China's real unemployment rate 10.2%, double official figure, expert warns of prolonged downturn

A prominent Chinese economics expert has warned that China's economy faces prolonged stagnation, diverging from the anticipated K-shaped recovery, and estimates the broader unemployment rate to be as high as 10.2%. Li Daokui, director of the China Institute for Economic Theory and Practice at Tsinghua University, stated at the China Macroeconomic Forum that the primary challenge for China's macroeconomy is not a K-shaped development but a "general cooling." He emphasized that while academia and industry are contemplating responses to a K-shaped recovery, addressing the persistent sluggishness in employment, consumption, and investment over the past three years is more urgent.

Li highlighted the critical signals within employment and investment data. He introduced the concept of "discouraged workers" – individuals who have stopped actively seeking employment and are thus excluded from official labor statistics but still wish to work. Including these individuals, along with the officially unemployed, pushes the broader unemployment rate to 10.2%, double the 5.1% urban surveyed unemployment rate reported by China's National Bureau of Statistics for May. Li estimates that approximately 24 million people face long-term employment difficulties, with over half, or 13 million, being between 16 and 24 years old.

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The biggest problem of China's macroeconomy is not K-shaped development, but overall cooling.

Furthermore, Li expressed concern over the declining trend in fixed-asset investment. He noted that from January to May, fixed-asset investment decreased by 4.1% compared to the same period last year. He pointed out that such a significant drop in investment intensity and severity is unprecedented in China's history, occurring only in 1961 and 1967.

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The intensity and severity of this investment decline are at a level never seen before in the past.

The expert identified reduced local government spending as the main driver of the economic slowdown. Over the past two decades, local government infrastructure investment and spending accounted for 41% of GDP, but this has recently fallen to 35%, with a notable decrease in expenditures on construction and equipment. Li argued that funds allocated to local governments are increasingly being used to repay existing debts rather than finance new projects, leading to a "spinning wheels" effect where capital does not flow into the real economy. He also cited measures by some local governments, such as retracting promised tax benefits, collecting taxes in advance, and delaying payments for construction projects, as factors that stifle business activity.

To counter these trends, Li proposed that the central government should increase its issuance of national bonds to convert high-interest local government debt into lower-interest debt. He also urged the central government to boost spending on public welfare and consumption, including measures like supplying affordable housing by purchasing unsold properties and facilitating the settlement of migrant workers in cities.

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Local governments are using funds to repay existing debts rather than invest in new projects, causing capital to spin without flowing into the real economy.