Bloomberg News

China Wage Gains Hurt by Weaker Profit Damp Consumption

November 26, 2012

China Wage Gains Trimmed by Weaker Profit as Xi Targets Consumer

Average urban salaries rose 12 percent in the first nine months from a year earlier without adjusting for inflation, slowing from 14.4 percent for all of 2011 and 13.3 percent in 2010, government data show. Photographer: Tomohiro Ohsumi/Bloomberg

China’s wage gains have moderated on weaker corporate profits, capping consumer demand as the government seeks to sustain a rebound after a seven-quarter economic slowdown.

Average urban salaries rose 12 percent in the first nine months from a year earlier without adjusting for inflation, slowing from 14.4 percent for all of 2011 and 13.3 percent in 2010, government data show. Restaurant operator Yum Brands! Inc. (YUM:US) reports smaller pay increases, and labor ministry data show the same for minimum wages.

Deeper declines in wage growth would undermine efforts by China’s new leadership under Xi Jinping to boost consumer spending and shift the world’s second-biggest economy away from dependence on investment and exports. Overcapacity in manufacturing is weighing on profits, with the latest reading due tomorrow when the statistics bureau releases industrial companies’ net income for this year through October.

“Given the poor profit picture, wage growth is bound to slow down in the coming quarters and this is set to reduce the robustness of consumption,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong, who formerly worked at the World Bank in Beijing. “The expected slowdown will impact the rebalancing in the sense that it will reduce the relative role of consumption in the short term.”

Li Keqiang, the second-highest ranked official in the new Communist Party leadership and set to take over from Wen Jiabao as premier in March, said last week that household spending is key to boosting domestic demand.

‘Disruptive Bust’

Minimum wages rose an average 19.4 percent in 18 provinces this year through September, government data show. That follows nine-month gains of 21.7 percent in 21 provinces last year and 24 percent in 30 provinces in 2010. China has targeted an annual average increase of 13 percent for 2011-15.

Consumption, which includes government and household spending, fell to 49.1 percent of gross domestic product in 2011 from 59.6 percent in 2002, when Hu Jintao began his decade as Communist Party chief. Last year’s figure was close to the lowest contribution since China’s reform and opening up policy started in 1978, government data show.

“Changing this model has become of paramount importance if China is to avoid a disruptive bust in investment in the next one to two years and lapse into a middle-income trap in the medium term,” George Magnus, senior economic adviser at UBS AG, wrote in a Nov. 22 report, referring to growth slowdowns in developing nations after incomes rise.

Hu’s Target

In his last major speech as Communist Party chief this month, Hu vowed to double per capita income by 2020 from 2010, a target that HSBC Holdings Plc estimates would signal real growth of about 7 percent a year.

China’s benchmark Shanghai Composite Index (SHCOMP) of stocks dropped about 18 percent from this year’s high on March 2 through Nov. 23 on concern that slowing economic growth and higher costs are crimping profits. The gauge was down 0.3 percent as of 1:46 p.m. Companies reported a combined 1.9 percent decline in third-quarter earnings, according to data on 899 corporate results compiled by Bloomberg since Sept. 30.

Industrial companies’ profits declined 1.8 percent in the first three quarters after a 27 percent rise for the same period in 2011, data from the statistics bureau showed

In a Nov. 19 report, JPMorgan Chase & Co. said it continues to be “underweight” on China equities and a “key concern is profits as capacity continues to grow faster than demand.”

Overcapacity could lead companies to cut capital spending, which would hurt the employment market, analysts led by Hong Kong-based Adrian Mowat and Sunil Garg wrote, adding that “wage inflation would fall from the mid-teens, resulting in weaker consumption.”

Consumer Confidence

Elsewhere in Asia, South Korean consumer confidence rebounded from a nine-month low this month as the economy began to show signs of improvement. Singapore’s industrial output fell from a year earlier for a third month in October as manufacturers produced fewer electronics and pharmaceuticals.

In the U.S., an index of Texas manufacturing by the Federal Reserve Bank of Dallas probably rose for a second month in November, a separate Bloomberg survey showed. The Chicago Fed is due to release its October national activity index reading.

In Europe, finance ministers from the 17-member euro area will hold a meeting today to discuss unlocking bailout funds for Greece. Indexes of consumer confidence in Germany and Italy are due today.

Growth Pace

China’s economy expanded 7.4 percent in the third quarter from a year earlier, the slowest pace in three years. Analysts forecast a rebound in the October-December period to 7.7 percent, based on the median estimate in a Bloomberg survey conducted Nov. 14-19.

Growth in investment growth has outpaced consumption for years, posing dangers including higher bad debts, overcapacity, lower profitability, environmental degradation, social instability and external imbalances, according to the World Bank and International Monetary Fund. The global financial crisis exposed the risks to China’s economy from its dependence on exports as shipments fell for 13 months and about 20 million migrant workers lost their jobs.

Yum! Brands, the U.S.-based operator of KFC and Pizza Hut restaurants which has about 5,000 outlets in China, saw its local labor-cost increases ease last quarter for the third straight period, slowing to an 8 percent pace, Chief Financial Officer Patrick Grismer said on an Oct. 10 conference call with analysts.

“Food inflation is falling, so there is less need to help minimum-wage workers,” said Alaistair Chan, a Sydney-based economist for Moody’s Analytics. “Median wage growth will naturally slow as it gets higher, because productivity gains slow” and diminishing returns to capital and labor set in, Chan said.

Consumer prices increased 1.7 percent in October from a year earlier, down from a three-year high of 6.5 percent in July 2011. Food costs rose 1.8 percent last month, down from an 11.9 percent gain a year earlier, according to the statistics bureau.

--Zheng Lifei. With assistance from Zhou Xin and Nerys Avery in Beijing, Sharon Chen and Stephanie Phang in Singapore and Paul Panckhurst and Darren Boey in Hong Kong. Editors: Scott Lanman, James Mayger

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Scott Lanman at slanman@bloomberg.net


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