Job seekers attend an employment fair in Shanghai, China on 15 February, 2009.

Even during China’s most feudal phases, higher education has offered a reliable means of meritocratic advancement. Well into the 1990s, the limited number of university graduates meant that all of them were virtually assured places among the economic elite.

As China tries to evolve from “the workshop of the world” into a more technologically advanced service economy, however, a swelling glut of graduates is threatening this age-old compact.

This year alone, Chinese universities are expected to produce a record 7 million degree holders, more than seven times the number 15 years ago. This rapid expansion has vastly outstripped demand: unemployment among recent graduates has rocketed to 16 percent, four times the norm, while the wage premium they receive has plummeted by 19 percentage points.

In some cities, semi-skilled factory workers now make more than university graduates in office jobs.

High youth unemployment has spurred social unrest in many countries. In China, the situation is even more fraught. For decades, the Communist Party has offered citizens a trade-off: economic opportunity in exchange for political docility. If the first is closed off, the bargain starts to look a lot less attractive.

Given the intensifying scramble for good jobs, connections have begun to matter more than merit. Party links in particular are a key deciding factor as businesses seek to build ties with influential officials by hiring their offspring.

The news media’s attention has been focused on high-profile Western banks, which allegedly recruited the children of top party officials in an effort to build guanxi, or close personal relationships, with the Chinese leadership.

But the problem extends right down the scale: one study of the career prospects of college graduates found that even the children of low-level party officials were able to secure starting salaries that were 15 percent higher than for those without such connections. No wonder graduates have become the most rapidly expanding demographic within the party: the share of students who choose to join has risen to more than 11 percent today from less than 1 percent in 1990.

Unsurprisingly, wealth now matters as much as connections do in landing jobs. Some banks set conditions for coveted internships. “The parents must have a fixed-term deposit of at least 500 000 yuan (R866 379) at the branch,” reads one advert.

Job seekers are forced to offer “gifts” in exchange for government positions, especially at the local level. Some students manage to stand out by gaining degrees abroad – 400 000 of them in the last year alone. But this tactic, too, is only available to a privileged few who can afford to pay Western tuitions.

The government needs to generate more high-skill jobs in order to soak up the flood of graduates. Slowing growth will make that difficult. Yet Chinese leaders could at least lift roadblocks to job creation – from restrictions on internal migration to regulations that favour industry over services.

For instance, Chinese graduates are trapped in their home cities or provinces by a strict household registration system that discourages them from moving to where the jobs are. This generates unemployment in marginal cities, while leaving important vacancies unfilled in megacities.

At the same time, China favours industry over services by subsidising the price of industrial land, with local governments keeping prices artificially low in the hopes of attracting additional investment. As a result, from 2000 to 2010, the average price of commercial land rose from three times that of industrial land to almost nine times, raising the relative cost of business for service firms.

Because services tend to be more labour-intensive and require more educated employees, this bias has slowed job growth for college graduates.

The policy of encouraging more Chinese to get a university education was meant to strengthen China. Instead, the push is creating new vulnerabilities. It’s too late to turn back, which means solutions must focus on stimulating demand for graduates and changing their skill mix.

As President Xi Jinping works to root out corrupt practices, he should also focus on the bribe taking that’s prevalent in the hiring process.

The alternative is a rising sense of injustice and frustration among tens of thousands of educated youth. That’s not a future he or China’s other leaders can afford to contemplate.

* Yukon Huang is a senior associate at the Carnegie Endowment for International Peace in Washington, where Canyon Bosler is a junior fellow.