Recruiting in China

The Manpower Employment Outlook Survey results for China were just released, with the data coming in a little worse than the previous two quarters, but strong compared to recent years. Net hiring intentions fell to 29% from 38% in Q1 this year, and a high of 51% in Q4 last year.

Chinese employers forecast an active labor market in Quarter 2 2011. While 34% of employers expect to increase staffing levels, 5% predict a decrease and 53% anticipate no change. The resulting Net Employment Outlook stands at +29%.

In short, though, the results are actually quite positive. Looking at the chart below, China is actually in the midst of a hiring boom. Compared to Q2 2010, much of its recent history hiring intentions for the second quarter of 2011 are still pretty strong. It's no wonder, then, that you hear stories about rising wages in China, or labor shortages. And it's this surge in employment that is creating an interesting set of threats and opportunities for the Chinese economy.

Looking at it on a sector-by-sector basis, the clear leader is Manufacturing, with a net 31% of firms looking to increase staff. The manufacturing sector also saw the smallest decrease compared to Q1 (down by only a couple of percentage points). Another strong sector is Finance, Insurance & Real Estate -- which is interesting with the backdrop of a booming property market -- with 10 million units of social housing set to be built this year.

Another strong sector is Services, with a net 28% of firms planning to hire; also interesting from an economic rebalancing angle. In other words, it is interesting to see sectors like Services, Wholesale & Retail Trade, and Finance doing well, as growth in these sectors will help China rebalance its economy to being domestic demand-led, rather than export-oriented.

So what is the overall synopsis? In terms of employment outlook, the answer is still "boom." Net hiring intentions show firms still need to hire more workers, which can be driven by a number of things, but is usually motivated by growth of the business and a need to increase capacity. It's this lack of spare capacity that is also contributing to higher inflation. Indeed, a key driver of inflation in China this year will not just be commodities, but also rising wage inflation.

This creates an interesting dilemma for the Chinese government: On the one hand it needs to stave off high levels of inflation to avoid instability and maintain a sustainable rate of growth; on the other hand, rising wages may also be a key catalyst in helping rebalance the Chinese economy and growing domestic demand, instead of relying on a low-cost export-oriented model. And of course there is the tension of reducing inflation, but without stalling the economy.

In short, the survey results suggest that the Chinese economy is still going strong, and is likely to continue to grow at a strong pace this year as domestic demand rises and government spending continues (the government plans to run a deficit this year). However, the inflation risks are highlighted and accentuated by this data point.

So it remains to be seen how the inflation battle unfolds. But as long as the fundamentals remain intact, it's almost a certainty that buying opportunities will be present, especially if valuations overshoot in reaction to monetary policy tightening.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.