China's labour market remains tight but mooted layoffs should be manageable. The real issue in our view is in labour shortage, not surplus.
China is a high-saving country seeing cyclical and policy driven downturn and is still consuming. Still, rising corporate leverage and credit risks are a concern and will require ongoing deleveraging and structural reforms.
Real estate and construction is driving credit growth and concentration risk is increasing with few firms at high leverage ratios. Property prices are starting to heat up amid easing of purchase limits and the relaxation of mortgage rules.
China is not Japan. There is little basis to expect a prolonged property slump or lost decade. But property oversupply in China's third- and fourth-tier cities suggests adjustment will continue for some time.
In our view, the earliest time a full-fledged China recovery could occur is in 2018. Before then a painful transition is likely.