The scariest reason China devalued the yuan, in one chart

There are a bunch of reasons why China decided to devalue the yuan, ranging from falling exports to an ailing property market.

The most worrying, though, is probably a destructive change happening in the country’s labour market.

China’s labour market had been tight for a while as citizens in rural reas moved to cities to find work and many aged out of the jobs markets.

That pushed the ratio of job offers-to-seekers upwards from 2010 through to the end of 2014.

That indicated that China’s economy was at the limits of its supply capacity, meaning any economic stimulus would have a limited affect.

And then something changed. The ratio started falling sharply earlier this year.

Nomura economist Richard Koo said in a recent note: “I suspect the breakdown of the upward trend in the job offers-to-seekers ratio came as a major shock to the Chinese authorities.”

He added: “This development underlines the severity of the current slowdown and is probably part of the reason why the Chinese government has begun to roll out stimulus measures in earnest.”

The Chinese authorities have taken a number of steps to shore up the economy, including devaluing the yuan, relaxing residential mortgage rules, and investing in infrastructure projects.

Thoe public works projects China’s government is planning to finance won’t necessarily jolt the economy back to action however, according to Koo.

“Now that the nation’s working-age population is starting to decline, the only way the economy can grow is via higher productivity per worker, which requires an efficient allocation of resources throughout the economy. That cannot be achieved if the government is allocating substantial resources to public works projects,” he wrote.

It takes years to make workers more productive and, in China’s case, liberalize an economy so resources are allocated more efficiently.

But China doesn’t have years right now.

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