:
0.4
consolidated fiscal expenditure, M2, inflation, and
GDP. 1 All variables are seasonally adjusted, and 0.2
the trend component is removed from the series by
applying the HP filter. The sign restrictions are set 0
Jan 2015-Dec 2019 Jan 2020-Sept 2022
such that fiscal expenditure and GDP should
Source: NBS; World Bank staff estimates.
respond positively to the fiscal expenditure shock.
We estimate the model over two samples: January 2015 to December 2019 and January 2020 to
September 2022.

We find that China’s fiscal spending multiplier has been lower during the pandemic, as tightened
public health measures and high uncertainty lowered the effectiveness of the fiscal stimulus. Our

1
Monthly GDP is estimated using a mixed-frequency econometric model with quarterly GDP series and monthly
indicators of economic activity such as industrial value-added, fixed asset investment, retail sales, and net exports.
23
China Economic Update - December 2022

estimates show that China’s fiscal spending multiplier has decreased to 0.68 since the start of the
pandemic, compared to 0.89 in the five years prior to the pandemic. This implies that the estimated
increase in fiscal expenditure of 0.7 percentage points of GDP in 2022 compared to 2021 is estimated to
have contributed 0.5 percentage points to GDP growth in 2022. (These estimates are only for the growth
impact of fiscal expenditure; stimulus on the revenue side is not included in this analysis.)

Despite modest policy easing credit demand remains subdued
The PBC has marginally eased monetary policy but maintained a cautious stance, reflecting
concerns over capital outflows and financial stability risks. The central bank lowered the one-
year loan prime rate by 5 basis points to 3.65 percent; the one-year medium-term lending facility
rate by 10 basis points to 2.75 percent; the five-year loan prime rate, which influences the pricing
of mortgages, by 30 basis points to 4.30 percent (Figure 13.A); and also cut the required reserve
ratio for banks. The PBC has also maintained relatively tight liquidity in the banking system
through its standard open market operations and lending facilities this year, but the PBC transfer
of RMB 1.1 trillion of profits from foreign reserves holding to the Ministry of Finance in the first
three quarters of 2022 added liquidity to the market (Figure 13.B). 2 Given high non-financial
sector debt levels, the central bank has tried to balance short-term support to the economy with
longer-term efforts to reduce leverage. Externally, the growing policy divergence with other major
central banks that have started tightening has also constrained the PBC’s room to maneuver due to
concerns over capital outflows.

Credit growth has remained subdued, mainly on account of substantially weaker household
loan demand. Credit growth to the non-financial sector slowed to 10.3 percent y/y in October
2022 from 10.9 percent y/y in June this year (Figure 13.C). The moderation was driven by
considerably slower short-term and long-term household loan growth amid COVID-related
uncertainty and weaker housing demand (Figure 13.D). The pace of government bond issuance,
which was largely front-loaded, also slowed in the second half of the year. Meanwhile, corporate
loan growth increased, largely in the form of short-term borrowing for working capital.

2
Source: People’s Bank of China (http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/4503994/index.html); the
Chinese central government's official website (http://www.gov.cn/xinwen/2022-04/20/content_5686297.htm).
24
China Economic Update - December 2022

Figure 13. Household credit demand has weakened substantially

A. Policy and market rates B. Net liquidity injection
(Percent) (Percent of GDP)
7-day SLF 1-year MLF 4 RRR change Open market operations
Excess reserve deposit rate 1-year LPR Lending facilities Net liquidity provision
7-day repo for bank Overnight SHIBOR
3
7-day reverse repo rate 7-day repo
4
2

3 1

0
2

-1
1
-2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
0 2019 2020 2021 2022
Nov-20 May-21 Nov-21 May-22 Nov-22
C. Growth in credit to the non-financial sector D. Corporate and household loan growth
(Contribution to growth, percentage points; y/y percent) (y/y percent)
Others Corporate bonds Bill financing Consumption&mortgage
Government bonds Shadow banking Short-term loans Business operations
Long-term loans Households
Bank loan Total social financing (minus equity) 19
15 Nonfinancial entities

12
14
9

6 9

3
4
0

-3 -1
2019 2020 2021 2022H1 2022Q3 Oct-22 Feb-21 Dec-21 Oct-22 Feb-21 Dec-21 Oct-22

Source: PBC; World Bank.
Note: In Figure A, LPR = Loan prime rate; SLF = Standing lending facility; MLF = Medium-term lending facility;
SHIBOR = Shanghai interbank offered rate. Both repo rate and Overnight SHIBOR data are three-day moving
average. In Figure B, net liquidity injection provided by the PBC through standing lending facility (SLF), the
medium-term lending facility (MLF), the targeted medium-term lending facility (TMLF), the pledged
supplementary lending (PSL), the special-purpose refinancing (SPRF), and the special relending or rediscounting
facilities. RRR = Reserve requirement ratio.

Fiscal expansion has contributed to a rise in debt
China’s debt ratio has risen to a new high, reversing last year’s deleveraging efforts. The
non-financial sector debt-to-GDP ratio, including external debt, increased by 10.4 percentage
points from end-2021 to 289 percent of GDP by the third quarter in 2022 (Figure 14.A). Weaker
economic growth, combined with higher borrowing to finance fiscal stimulus, pushed up the
domestic non-financial debt ratio. Meanwhile, external debt remained low at 12.4 percent of GDP,
up only by 0.3 percentage points from 2021.

The infrastructure stimulus has accelerated subnational government debt accumulation.
Local government debt rose by 2.2 percentage points between December 2021 and September

25
China Economic Update - December 2022

2022 to 28.8 percent of GDP, driven by special bond issuance in 2022H1 to finance infrastructure
projects and to compensate for shortfalls in land sale revenues. In addition, the debt of local
government financing vehicles (LGFVs) increased to an estimated 48.5 percent of GDP, 2.7
percentage points higher than at the end of last year (Figure 14.B). Meanwhile, central government
debt has remained broadly stable at 20.6 percent of GDP.

Household debt remained broadly flat on weak confidence, while corporate debt increased
to meet short-term liquidity needs. Heightened uncertainty about future income and the slump
in the housing sector slowed consumer loan and mortgage growth. As a result, household debt has
remained broadly unchanged in the first three quarters of 2022 at about 62 percent of GDP.
Meanwhile, corporate debt (excluding LGFVs) increased to nearly 117 percent of GDP, up 4
percentage points from last year, led by short-term borrowing by privately owned enterprises.

Figure 14. Debt has risen to a new high

A. Composition of total non-financial sector debt B. Domestic non-financial sector debt
(Percent of GDP) (Percent of GDP)
External debt Central government Local government
Domestic non-financial sector debt LGFVs Households
Total 300 POEs SOEs (excl. LGFVs)
300

250
250

200 200

150 150

100 100

50 50

0 0
2011-13 2014-18 2019 2020 2021 2022H1 2022Q3 2011-13 2014-18 2019 2020 2021 2022H1 2022Q3
Source: PBC; Wind Information Database; CEIC Data; World Bank.
Note: Figure B. LGFVs = Local government financial vehicles; POE = Private-owned enterprise; SOE = State-
owned enterprise.

While the banking sector generally remains sound, some rural banks are more
vulnerable
Reported non-performing loans (NPLs) have continued to decline, but NPL ratios for rural
banks remain higher than for other financial institutions. The reported aggregate NPL and
special mention loan (SML) ratios continued to decrease, standing at 1.7 percent and 2.3 percent,
respectively, at the end of June 2022, both lower than pre-pandemic levels (Figure 15.A). Credit
risk for rural banks remained significantly higher than for other financial institutions. Despite
recent improvement, the NPL ratio for rural commercial banks was 3.3 percent. Moreover, ongoing
regulatory forbearance may mask the underlying deterioration of credit quality.

Banking sector buffers appear adequate overall. The aggregate capital adequacy ratio (CAR)
of commercial banks reached 14.9 percent at the end of June 2022, 39 basis points higher than a
year ago and significantly above the Basel III minimum requirement of 10.5 percent. Large state
26
China Economic Update - December 2022

banks, which account for roughly half of total commercial bank assets, reported a significant CAR
increase in 2022Q2, whereas rural commercial banks showed only marginal improvement and
joint stock banks and city banks reported a deterioration in their capital adequacy (Figure 15.B).

Figure 15. The banking sector appears sound, with rural banks remaining most at risk

A. Non-performing loan ratios B. Capital adequacy ratios
(Percent) (Percent)
Large state commercial bank Large state commercial bank
Joint stock bank Joint stock commercial bank
City commercial bank City commercial bank
5 19
Rural commercial bank Rural commercial bank

4
17

3
15
2

13
1

0 11
Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 2017 2018 2019 2020 2021 2022
Source: PBC; World Bank.

27
China Economic Update - December 2022

II. Outlook, Risks, and Policy Implications
Global outlook

China will face a difficult global environment in 2023. According to June 2022 World Bank
projections, following a sharp deceleration in 2022, global growth is expected to be a subdued 3
percent in 2023, weighed down in particular by continued monetary policy tightening (Figure
16.A; World Bank 2022b). The global manufacturing Purchasing Managers’ Index (PMI) has
declined from its peak in mid-2021 to 49.5 in October 2022, pointing to a contraction in global
activity for the first time since 2020 (Figure 16.B).

Significant downside risks surround the global outlook, including rising financial stability
concerns and the possibility that central banks need to raise interest rates more than
expected to quell inflation, as well as a protracted war in Ukraine. Greater than expected
tightening accompanied by financial-market stress could push the global economy into recession
(Gué nette et al. 2022) and trigger significant capital outflows from emerging economies.
Intensifying geopolitical tensions pose risks to trade and the global economy more generally
(Brenton et al. 2022). Finally, prolonged severe energy disruptions present an additional
substantial downside risk to the euro area outlook.

Figure 16. China will face a difficult global environment in 2023

A. Number of policy rate rises and cuts B. Global PMI
(Number, 3mma) (Index, 50+ = Expansion)
30 60 Global manufacturing PMI (ex. China)
Rises Cuts

20 55

10
50
0
45
-10

40
-20

-30 35
1970 1983 1996 2009 2022 Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 Oct-22
Source: S&P Global; Haver Analytics; World Bank staff estimates; World Bank, 2022b.
Note: Figure A. 3mma refers to three-month moving average.

China outlook
After slowing to 2.7 percent y/y in 2022, China’s growth is projected to recover to 4.3 percent
in 2023, though the forecast is subject to unusually high uncertainty. China has been moving
quickly toward reopening since November 2022, with public health measures being eased rapidly.
During the initial stage of reopening COVID infections will rise sharply and might lead to
voluntary reduction in social interactions, which will weigh on consumer demand and may lead to
continued disruption even after restrictions are lifted. Some disruptions to manufacturing
production and logistics are possible due to worker absenteeism. These impacts of the initial exit
28
China Economic Update - December 2022

wave are expected to be concentrated in the first quarter of next year followed by a rebound in
subsequent quarters, as the economy transitions to living with COVID and pent up demand is
released. This is consistent with the experience of other countries that rolled back COVID
containment measures where Omicron had a relatively short-lived impact on domestic demand
followed by a strong rebound.

The government is expected to maintain an expansionary policy stance, but less aggressively
than in 2022. Following the significant fiscal expansion in 2022, the baseline scenario assumes a
somewhat smaller fiscal deficit next year. The government will likely continue to rely on
infrastructure investment, as well as health and social spending, to support the economy. The
scenario also assumes that monetary policy will maintain an accommodative but relatively
cautious stance, given capital outflow and financial stability risks. However, the PBC is expected
to step in and provide liquidity if financial market stability risks materialize.

The structure of aggregate demand is expected to gradually shift in favor of domestic
demand. Private consumption is likely to remain subdued earlier next year, with a recovery
anticipated to take hold in the second half of the year, as consumer confidence improves and pent
up demand is released. Investment growth would also pick up, supported by continued
infrastructure spending and improved investor sentiment. Meanwhile, support from external
demand is expected to wane in line with deteriorating global demand growth.

The current account is projected to narrow to 1.5 percent of GDP in 2023, reflecting a sharp
decline in the trade surplus. China is likely to face a significant deterioration in external demand
amid weaker global growth. Import growth is expected to pick up on the back of stronger domestic
demand. With China expected to fully reopen later next year, the services trade deficit is likely to
widen.

Headline inflation is expected to rise moderately as domestic demand improves. Pent-up
demand supported by higher incomes and excess household savings could lift consumer inflation,
as the economy reopens. Pork prices are expected to continue to rise and remain elevated in the
first half of 2023, then gradually decline as supply recovers. Meanwhile, lower imported
commodity prices amid weaker global demand could partly offset the upward domestic price
pressures.

As growth is expected to pick up in 2023 and 2024, the pace of poverty reduction should
accelerate. While rural extreme poverty by the national definition (US$ 2.3/day per person in 2017
purchasing power parity (PPP)) has effectively been eliminated, about 19 percent of the population
(273 million people) is expected to have consumption levels below the typical upper-middle-
income poverty line of US$ 6.85/day per person (2017 PPP) in 2022 (Figure 17.A).3 Using this
threshold, an additional 15 million people are expected to be lifted out of poverty in 2022,

3Note on the new global poverty lines: Poverty data are now expressed in 2017 Purchasing Power Parity (PPP) prices versus 2011
PPP in previous editions to reflect the most recent price levels and the value of national poverty lines worldwide. See
https://pip.worldbank.org/home.
29
China Economic Update - December 2022

compared with 45 million estimated for 2021 (Figure 17.B). The pace is likely to accelerate in the
following years, with 23 million and 26 million people estimated to be lifted out of poverty in 2023
and 2024, respectively, but that pace will still be lower than in the pre-COVID years. Among the
remaining poor, around 40 percent reside in urban areas, suggesting that policies to improve the
welfare of the most vulnerable would need to be directed to both rural and urban areas.

Figure 17. Poverty reduction will continue, albeit slower than in previous years

A. Poverty rate B. Number of poor
($6.85 per person per day, percent) ($6.85 per person per day, millions of people)
Urban Rural National Urban Rural National
50 500

40 400

30 300

20 200

10 100

0 0
2018 2019 2020 2021 2022 2023 2024 2018 2019 2020 2021 2022 2023 2024
Source: World Bank staff estimates using tabulated data from China’s National Bureau of Statistics (NBS) and World
Bank GDP growth projections.
Note: Last grouped data available to calculate poverty is for 2019. Projections based on per capita GDP growth
estimates, using a neutral distribution assumption with pass-through 0.85 to per capita household consumption.

Table 1. China selected economic indicators

Annual percentage change, unless otherwise indicated 2019 2020 2021 2022f 2023f 2024f
Real GDP growth, at constant market prices 6.0 2.2 8.1 2.7 4.3 5.0
Private consumption 6.5 -1.8 12.4 0.8 6.0 6.5
Government consumption 6.0 3.2 4.0 4.9 4.1 3.9
Gross fixed capital formation 5.3 3.2 2.3 1.6 3.3 4.6
Exports, goods and services 2.1 1.7 17.9 2.1 0.2 1.9
Imports, goods and services -1.8 -1.4 10.7 -3.2 1.0 2.6
Real GDP growth, at constant factor prices 6.0 2.2 8.1 2.7 4.3 5.0
Agriculture 3.1 3.1 7.1 3.8 3.1 3.1
Industry 4.9 2.5 8.2 3.5 3.7 4.0
Services 7.2 1.9 8.2 2.0 4.8 5.9
Inflation (Consumer price index) 2.9 2.5 0.9 2.0 2.3 2.4
Current account balance (% of GDP) 0.7 1.7 1.8 2.3 1.5 1.3
Financial account balance, excl. reserves (% of GDP) -0.1 0.4 -0.2 -1.1 0.5 0.2
Net foreign direct investment (% of GDP) 0.4 0.7 1.2 0.1 0.5 0.3
General public budget balance (% of GDP) -2.8 -3.7 -3.2 -2.8 -3.2 -3.0
Augmented fiscal balance (% of GDP) * -4.6 -8.5 -4.4 -7.4 -5.7 -4.2
Government debt (% of GDP) 38.5 45.4 47.1 51.7 54.4 55.1
Primary balance (% of GDP) * -3.6 -7.5 -3.3 -6.2 -4.5 -2.9
Source: World Bank.
Note: f = forecast (baseline). * World Bank staff calculations. The augmented fiscal balance (narrow definition)
adds up the General Public Budget (excluding adjustment from the Stabilization Fund), the Government Fund
Budget, the State Capital Operation Budget, and the Social Security Fund Budget. The primary balance is the
difference between revenue and non-interest expenditures.

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China Economic Update - December 2022

Risks
Amid high uncertainty, downside risks to China’s growth outlook prevail. On the downside,
recurrent COVID-19 outbreaks, persistent precautionary behavior and renewed mobility
restrictions to slow the spread of the virus could hold back the recovery in consumption and
services, discourage private investment, and disrupt trade flows. On the upside, full-year growth
could be higher than in the baseline if comprehensive public health measures help contain the
spread of COVID-19 faster than expected in the baseline.

The stress in the real estate sector could also have wider macroeconomic and financial
consequences. A prolonged housing market downturn can increase the risk of contagion through
the balance sheets of households, local governments, and banks. Declining housing prices can have
negative effects on household balance sheets, which in turn could lower household consumption
expenditures. Prolonged weakness in the real estate sector could also exacerbate local government
financial risks, which rely heavily on the sale of land-use rights. In addition, the protracted housing
sector slowdown could adversely impact banks’ balance sheets, especially those of small and rural
lenders.4

The risks associated with climate change are growing. As experienced earlier in 2022, changing
weather patterns contribute to increasingly disruptive events, such as heat waves and floods. These
are associated with rising costs in terms of losses in economic activity.

Externally, risks emanate from highly uncertain global growth prospects, sharper-than-
expected tightening in financial conditions, and heightened geopolitical tensions. Inflation
remains high around the globe and could be pushed higher by renewed supply disruptions caused
by Russia’s invasion of Ukraine. Persistently high inflation could prompt major central banks
outside China to tighten monetary policy further than anticipated, triggering a sharp tightening of
global financial conditions with adverse spillovers to China’s economy. Geopolitical tensions and
trade fragmentation represents another risk, particularly if they constrain China’s imports of
critical technology, slow the transfer of productivity-enhancing innovations, and lead to a
decoupling of high-tech supply chains.

Policy implications
Although policymakers stepped up macroeconomic policy easing in 2022, COVID-19
outbreaks and restrictions have limited the effectiveness of policy stimulus. The cycle of
recurrent COVID-19 outbreaks and mobility restrictions has constrained economic activity and
heightened uncertainty. This, in turn, has weighed on investor and consumer sentiment,
constraining the impact of the stimulus measures. This also means that a relaxation of the COVID-
19 policy—rather than additional fiscal or monetary policy stimulus—is likely to provide the

4
Around 40-50 percent of total bank loans are property-related if loans to real estate developers, mortgage loans,
and other loans collateralized by land or property are summed up.
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China Economic Update - December 2022

largest boost to the economy. The recent rapid adjustment in COVID-19 measures suggests that
the authorities are quickly shifting toward reopening.

Strong public health preparedness, including more intensive efforts to increase vaccination
rates among those most at risk of severe disease, rolling out a second booster campaign, and
ensuring access to effective COVID-19 treatments could all lead to a safer reopening.
Completing a primary series and first booster of the COVID-19 vaccine offers substantial
protection against severe disease. In China, 69 percent of over 60-year-olds had received a booster
dose as of mid-November 2022, but the vaccination rate was just 38 percent for over 80-year-olds
(latest data July 7, 2022). Strong efforts to encourage the uptake of all recommended vaccine doses,
particularly for those at higher risk, such as the elderly and those with chronic diseases, could limit
the impact of the rise in infections and hospitalizations. Those at higher risk may also benefit from
a second booster, as well as early access to treatments such as antivirals and monoclonal antibodies
that can prevent the progression to severe disease. An effective system to identify and diagnose
those at higher risk would also be needed.

Continued macroeconomic policy support is warranted since growth remains well below
potential and the global environment is weakening. China has adequate fiscal policy space,
especially at the central level, which could be deployed to bolster a stronger recovery, as COVID-
19 related public health measures are eased. With a recovery in tax revenue following the
completion of last year’s one-off tax rebates, fiscal efforts could be redirected toward social
spending and green investment rather than traditional infrastructure investment. This would not
only support short-term demand but also contribute to a medium-term shift toward more inclusive
and sustainable growth. High debt and growing fiscal strains at the subnational levels call for the
national government to take on a larger role in financing such support measures. Concurrently,
reforms to strengthen the revenue base of local governments (in a progressive manner) could help
address fiscal sustainability concerns and mobilize resources to strengthen the provision of public
services and the social safety net. Over the medium term, as the recovery becomes entrenched and
the economy returns to potential, the fiscal policy stance could shift toward consolidation to rebuild
policy buffers.

Unless inflation moves well above target and capital outflows intensify, monetary policy
could maintain a moderately accommodative stance to support the economic reopening. With
average inflation projected at 2.3 percent in 2023, further monetary policy easing may be warranted
until growth in private demand has returned to pre-pandemic trends. However, policy easing
should be data dependent and factor in interest rate differentials with other major economies to
avoid disorderly movements in the RMB exchange rate. Over the medium term, further
modernization of the monetary policy framework would strengthen the effectiveness and
transmission of central bank policies.

The authorities also need to continue efforts to mitigate financial stability risks related to
high corporate leverage, especially in the real estate sector. Careful monitoring of bank
exposure to risks is warranted ahead of the withdrawal of forbearance measures. In the medium

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China Economic Update - December 2022

term, strengthening insolvency and bank resolution frameworks would facilitate an orderly exit of
weak or failing corporates and help businesses that are viable but need restructuring. This will
facilitate the allocation of resources to more productive firms and support private investment.

China’s policymakers have in recent months reiterated their commitment to market reforms
and opening up; it will be important to follow through on those commitments as the effects
of the pandemic fade. The authorities have stated their commitment to improving the enabling
environment for businesses (including the protection of property rights, market access, and
competition), providing support to develop domestic innovation capacity, and further opening
China’s market to foreign trade and investment.5 Pursuing those reforms will be crucial as China
confronts a complex economic transition toward greener and more inclusive growth against the
backdrop of a challenging domestic and global environment.

5
See, for example, Xinhua, December 8, 2022, “Li Keqiang Meets with World Bank President Malpass,”
https://www.chinanews.com.cn/gn/2022/12-08/9911218.shtml [in Chinese].
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China Economic Update - December 2022

III. Youth Unemployment—An Emerging Challenge
China is facing high youth unemployment
The overall labor market has struggled amid frequent COVID-19 outbreaks, but the youth
unemployment rate has risen more rapidly (Figure 18.A).6 After a peak at 6.1 percent in April
2022, the overall surveyed urban unemployment rate declined to 5.5 percent in October. In
contrast, the youth unemployment rate shot up to a record high of almost 20 percent in July. It has
since moderated to 17.9 percent in October, after the usual June-July graduation season. Almost
60 percent of the unemployed youth are new entrants to the urban labor force and face difficulties
finding jobs ((Figure 18.B).

Figure 18. Youth unemployment rate and international comparison

A. Surveyed urban unemployment rate B. Reasons for unemployment by age in 2020
(Percent) (Percent)
20 Overall Youth:16-24 Never worked Resignation Last job completed Others
Prime Age:25-59 100

15 80

60
10

40
5
20

0 0
Jan-18 Aug-18 Mar-19 Oct-19 May-20 Dec-20 Jul-21 Feb-22 Sep-22 16-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59
C. Youth versus adult unemployment D. International comparison of youth
(Unemployment rate of prime age = 1) unemployment
(Percent)
45 CN EU-27 USA
Youth=3*Adult 30
Youth=4*Adult Youth=2*Adult 27.4 UK JPN KOR
40
35 25
19.9
30 20
CN2022
25
(Aug) Youth = Adult 15
20 13.6
15 10
10
5
5
CN2018
0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22
Source: National Bureau of Statistics; OECD.
Note: In Figure C, red dots represent China, the others represent various OECD countries. The prime-age workers
in China are those ages 25-59; for all other countries, prime-age workers are ages 25-54.

6
In China, youth unemployment refers to the share of the labor force ages 16-24 without work but available for and
seeking employment. Working people between the ages 25 to 59 are typically referred to as “prime-age” workers.
34
China Economic Update - December 2022

Worldwide, the unemployment rate for youth is typically higher than for prime-age workers,
although this varies depending on the country’s education system and labor market. In most
OECD countries, the youth unemployment rate (ages 15-24) is found to be two to three times that
of prime-age workers (ages 25-54) (Figure 18.C). Countries’ institutional arrangements to support
the youth to gain work experience have been found to make a substantial difference (Pastore 2018).
In Germany, for instance, a good dual education system allows young people to acquire work
experience through apprenticeships.

Compared with OECD countries, the ratio of the youth unemployment rate to the prime-age
unemployment rate was similar in China before the pandemic but has been much higher in
2022. The ratio in China was 2.5 in 2018; it increased to about three in 2020 and 2021 and has
reached almost 4 as of October 2022 (Figure 18.C). In most OECD countries, youth unemployment
is already at or below pre-pandemic levels (Figure 18.D).

Box 3. China’s unemployment monitoring system

China publishes two official measures of unemployment.7

The registered unemployment series, established in the early 1980s, reports the number of urban workers
(with local hukou) who lost their job and registered with the local labor bureau to receive assistance. By
design, it excludes migrants and the self-employed.

The urban surveyed unemployment rate is based on a National Labor Force Survey and has been
released monthly since 2018. The labor force survey collects information on those ages 16 and above,
irrespective of their residential status (hukou). Unemployed migrants are included in the urban
unemployment rate, as long as they continue to reside in the city. In addition, the China National Bureau
of Statistics (NBS) also releases surveyed unemployment rates for local workers, migrant workers, the 16
to 24 year old population (youth), and those 25 to 59 years old.

The surveyed unemployment rate follows the ILO definition, requiring persons to be actively searching
for a job within the past three months and be able to start work within the following two weeks. The short
time series of national surveyed unemployment rates and its disaggregation by age groups limit the scope
of empirical analysis on youth unemployment. In addition, since the household-level data are not publicly
available, it is not possible to present a more comprehensive profile of unemployed workers.

Factors contributing to China’s youth unemployment

There are three main types of unemployment—frictional, cyclical, and structural. Frictional
unemployment occurs when workers move between jobs and people transition in and out of the
labor force. Reducing the costs of searching and moving between jobs can lower frictional
unemployment. Cyclical unemployment is short-term involuntary unemployment that is caused by
changes in economic activities over the business cycle. Structural unemployment is long lasting

7
Source: Ning 2018; Li 2020.
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China Economic Update - December 2022

and involuntary, reflecting a mismatch between the skills that workers possess, and the skills
demanded by employers. It is typically caused by economic restructuring and technological
change, which can make some skills obsolete.

Tightened mobility restrictions and regulatory changes in certain sectors have weighed on
activity, reducing net job creation since 2020 and disproportionally affecting the young. The
net job gains (job gains minus job losses) in the urban labor market are significantly lower than
during the pre-pandemic period, largely due to more job losses (see Figure 7.B in Part I). As
discussed in the first section of this report, frequent COVID-19 outbreaks have hit services harder
than other sectors of the economy. As the largest employer of recent graduates, weak activity in
the services sector has disproportionately affected the young. In addition, regulatory interventions,
such as to reduce leverage in the property market, have contributed to a slowdown in certain
sectors, including private tutoring and real estate. This has further limited the job opportunities for
new entrants into the labor force since 2021.

From a labor supply perspective, a spike in the number of graduates in 2022 brought further
pressures to the urban labor market. The number of college graduates has risen consistently
since the expansion of higher education started in 1999. But in 2022, the number of graduates grew
significantly more than in previous years, with 1.7 million more graduates than in 2021, equivalent
to the total increment of graduates over the previous six years combined (Figure 19.A). The spike
was likely due to a combination of increased enrollment in previous years and more students
pursuing postgraduate studies due to weak labor market conditions. The new cohort of 10.8 million
graduates in 2022 accounts for almost one-third of the youth labor force, putting greater pressure
on youth employment in the context of weak job growth.

Figure 19. College graduates and employment index

A. Number of graduates B. CIER Employment index
(Million) (Ratio = job vacancy / job application)
16 TVET College graduates Postgraduates College graduates Overall
14 2.5
Projections 2.38 2.15
12
2.0
10 1.63
1.5 1.52
8 1.57

6 1.0
0.79 0.57
4
0.5
2 0.53

0 0.0
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2018Q1 2018Q4 2019Q3 2020Q2 2021Q1 2021Q4 2022Q3
Source: NBS; World Bank staff estimates; Ministry of Education; China Institute for Employment Research
(CIER).

The rise in youth unemployment also reflects long-term trends that disfavor young workers.
Based on UN Population projections (United Nations 2022), the number of college graduates is
estimated to keep increasing by over 0.36 million per year in the coming 10 years compared with
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China Economic Update - December 2022

0.23 million per year between 2010-19 (Figure 19.A). With a larger number of universities, college
enrollment has risen from 55.6 percent of the college-aged population in 1999 to 81.1 percent in
2022. In addition, technical and vocational education and training (TVET) has expanded since
2018 (Ministry of Education 2022). While college education and TVET have been increasing, the
ratio of job vacancies to job applications for college graduates has been declining from an average
of 1.6 in 2018-19 to 1.0 in 2020-22.8 In comparison, the same ratio when applied to all workers,
has been higher and relatively more stable at 2.0 in 2018-19 and 1.7 in 2020-22 average (Figure
19.B). This suggests that there may be mismatches between the skills of recent graduates and those
demanded by employers.

Sectoral job market data offer some evidence of a skills mismatch for college graduates.
Based on online job market data for the third quarter of 2022, the highest demand for graduates
was in internet services and e-commerce, professional services, consulting, and real estate. These
sectors accounted for two-fifths of total job postings. While these are also the sectors with the most
job applicants, they accounted for only 24.2 percent of all applicants (Figure 20.A). By occupation,
the highest demand for college graduates was for sales consultants and in customer service, while
the applications of college graduates were more evenly spread across occupations (Figure 20.B).
Moreover, using a random sample of job seekers of working age and recruitment listings from
Zhaopin.com, an online recruitment company, Zheng et al. (2021) found that job seekers’
intentions are largely concentrated in five industries—IT, education, real estate/construction,
finance, and consulting—accounting for more than 90 percent of all job seekers. In comparison,
the demand for workers was more diversified, with job listings in the same five industries
accounting for about 50 percent of all vacancies.9

The skills mismatch may reflect not only a mismatch between the fields of college study and
the needs of employers but also a variation in the quality of college and TVET education.
Based on the Ministry of Education’s Quality of Employment Reports for Graduate Students,10
67.1 percent of top four university graduates found jobs, 31.1 percent continued with post-graduate
studies, and only 1.8 percent did not find jobs. In comparison, 52.4 percent of graduates from four
lower-ranked universities found jobs, 39.0 percent continued with post-graduate studies, and 8.6
percent did not find jobs upon graduation in 2021.11 The rapid expansion of TVET since 2018 has
also raised concerns about the quality of lower-tier institutions due to inadequate funds and
teaching capacities. Combining the information on college fields of 2019 graduates with a follow-
up sample survey of their jobs, Jiang and Guo (2022) found that one quarter of their jobs are not
related to their college specialties due to different types of mismatches. A lack of job-related skills
and the unavailability of jobs in related fields are important reasons for the mismatch. Among
mismatched college graduates, the skills mismatch is associated with lower probabilities of job
satisfaction, promotion, and job stability.

8
China Institute for Employment Research, based on data from Zhaopin.com.
9
The projections took the enrollment rates of 2020 as a base, introduced a moderate increase based on historical trends and considered the size of
age cohort populations.
10
See https://www.ncss.cn/ncss/zt/2021jyzlbg.shtml.
11
The top four universities include Tsinghua University, Peking University, Fudan University, and Shanghai Jiaotong University; the four lower-
ranked universities include Shandong University, Sichuan University, Zhongnan University, and Jilin University.

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China Economic Update - December 2022

Figure 20. Labor market mismatch by industry and by occupation

A. Job vacancies and job seekers in top 10 sectors B. Job vacancies and job seekers in top 10
(Percent of total) occupations
(Percent of total)
Heavy industry Software R&D
IT services Business operations
Fast food Finance
Retail & wholesale Clerk/assistant
Entertainment/sports Administration
Medicine Jobseekers Visual & interactive design Jobseekers
Banking and financial services
Education Recruiters Recruiters
Mechanical design
Communications
Human resources
Software
Real estate transaction
Electronics Performers & brokers
Real estate Management trainees
Consulting Ordinary/technical workers
Professional services Customer service
Internet/e-commerce Sales consultants
0% 3% 6% 9% 12% 15% 18% 0% 5% 10% 15% 20%
Source: China Institute for Employment Research.

Policy implications
The explorative analysis presented above has highlighted China’s emerging youth
unemployment challenge. Labor demand and job creation in China have been sluggish in recent
years due to both structural and cyclical reasons, especially in the labor-intensive service sectors,
making it difficult for the youth to transition from education into active employment. On the supply
side, pressures were compounded by an increased number of graduates entering the labor market.
Moreover, while China will need a higher skilled workforce as it transitions to higher quality
growth and high income, the quality and relevance of graduates do not always match the
requirements of the labor market.

Table 2. International experience of youth employment programs

Short term effect Long term Costs to Government
effect (best case)
Private sector incentives (employment Positive Small, positive High
subsidies and start-up grants)
Job search assistance Positive Small, positive Low
Training Negative Large, Positive Medium/high
Public works jobs Positive Zero to small, High
positive
Source: Adapted from Kluve (2016).

The government’s policy response to this challenge has largely relied on short-term measures
and could be complemented with more structural measures. To ease the adverse impact of the
pandemic on the labor market, the Government adopted various measures including employment
subsidies and public works programs. International experience suggests that these measures are
effective in addressing short-term youth unemployment challenges but are highly costly and
typically generate small long-term impacts (Table 2). Going ahead, these short-term measures

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China Economic Update - December 2022

could be complemented with structural measures to (i) strengthen the relevance and quality of
skills; (ii) improve labor market mobility; and (iii) address information asymmetries and
strengthen labor market statistics.

Strengthening the quality and relevance of skills. Fostering collaboration and partnership across
job seekers, universities, training institutions, government agencies and employers can help the
youth to build the required skills that are more responsive to labor market needs. A widely used
instrument to support skill development is work-based learning which has been applied in three-
quarters of OECD countries (OECD, 2021). Work-based learning opportunities which encompass
a diversity of arrangements including apprenticeships and internship for young people have been
found to enhance skills and ease the school-to-work transition and are also cost-effective (ILO and
UNICEF 2019; Osborne, 2022). While China has started to implement and expand work-based
learning opportunities, the rich international experience could offer China lessons on how to
strengthen these programs and make them more valuable to both job seekers and employers.

Improving labor market mobility. First, easing constraints on labor mobility by reforming the
hukou, China’s system of household registration, for all urban areas, would enhance mobility,
allowing job seekers to participate more easily in the most dynamic urban labor markets. Second,
China could improve labor mobility by pooling social security systems, including unemployment
insurance funds to support coverage expansion, facilitate portability of benefits, and diversify labor
market risks. The unemployment insurance scheme covers only about 47 percent of urban
employment, mainly formal sector workers with labor contracts. In 2022, the government started
to cover unemployed college graduates which is encouraging. Pooling unemployment insurance
funds from prefecture to province and finally at the national level will be crucial to diversify labor
market risks across the country. In addition, an integrated national unemployment insurance
system can facilitate labor mobility, allowing for portability of benefits and stronger social
protection for workers.

Addressing information asymmetries and strengthening labor market statistics. At the micro
level, China could further strengthen public employment services to address information
asymmetries in the labor market. This can be done by combining job search assistance, such as
individualized counselling and job seeker profiling, with the information from job boards where
employers can post available jobs. At the macro level, this includes better statistics and information
on labor market performance and increasing public access to labor market data to inform policies.
While NBS has developed an integrated labor force survey to monitor urban and rural
unemployment, the next step would be to make the (anonymized) labor force survey data publicly
available. This would allow researchers to carry out in-depth analysis to better understand labor
market dynamics. Lastly, strengthening the monitoring and evaluation system of labor market
programs is essential to inform evidence-based decision-making and can help guide policymakers
on when and where different programs are effective and how they can be improved upon.

39
China Economic Update - December 2022

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