Conflicting Message on Inflation

China struggles to control wage fever following a real estate boom.
By Michael Lelyveld
china-real-estate-305.jpg A worker loads concrete blocks near newly built apartment buildings in Beijing, April 29, 2010.

BOSTON—As workers seek higher wages, China is pursuing seemingly conflicting policies to control inflation, economists say.

On the one hand, the State Council is preparing to approve a regulation that would peg wage increases to the consumer price index (CPI), China Business News reported on July 28.

Experts say the practice known as "indexing" usually ratchets up inflation rather than keeping it down.

On the other hand, the government is cracking down on "speculation" and unauthorized price hikes for food items like corn, mung beans and garlic.

The State Council is also considering a law to cap prices for monopoly industries like public utilities, the official Xinhua news agency said.

The measures on wages and prices appear to be pulling in opposite directions on inflation, said Gary Hufbauer, senior fellow at the Petersen Institute for International Economics in Washington.

"This package makes no economic sense, but it may make good public relations or political sense in terms of showing the people that the government cares," he said.

Slapping penalties on "speculators" for raising prices is seen as particularly misguided. Such price controls only serve to discourage production, create scarcity and push price pressures up.

"This is really, truly economic nonsense," said Hufbauer.

"This kind of thing is what I would call pure populism: To try to tell the people that the reason prices are going up is evil speculators—not floods, not poor government policy with respect to these products, but some kind of evil bogey man," he said.

Pricing and wages

On July 14, the National Development and Reform Commission (NDRC) threatened fines of up to 2 million yuan (U.S. $295,000) for "price manipulation" of agricultural products, the official English-language China Daily reported.

The authorities are especially concerned about electronic trading as a "platform for speculation," the paper said.

On July 1, the NDRC announced it would open two new offices to deal with "market manipulation" after produce traders in northeast Jilin province were fined for boosting prices of mung beans.

While the price policies may be blatantly anti-market, the wage measures are more complicated, economists say.

Although China's government is taking tough steps, the official inflation rate is still relatively small, rising at an annual 2.6-percent pace in the first half of the year.

Derek Scissors, Asia economic research fellow at the Heritage Foundation, said China's inflation problem is largely with housing costs, which are not reflected in the low CPI figures.

Last year, residential property prices jumped an average of 25.1 percent nationwide from a year earlier, according to Ministry of Land and Resources data. The result is that housing has become unaffordable for many workers, leading to big wage hikes in the first half of the year.

Wage hikes

More than 23 provinces and cities have raised minimum wages, according to the China Daily. In Beijing, the minimum monthly wage rose 20 percent to 960 yuan (U.S. $142), The New York Times reported in June.

Shanghai now has the highest monthly minimum wage of 1,120 yuan (U.S. $165) following a 16.7-percent increase, the China Daily said.

But pay rates climbed even more at some companies and major exporters.

Foxconn Technology Group, which assembles electronic products like Apple iPhones, doubled its average monthly wage to 2,000 yuan (U.S. $295). The pay increases followed a spate of worker suicides at Foxconn factories in China which labor rights activists blamed on difficult working conditions.

For those who won big wage increases, the new indexing measure may mean much smaller raises in the future, since CPI is less than 3 percent. The government is saying, in effect, that double-digit pay hikes will not come every year.

"They're telling them, 'That was it, I hope you enjoyed it,'" said Scissors. "That's pretty much what they have to do." Otherwise, a wage-price spiral could push inflation much higher.

Unequal increases

But not everyone has shared equally in the recent wage hikes.

In the first half of 2010, the per capita income of urban households rose over 20 percent from a year earlier to 10,699 yuan (U.S. $1,579), according to National Bureau of Statistics (NBS) reports. Rural households saw a smaller 12.6-percent gain to just 3,078 yuan (U.S. $453) over the six-month period—less than one-third the pay of city dwellers.

In May, an NDRC researcher told the China Daily that the gap between rich and poor has been steadily widening since reaching the "alarming" level a decade ago.

Several provisions of the draft regulation on wages reflect concern with the inequality. One measure would cap the pay of senior managers at state-owned monopolies. Another would keep employers from including overtime in counting minimum wage increases.

Scissors said the effect of the new inflation policies will depend on how they are carried out.

"It's managing the low end of the wage increases and the high end of the wage increases at the same time," he said. "I don't think much of this is going to be implemented, but it's sending a political signal to both groups."


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