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Consumption 'not spurred by higher pay'

By Wang Xiaotian and Andrew Moody (China Daily)
Updated: 2010-03-22 10:07

BEIJING: China's repeated efforts since the start of the year to raise people's incomes may not stimulate domestic consumption and therefore won't lead to higher inflation, a major economic concern for both regulators and investors, said analysts.

These efforts include raising the minimum wage, the payment for part-time jobs and retirement pensions as well as an ongoing debate over whether to raise the income taxation threshold.

"Generally speaking, these measures are still too weak to produce more demand and spur ordinary consumption," said Wang Tao, head of China economic research at UBS Securities. "Also, it has become more difficult to stimulate demand since the global recession."

After authorities in Jiangsu province on January 23 said they would raise the minimum wage by more than 12 percent, officials in Beijing, Chongqing, Guangdong, Shanghai, Zhejiang and other regions have promised to follow suit by more than 10 percent and deliver other favorable policies such as increasing retirement pensions and part-time job payments. Some regions including Shenzhen even announced a 20 percent hike in the minimum wage.

Hans Timmer, director of the development prospects group at The World Bank in Washington, agreed increases in wages wouldn't prove inflationary in China.

"Recent increases in wage levels are more of a sign of things getting back to normal and that China is leaving the crisis behind," he said.

The wage increases in southern China seem quite high but are likely to be just an adjustment for small or no increases last year, he added.

In 2008, nearly half of the provinces in China didn't adjust the minimum wage as they usually did annually at the beginning of the year, and in 2009 every region made no adjustment as businesses suffered and tried to cut cost during the economic slowdown. He said China needed to avoid the stop-go policies of the 1990s when periods of 20 percent inflation were followed by a government credit squeeze.

"The problem then was the economy suddenly hitting its production capacity and inflation jumping quickly, creating a wage price spiral that reinforced itself."

Some of the recent wage inflation was down to labor shortages, partly as a result of a shrinking working population due to the one-child policy, which has created a society with a skewed ageing population, said Timmer.

Analysts also doubted whether raising people's tax threshold would contribute to increased domestic consumption.