2010-09-21

Wage inflation coming to China

Firms see pay floor rising 20pc a year up to 2015
Beijing plans to raise the minimum wage by at least 20 per cent annually over the next five years to boost domestic spending power and consumption, according to a powerful consultative body.
More than doubling the pay by 2015 would be top of the agenda of the nation's next five-year plan, said Huang Mengfu, vice-chairman of the National Council of Chinese People's Political Consultative Conference and chairman of the All-China Federation of Industry and Commerce.

Beijing is making a concerted push to lift domestic demand in an attempt to lower its reliance on exports and close the gap between the poor and the rich, he said.

In return for raising salaries, Huang said the CPPCC would propose to reduce government fees and administrative charges levied on factories.

"Chinese wages are too low and lagging behind the country's economic growth," Huang told a 30-strong delegation of Hong Kong Young Industrialists Council yesterday. "The wage increase may put some pressure on manufacturers, but this is inevitable during economic development."
China is cutting government to ease the costs on business, in order to pay for a rise in the minimum wage. Another avenue for incomes comes via farmland, which still has yet to be fully reformed. The laws are in place, but more work is needed.

Releasing the 8 trillion yuan tied up in China's farmland
But in many areas the laws are more honoured in the breach than the observance. According to a mid-2008 survey by the Rural Development Institute, only around a quarter of farmers had heard of the 2007 property law. Some 80 million households had never received either their land certificates or contracts. And nearly a third of farmers said land seizures continued unabated.

Prosterman and Gao argue that if Beijing wants to increase rural incomes and consumption, the government should give priority to enforcing the law and implementing policies. Officials should be pushed to issue land documents to all farmers over the next five years. Arbitrary reallocations and illegal seizures should be stopped, and fair compensation paid for legal seizures.

What's more, the authorities should make a concerted effort to educate farmers about their rights, complete with information hot-lines and established procedures for dealing with complaints.

On top of that, the government should put in place the final piece missing from the rural jigsaw by allowing farmers to mortgage their land holdings to fund improvement programmes.

The impact on incomes could be enormous. Based on an annual rental value of around 3,400 yuan (HK$3,900) per hectare in the embryonic leasing market and assuming a 5 per cent yield, Prosterman calculates the average capital value of China's farmland is 68,000 yuan a hectare. That means China's farmers are sitting on assets worth an astonishing 8.2 trillion yuan, or almost 25 per cent of China's gross domestic product.
The latter is an opinion article, but reform is generally moving in this direction.

Inflation will be tough to keep down with wages doubling, however, unless the banking system needs recapitalization. In that case, savings rates will drop, causing the higher wages to be plowed into savings.

There's great risk in this system. Assuming wages rise beyond their market clearing rate and the renminbi appreciates, China could face rising unemployment. On the other hand, the government is cutting costs to pay for the plan. If the government's reaction to economic hardship is to cut the bureaucracy and taxes, then even poor implementation or bad luck can be overcome.

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