Saturday, August 6, 2011

Explosive Income Growth

New data show that disposable incomes of China's urban residents rose 13.2% and rural incomes grew 20.4% in the first half of 2011. A China Grain Net commentary on the new statistics warns that these eye-popping growth rates are both good news and potentially bad news for an economy on a knife's edge.

The rapid growth reflects both economic growth trickling down to the lower rungs of China's economic ladder and upward pressure on commodity prices and housing prices. China's CPI was up 5.4%. After deducting inflation, the real growth in urban incomes was 7.6% but real rural income growth was still a blazing 13.7%.

In the first half of 2011, 18 provinces lifted their minimum wages. Urban employment increased by 6.5 million in the first half of 2011. Social insurance is also being ratcheted up.

Rural incomes rose due to rising income from off-farm employment and rising commodity prices. Income from employment rose 20.1%. Income from household business operations (chiefly farming) rose 21%, of which 17% was due to higher prices of commodities they sold.

The explosive growth in income is linked to inflationary pressures. Higher wages mean rising labor cost pressures that pass through to higher prices. An official with the State Information Center's Economic Monitoring Department observes that rising labor costs are an indisputable trend. He says wages are still low but they're rising steadily.

Wages of unskilled workers have a lot of room to rise. The highest monthly minimum wage is Shenzhen's 1320 yuan, equivalent to about US$200 per month. The highest hourly minimum wage is Beijing's 13 yuan, about $2 an hour. During the 12th five-year plan, the target is to raise minimum wages 13% per year.

(The minimum wage tends to ratchet wages upward, but actual wages for unskilled workers are higher, especially in coastal areas where factories are raising wages in order to keep workers. Thirteen provinces set "reference wages" that are about 15% higher than the minimum.)

Rising commodity prices cut two ways. Increased demand is pushing up farm prices, bringing more income to farmers. Perhaps the vast rural population is finally getting a long-awaited invitation to the China growth party. On the other hand, rising food prices--which account for most of the increase in CPI--hit low-wage workers hardest. The food component of China's CPI was up 11.7% year-on-year in May.

In fact, the rural population now buys most of its food (instead of eating food they grew themselves) so they also are somewhat vulnerable to rising food prices.

Another land-constrained sector is housing. China's real estate developers have been eager to erect luxury housing estates, but migrants are crowded into work-site dormitories and tents and ramshackle rental housing in villages on city outskirts. The housing CPI was up 6% in May.

Meanwhile, labor and commodity costs don't seem to be having a profound effect on consumer prices of manufactured goods. Other sectors' prices are rising faster than in past years but still much more slowly than food and housing. Clothing CPI was up 1.8%, medical and health products were up 3.2%, and consumer prices in other sectors were up by less than 1%.

The target for the 12th five-year plan is for GDP and personal income to rise at equal rates. This represents a goal of transitioning from export- and investment-led growth (GDP growth exceeds personal income growth) to consumption-led growth. This also entails spreading more income to low-wage workers.

The fundamental scarcity of land pushes up prices of food and housing, undermining the goal of lifting the real living standards of the billion or so people at the bottom of China's economic ladder. Double-digit income growth could be "explosive" in more ways than one.

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