FXStreet (Delhi) – Zhiwei Zhang, Research Analysts at Deutsche Bank, suggests that the key macro uncertainty in 2016 for China lies in the labor market. Key Quotes “In spite of expectation of slower growth beyond Q1, the prospect of unemployment is unclear. The best indicator in the market about labor condition is the ratio of job vacancies to job seekers. This ratio dropped in H1 as growth slowed, which is intuitive as it suggested weak labor demand. But it surprisingly rebounded in Q3. Moreover the ratio has been above 1 for 20 consecutive quarters. This suggests the job market does not show signs of rising unemployment despite of the slower growth. We understand why the labor market has been resilient, but we do not have full confidence it will stay so in 2016. The stable labor market reflects three factors. The labor force is shrinking, hence less pressure to supply side. The demand side has been boosted by a robust service sector, which helps to absorb labor from the weak industrial sector. Moreover, the government managed to prevent large scale layoffs so far, despite the growth slowdown. This delays job destruction. The labor market outlook is uncertain because the delayed job shedding may occur in 2016. The government started to send signals recently that it would tolerate more bankruptcy. Premier Li Keqiang mentioned the risk imposed by “zombie companies” on the economy in a State Council meeting in November. The lack of government intervention in the recent Shanshui cement bond default may also indicate the subtle change in government’s thinking. The government recently mentioned the importance of managing the supply side of the economy, which suggests it may finally address the overcapacity problem more seriously. We believe it is the right policy to allow some “zombie companies” to go bankrupt. It will help improve the efficiency of the economy and avoid building up of bad loans down the road. The impact on the labor market in the short term is difficult to forecast. We assume as a baseline case that there will be some signs of rising unemployment in the economy. In such a scenario we believe the government will respond by cutting interest rates twice in H2 2016, and expand fiscal spending.” For more information, read our latest forex news.