CNBC's The China Connection newsletter: AI hits an already weak jobs market

As China's economic growth slows, companies are increasingly exploring AI-driven efficiencies, potentially displacing millions of workers. 360 Security Technology plans to eliminate its marketing department using AI, projecting savings in the tens of millions, while Meituan reports 52% of new code is AI-generated, up from 27% in March. Despite government subsidies for employment and efforts to embrace AI in sectors like elder care, concerns persist amid weak labor market data and a 34% plunge in China's exports to the U.S. last month.

Analysis

China's aggressive adoption of artificial intelligence is occurring amidst a period of decelerating economic growth, creating significant risks for labor displacement, as exemplified by 360 Security Technology's plan to eliminate its entire marketing department for "tens of millions" in annual savings and Meituan's disclosure that 52% of its new code is AI-generated, a substantial increase from 27% in March. This trend is further underscored by U.S. financial giant Citi's decision to cut 3,500 tech jobs in China by October and Anthropic CEO Dario Amodei's forecast of potential 10-20% AI-driven unemployment within five years, prompting a demand shift towards AI-skilled young recruits. While Chinese authorities are promoting AI and robotics, including a pilot program for elder care robots, and have allocated 66.74 billion yuan ($9.29 billion) for employment subsidies, persistent job fears are exacerbated by broader economic challenges. These include fierce domestic competition, notably in the electric vehicle sector leading to "neijuan," and escalating trade tensions, which contributed to a 34% plunge in China's exports to the U.S. last month, impacting an estimated 16 million jobs according to Goldman Sachs. May's business surveys revealed a contraction in the labor market, particularly in construction and among small businesses, a situation Goldman Sachs described as "rarely seen in the past decade," although this weakness could potentially trigger further government stimulus, with a key policy meeting anticipated in late July. Recent developments, such as a U.S.-China trade agreement framework, provided a temporary lift to market sentiment, with the CSI 300 and Hang Seng Index rising 0.8% and 0.6% respectively on the news; year-to-date, the CSI 300 has lost approximately 0.97% while the Hang Seng Index has gained over 21.54%. Despite this market reaction, underlying economic indicators like a fourth consecutive negative CPI reading in May and a sharper-than-expected fall in imports signal persistent weak domestic demand.

Key Decisions for Investors

• The rapid AI integration in China presents a dual-edged sword: investors should identify companies leading in AI adoption or providing AI solutions, while being cautious about sectors vulnerable to labor displacement and cost-cutting pressures.
• Given the weak labor market, falling CPI, and trade-related export declines, investors should closely monitor upcoming Chinese economic data, particularly May's retail sales and industrial production, and the late July policy meeting for indications of economic stabilization or further stimulus measures.
• While the recent U.S.-China trade agreement provides short-term market relief, the underlying fragility of domestic demand and ongoing trade sensitivities necessitate a cautious approach, particularly towards companies heavily reliant on U.S. exports or facing intense domestic competition.