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China’s 12th Five Year Plan: The Coming Storm On Wages

Posted in China Business

By Steve Dickinson

The 5th Plenum of the 17th CCP Central Committee completed its meeting in Beijing on October 18. here is the full text of that meeting. Aside from various political issues, the major task of the plenum was to adopt the outline for the 12th Five Year Plan that will guide China’s economic development of China from 2011 to 2015.

The plenum approved the outline for the plan, entitled The Communist Party of China (CPC) Central Committee’s Proposal on Formulating the Twelfth Five-year Program (2011-2015) on National Economic and Social Development. The Chinese version of that document was published on October 27. The formal plan will be drafted on the basis of the Proposal and will be submitted for approval at the next meeting of the National People’s Congress, scheduled for March 2011. One wonders what China will do in the first quarter of 2011 when there is no formal plan in effect. I am reviewing the Proposal and will publish some reports on its contents shortly.

Though there has been much speculation and discussion in the foreign press regarding the probable contents of the 12th Plan, I have been looking more at the the concerns of the local Chinese. In preparing for my review of the Proposal, my research assistant and I gathered several hundred pages of local Chinese language internet news reports on the 12th Five Year Plan. I was surprised to find that over 80% of the concerns were about a single issue: income disparity. The following concerns were constantly expressed:

  • There is a growing disparity between the highest income earners and the lowest income earners (the GINI coefficient).
  • There is a growing disparity between the incomes of urban residents and rural residents.
  • There is a growing disparity between the incomes of residents of the coastal provinces and the residents of the rest of Western, Central and Northeast China.

These are common complaints of “uneven development” that have been the subject of concern in China for some time. We also saw the following new, more troubling, concerns consistently expressed:

  • The percentage increase in the wages of Chinese citizens has not grown as fast as the percentage increase in China’s overall GDP.
  • Though China has a high savings rate, the percentage increase in the savings of Chinese citizens has not increased at the same rate as the percentage increase in the Consumer Price Index. This means that even though the Chinese save, they are actually falling behind in terms of wealth accumulation.

Overall, the feeling is that “if China is now the second largest economy in the world, why don’t we feel better off?” The underlying theme is that “clearly China has made a lot of money over the past 10 years, but where did all that money go?” It certainly did not go into the pockets of the Chinese urban factory and service workers and it certainly did not go into the pockets of the Chinese farmers.

This theme is the basis for the new book by Lang Xianping 郎咸平 (Larry H.P Lang), a distinguished Hong Kong University Chinese economist. Lang’s new book, published in September, is entitled “Why Is Our Life So Hard? Why Is Our Income So Low? Why Are Our Prices so High? Why Do Our Businesses Struggle So Hard?” (我们的日子为什么这么难) (He apparently likes long titles). This book has only been out for a month and is already the number 2 best seller in Qingdao. This shows how its theme resonates with the local public. Professor Lang also has a blog (in Chinese) here.

In the first chapter of the book, Lang points out the strangeness of wage structure with the following key numbers: 

  • In 2009, China’s domestic consumption as a percent of GDP was 29%. No modern country has ever achieved such a low number. The number for the U.S. is about 70%. Even the number for Africa is about 50%.
  • The percentage of wages in China as a portion of GDP is 8%. This number is so low that it really cannot be understood. The number in the U.S. is 58%. The number in Mexico is 33%. The number in the Philippines is 27%. In most of Africa, the number is 20%.
  • China has the lowest average wage in the industrial world at $.80 per hour, with the highest number of hours worked at 2,200 per year. Compare this to Brazil, for example, where the average hourly wage is $2.25 and the average hours worked per year is 1,841.

Given this data it is no surprise the average Chinese worker feels left out of China’s economic miracle. That is, the “economic miracle” was created by sacrificing the Chinese wage earner. Lang’s point, stated more forcefully, is that these numbers show there has been no Chinese miracle for the average Chinese.

I will leave the obvious social and political implications to others and just examine what this all means for foreign businesses in or involved with China.

Clearly, the pressure is enormous in China for an upward push in wages in every segment of the economy. This means that for foreign businesses outsourcing product in China, making product in China and operating service businesses in China the party is over. All companies operating in China will see sharp increases in wages over the next five years. This trend simply cannot be avoided. This sharp increase in Chinese wages will then have a knock on effect, pulling up wages in places like Vietnam and Cambodia that look to China for a lead in manufacturing wages and costs. This is the future. Get ready for it. 

Professor Lang answers the “why” question he poses in his book’s title by asserting it is all a European/American imperialist plot explicitly designed to exploit China on an imperialist model. This answer is why he is permitted to publish his gloomy books: all of China’s many problems can be attributed to foreign plots. Lang is an interesting character: a Wharton School PhD who is an avowed student of Lenin’s views of Western imperialism. He is by far the most popular economics writer in China today and must be taken seriously. Though I question his mono-causal analysis, I agree with much of what he says in this and other books about the structure of the Chinese economy. 

China’s wage storm is coming.

What do you think? 

  • jone

    You are right about how Vietnam and Cambodia are going to continue tracking China in terms of wages. I don’t understand how people think that China’s wages are just going to keep rising while Vietnam’s and Cambodia’s will stay the same.

  • Twofish

    Harris: The underlying theme is that “clearly China has made a lot of money over the past 10 years, but where did all that money go?” It certainly did not go into the pockets of the Chinese urban factory and service workers and it certainly did not go into the pockets of the Chinese farmers.
    Except that it did. Consumption rates in China are low because Chinese are massive savers.
    Harris: Given this data it is no surprise the average Chinese worker feels left out of China’s economic miracle. That is, the “economic miracle” was created by sacrificing the Chinese wage earner. Lang’s point, stated more forcefully, is that these numbers show there has been no Chinese miracle for the average Chinese.
    The one thing that leaves out is that wages have grown for practically everyone over the last decade. The fraction of wages to GDP has shrunk, but the overall wages has increased. Now one thing that is interesting is that increasing wages does not necessarily translate into happiness, but that’s another issue.
    Harris: This answer is why he is permitted to publish his gloomy books: all of China’s many problems can be attributed to foreign plots. Lang is an interesting character: a Wharton School PhD who is an avowed student of Lenin’s views of Western imperialism. He is by far the most popular economics writer in China today and must be taken seriously.
    On the other hand, there are people that with radically different economic views about what is wrong. One thing that most people in the West sort of assume is that there is one official view and that alternative viewpoints are not tolerates. Frankly, as long as you aren’t calling for the overthrow of the Party, you can write books, so you have a pretty wide spectrum of economic beliefs. You also have some odd mixtures of beliefs that you don’t find in the West.

  • http://www.chinatranslated.com Duncan

    While I totally agree with the underlying point Steve’s making I feel I need to push back slightly against the rubbish coming out from Mr Lang Xianping, who I fear has got a little carried away from reality with his celebrity status. First of all: wages are 8% of GDP??? Wages are low in China, and so is consumption, and I know that the data to measure wages are a little shaky, but that number is patently ridiculous. If you took a brief glance at the rise in household deposits or at annual measures of household expenditure, both of which have better data than wages, it would become obvious that 8% is just not possible.
    Second, domestic consumption was a hell of a lot higher than 29%. Official data from the government show private consumption alone was 36.3% of GDP in 2009, which is still a historically unprecedented low so why exaggerate? Meanwhile if you really want to look at “domestic consumption” you also have to include public consumption, which was a further 13.2% of GDP, for a grand total of 49.5%.
    I can also say from experience of trying to look for it and talking with experts like Judith Bannister on the subject, that it is virtually impossible to come up with per hour wages data. Wage data alone is not very robust, but the real trouble comes with finding the total number of hours worked by the average worker. I would love to know where Mr Lang got his data from on that one. Our own estimates suggest that Chinese workers’ pay was roughly US$1.9 per hour in 2009, which would already put it marginally higher than places like Indonesia and the Philippines – a placement which would seem to fit more with anecdotal labour cost reports.
    But again, I do agree the wage storm is coming. People are serious talking about 15-20% rises for the next five years, even for semi-skilled workers (though clearly that will not apply to all companies, regions or workers).

  • Chris

    Steve, very astute observations.
    While I think there is much disguised salary income out there (at every level, not just for the rich) and that the wage bill as a % of GDP is not as absolutely dismal as those figures indicate, it does remain appallingly low.
    Andy Xie, ex-Morgan Stanley economist, wrote an excellent essay some months ago predicting a 400% increase in unskilled / semi-skilled Chinese worker wages over the next 10 years.
    At an enterprise level, I can tell you there is strong wage pressure, with each and every Chinese staff member pushing (all very politely but firmly at this stage) for solid salary increases. Each new employee coming in at a 10-20% premium on existing staff. Attracting strong mid-level management talent becoming competitive and significantly more expensive than 2-3 years ago.
    While there is no doubt the sheer greed of many USA/European enterprises to minimise costs and maximise margin has resulted in the massive transfer of industrial production to China, it is hardly an imperialist plot. Indeed, at a brutal cost to workers here, it has given China an enormous capacity to generate wealth, goods, infrastructure and to rebuild the country.
    The present problem, is that the distribution of that wealth is unfair and unhealthy. Far too much sits with the State which invests in infrastructure but does not redistribute or spend on human capital or ends up with a small proportion of ultra wealthy.
    Foreign enterprises need to factor in the risks, costs and benefits of the coming “wages storm” (as Steve accurately puts it). China will no longer be ‘cheap’ and each and every business will need to consider the risks and the opportunities and have a plan.
    The Chinese Govt, Labour Bureaus and Unions will no longer have the same passive role in facilitating low wages or suppressing workers demands. They will move to either a neutral position requiring enterprises to negotiate directly with staff or more actively forcing salary increases and HR compliance. That is the essential message of the 12th 5 Year Plan – CCP leadership will allow labour to defend its own interests.
    China managers will have to communicate very clearly to global HQ that 3-5% annual wage increases will be unacceptable to staff. They will need a plan to ensure productivity growth.
    At the same time the opportunities for developing incredible and highly profitable consumer businesses will explode. At present, it appears Chinese enterprises capturing the bulk of strong growth in consumer demand. Most foreign enterprises amazed at the extraordinary growth in premium consumer businesses and few are dipping their toes into the much larger, more brutal and dynamic mass consumer markets.

  • http://none dirk

    Strangeness? Answer me who do you think has benefited from government businesses & trade surpluses? Has the spread of wealth been universal or selfishly hoarded by the privileged few for their own aggrandisement? Who is ripping off the Chinese worker force?

  • http://www.mutantfrog.com Joe Jones

    About 20 years ago I never saw any discussion of GDP anywhere. Textbooks and studies were all about GNP, which ignored the location of production and rather looked at the source of the capital. That’s probably part of the reason for the disconnect here. China is getting wealthier, but a lot of that wealth “leaks out” to foreign-domiciled investors.
    (I also believe that Japan’s apprehension about becoming #3 is misplaced — they are almost certainly still #2 on a GNP basis given that Japanese companies make such a huge amount of money outside Japan, including China, while still controlling the lion’s share of production at home.)

  • Twofish

    Chris: The present problem, is that the distribution of that wealth is unfair and unhealthy. Far too much sits with the State which invests in infrastructure but does not redistribute or spend on human capital or ends up with a small proportion of ultra wealthy.
    It really depends on your basis for comparison. Frankly, I think that the Chinese state does a much better job at income redistribution and human capital formation than most other developing nations. Not to say that it can’t do better, but I think it’s doing a decent job.
    You have to be careful not to remove wealth disparities if it ends up killing the golden goose.
    dirk: Strangeness? Answer me who do you think has benefited from government businesses & trade surpluses?
    Pretty much everyone in China. That’s why it’s so important to keep the pie growing, because as long as the pie grows, you can split it up to pay for everything.
    dirk: Has the spread of wealth been universal or selfishly hoarded by the privileged few for their own aggrandisement? Who is ripping off the Chinese worker force?
    It depends on how you define rip off. If the economy grows 10%. I take 5% and then give you 5%, is this better or worse than if the economy grow 2% and I give you all of it? Personally I prefer the former situation.
    One other thing. China has a high Gini coefficient, but if you go to China and just walk down the streets, you don’t get the idea that the wealth disparity is anywhere near what it is in India or Latin America. One thing about Chinese wealth disparity is that it for the most part tends to be inter-regional rather than intra-regional.

  • Twofish

    1) Consumption in China is roughly similar to other East Asia countries at similar levels of development. Yes the consumption fraction in China is much lower than Africa, which explains why Africa has so much development trouble.
    2) I’m not sure where the wage share statistic comes from. Googling the numbers I’m getting are 40% for China.
    See graph 11
    http://www.cesifo-group.de/portal/page/portal/CFP_CONF/CFP_CONF_VSI/VSI%202010/vsi10_roc_Cheung/Paper/vsi10_roc_Ma.pdf

  • jeromecole@gmail.com

    Consumption in China appears to be a very small part of its economy because the Chinese government is cooking the books. GDP = Consumption + Investment + Government spending. China uses its state owned banks and enterprises to manipulate investment in a massive fashion while it uses government spending for “stimulus”. While technically increasing GDP this type of manipulation is really just an act of fooling around with the accounting identities for investment and government spending. Consumption is not so easily manipulated by the state and that is where the disconnect between reported economic growth and actual living conditions becomes apparent. What China is doing is a sophisticated equivalent of printing money and then using it to pay people to move piles of rocks from one place to another.

  • Twofish

    Jeromecole: What China is doing is a sophisticated equivalent of printing money and then using it to pay people to move piles of rocks from one place to another.
    Exactly, and Keynes argued in the 1930′s that this is exactly what you do to get yourself out of a recession. The term example he used was to pay people to bury money, and then pay people to unbury it. The Great Depression was ended by WWII, which involved hiring people to build lots of shiny metal objects and then blowing them up.
    The danger that you get into is that people are afraid of losing their jobs, so they stop spending, so unemployment goes up so people are afraid of losing their jobs. To get the economy out of the ditch, you just drop money from helicopters, and it seems to have worked. China is no longer in a recession. If you do this sort of thing for too long then you have problems, but you have to get past the short term to get to the long term.
    Now if you just some of that spending to do “useful things” build a national high speed railroad system or put together a national health care system, then that’s even better.
    Also you have to understand why China is poor. Basically 60% of the population is employed in agriculture, doing the work that could be done by 5% of the population. If you suddenly made things very efficient, then it would be an economic disaster, since you’ll have mass numbers of people with nothing to do, so Chinese agriculture is this giant make work project, to have people doing stuff that is incredibly inefficient, and then moving people to the factory as quickly as possible. It’s doing this at a rate of about 100 million people a decade.
    jeromecole: Consumption is not so easily manipulated by the state and that is where the disconnect between reported economic growth and actual living conditions becomes apparent.
    And actual living conditions in China have been improving and the Chinese economy is in pretty good shape. The global recession in China is over, and the thing the government has to start doing is to pull back on the gas, to make sure that you don’t have asset bubbles.
    There are a lot of things that China is doing wrong with its economy, and a lot of things that it could do better. However, while there is always a risk of arrogance and overconfidence, I have to say that China has been able to manage its economy as well or better than the Western nations have managed theirs, so there is no particular reason to lecture China on how to run its economy.
    Once the the ironies is how many books over the last two decades have talked about the Coming Collapse of China, whereas it turns out that the US economy imploded before China’s did.

  • Twofish

    One other thing. The US is putting some heavy pressure on China to appreciate the RMB, and allow the dollar to depreciate, which means that you are looking at a 10-20% increase in costs even in the absence of any wage increase.

  • Anon Again

    I have been in China for seven years now and one thing I have learned is that when China puts out a Five Year Plan saying it is going to do something, it does it. It is maybe the best outline for future business opportunities in the world. Read it and weep.

  • Tanner Boyle

    @ Anon Again – So you have seen the government do this one time?

  • Gaudia

    Twofish: “The US is putting some heavy pressure on China to appreciate the RMB, and allow the dollar to depreciate, which means tha tyou are looking at a 10-20% increase in costs even in the absence of any wage increase.”
    Is this a threat?
    Your perception is diametrically opposite of mine. The US is not putting pressure on China to appreciate the RMB. It wants the open market to set the price of each currency. “Open Market”, got the point?
    In an open market, China political leadership recognizes what will happen. The price of the RMB will recognize China’s exceptionally valuable manufacturing sector. The rest of the world doesn’t care about China’s internal problem of 60% on farm and earning nearly nothing. The rest of the world recognizes China’s aggressive application of cheap labor, and those who value currency will adjust the value accordingly.
    You are scared, and correctly so, for the laborers in China who have been getting a free ride, not being exploited by the West, may discover that the world thinks the China money is worth more, and therefore will pay more for it. And that will effectively cause a “rise” in the price of China labor.
    And what will be the consequence of rising China labor?
    Are you afraid of that? If not, free the RMB to float.
    And given today’s announcement, let the RMB float with the Ruble tied to it (which may be an anchor and actually help China’s RMB not rise as steeply.
    As to increased costs of 10 to 20% (plus duty on that increase), what are you saying? Are you saying that you are protective of the Western consumers? You don’t want the West to experience a cost inflation? This is the king in his underwear talk.
    What will happen, if Andy Xie, referenced above, is correct, and there is a 400% increase in China wages, and they are now $1.90 instead of the oft-referenced $0.80, would be to raise China labor very close to the current US labor price of $8.50/hour.
    And what would be the result? If you think that China’s export market will close off, you are correct. At what price? At the profit of labor in some of the Western importer-countries.
    A rise of the RMB would shift some of the transferred jobs back to the West.
    I’ll close with a fact circumstance. Reusable shopping bags are the rage here in the USA. The price is between $0.90 and $2.00, retail. The labor cost per sewn bag is roughly 10 minutes. Based on current labor differential, China has that business. A rise of 400%, from your stated $1.90 (which I doubt, highly, as a Western importer of those bags), would cause the cost of the bag to be the same price in the US as in China. China’s perception that it has a right to this export market will then change, as there will be no import market for that labor intensive product. There are hundreds of thousands of products similar to this, in which labor price is the key advantage to China, which will no longer be exportable.
    Please do not allude to some serious adverse consequence an inflation cost to the West if the RMB floats, which you represent is a force rise in its price. The true threat is to China to raise its conciousness and understand that human greed, Western Judeo-Christian political reality, and a desire in the West to see the population in China experience the benefits of capitalism, the free market’s manufacture of goods and services, for themselves, are the unique factors which the previously and currently godless Chinese (read that as devoid of compassion for fellow humans alive other than themselves) which have resulted in China’s “success”.
    With a rise in labor costs, the Chinese will need to turn to their own internal labor and population problems.
    China exports cheap-labor, intensive labor products and extractive-resource-related jobs. A floating RMB will help in the latter and reduce the former.
    It’s time for China to participate in the world market as a responsible co-member instead of as a 19th century mercantilist.

  • BCA

    It will be interesting to read this post again in a couple of years to see how much of its 5 year plan China has realized.

  • Chelsea Miller

    I am doing some research on China’s female workers. Namely those in the urban sectors, less so the migrant workers. I am trying to find demographic information, statistics, census info, average wage and age correlation, ectetc. But I can find nothing directly from China or form Chinese research. I can only find western news sources. How do they come about their information? For example, you say
    In 2009, China’s domestic consumption as a percent of GDP was 29%. No modern country has ever achieved such a low number. The number for the U.S. is about 70%. Even the number for Africa is about 50%.
    The percentage of wages in China as a portion of GDP is 8%. This number is so low that it really cannot be understood. The number in the U.S. is 58%. The number in Mexico is 33%. The number in the Philippines is 27%. In most of Africa, the number is 20%.
    China has the lowest average wage in the industrial world at $.80 per hour, with the highest number of hours worked at 2,200 per year. Compare this to Brazil, for example, where the average hourly wage is $2.25 and the average hours worked per year is 1,841
    So where do these numbers come from? Is there a national Chinese information site or newspaper or journal I am missing?

    Thank you, I only want to make sure the numbers I see online are from somewhere other than educated guesses.