China’s white-collar wage cuts fuel deflation risks and harm consumption.
China's white-collar wage cuts fuel deflation risks and harm consumption.
China’s Austerity Measures Hit Workers’ Incomes
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BEIJING/HONG KONG, July 28 (ANBLE) – Cola Yao earns 40% less than last year promoting credit cards for a Chinese state-owned bank, so she buys fewer clothes, less make-up, and has canceled her child’s summer swimming classes. “The cut is severely affecting my life in every aspect,” said Yao. Financial firms and their regulators have cut salaries and bonuses after China’s top graft-busting watchdog vowed to eliminate “Western-style hedonism” in the $57 trillion sector. This unexpected austerity comes on the back of China’s slowing economy, complicating efforts for Communist Party leaders who pledged this week to boost workers’ incomes to revive household consumption, a major policy goal. Some indebted local governments have also cut civil servants’ pay, while hospitals, schools, and private businesses facing a drop in sales have done the same. These wage cuts are further weighing on already fragile consumer confidence, raising risks of a self-feeding deflationary spiral in the world’s second-largest economy. “Wage cuts will intensify deflationary risks and reduce willingness to spend,” said Zhaopeng Xing, ANZ’s senior China strategist.
Rising Concerns and Economic Impact
While Chinese still earned 6.8% more on average in the first half of this year than in the same period of 2022, at 11,300 yuan ($1,580) per month, there is little optimism that this pace can be maintained. The increase in wages was likely driven by rural migrant workers returning to factories after COVID-19 lockdowns, compensating for subdued pay growth in white-collar jobs.
A survey by recruiter Zhaopin showed average wages offered for new jobs in 38 major cities dropped 0.7% in the second quarter from the same period of 2022, having grown only 0.9% in the first quarter. In the first six months, total household disposable income, which includes wages and other sources of revenue, rose 5.8%, barely surpassing 5.5% growth in economic output. This highlights one of China’s key structural weaknesses – household consumption contributes much less to its economic output than in most other countries. Analysts stress that disposable income needs to rise much faster than overall economic growth to rectify this imbalance. For most of the past four decades, it was the other way around.
Weak Bargaining Power and Wage Cuts
Unilateral wage cuts are illegal in China, but complex salary structures offer ways around that. Cola Yao’s monthly earnings dropped to 6,000 yuan because her employer in the eastern city of Hefei raised her performance goals linked to the usage of credit cards. Meanwhile, Shao, a make-up salesperson in the eastern city of Suzhou, faced a choice between accepting a 50% wage cut or leaving her company. She opted for the latter, but her colleagues took the hit and now face delayed paychecks.
“Workers are pressed not only by the company, but also by the labor market. Their bargaining power…is weakened, so they tend to accept wage cuts,” said Aidan Chau, a researcher at the Hong Kong-based rights group China Labor Bulletin. State institutions typically keep base salaries untouched but reduce various allowances, according to public sector workers. A Shanghai doctor surnamed Xu said his public hospital canceled quarterly bonuses and asked staff to do more overtime. Xu, who works at a public hospital, saw his pay drop by 20% over the last two years. The extra work affects his social life, leading him to spend less on going out.
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A Frugal Society and Financial Insecurity
Frugality is becoming endemic in China, with retail sales yet to return to their pre-pandemic trend and households preferring to save. New household bank deposits in January-June rose 15% to 12 trillion yuan, equivalent to more than 50% of the total retail sales for the period. Analysts see this as a symptom of financial insecurity among consumers. “If weak confidence becomes entrenched, it could be self-fulfilling and derail the recovery,” said Xiangrong Yu, China chief ANBLE at Citi.
In conclusion, China’s austerity measures have had a significant impact on workers’ incomes, as salaries and bonuses are cut in various sectors. This has further dampened consumer confidence, leading to a potential deflationary spiral in the country’s economy. The slowdown in wage growth, along with rising household savings, highlights the need to boost disposable income and promote household consumption as a key driver of economic growth. As workers face weakened bargaining power and wage cuts, the long-term effects on their livelihoods and spending habits could have far-reaching consequences. It remains to be seen how the Chinese government and businesses will address this issue and revive household incomes to stimulate sustained economic recovery.
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