White collar wage cuts fueled by deflation risks in China is hurting consumption. Fears are growing that China’s deflation is just tethering on the verge after another slate of underwhelming economic data provided more evidence of stagnating growth, renewing calls for more meaningful policy intervention.
On Monday, Beijing announced that GDP for the second quarter grew 6.3% from a year ago, missing market expectations for 7.3%. This also marked a 0.8% growth from the first quarter, slower than the 2.2% quarter-on-quarter pace recorded in the first three months of the year.
China deflation
“We need to see broad and persistent price pressure before we can declare deflation,” said Hong Hao, Grow Investment Group’s chief economist. “This is happening in the upstream sectors and it normally takes two to four quarters to pass down.”
“I think we are on the verge of deflation. Now it’s the time to act to stem the deflationary pressure,” he added.
Hong pointed to official data last week showing that China’s producer prices fell 5.4% in June from a year earlier and slipped 0.8% from a month ago falling below analysts’ expectations. The annual decline in June was China’s ninth consecutive drop and it’s steepest since December 2015, prompting deflation risks in China.
The unexpected austerity comes on the back of China’s slowing economy, complicating efforts for Communist Party leaders who pledged this week to boost workers’ incomes to revive household consumption, a major policy goal.
Drop in white collar wages
Financial firms and their regulators have cut white collar wages and bonuses after China’s top graft busting watchdog vowed to eliminate “Western-style hedonism” in the $57 trillion sector.
Some indebted local governments have cut civil servants’ pay. Some hospitals and schools, as well as some private businesses facing a drop in sales, have done the same.
It is unclear how many white collar wages of Chinese workers have had faced cut this year, but economists warn the high-profile examples are further weighing on already fragile consumer confidence, raising risks of a self-feeding deflationary spiral in the world’s second-largest economy.
“Wage cuts will intensify deflationary risks and reduce willingness to spend,” said Zhaopeng Xing, ANZ’s senior China strategist.
While Chinese still earned 6.8% more on average in the first half of 2023 than same time 2022, at 11,300 yuan ($1,580) per month, it seems though to maintain the pace.
The Economist Intelligence Unit’s Xu Tianchen said that increase in white collar wages cut was likely driven by rural migrant workers returning to factories after COVID-19 lockdowns, which compensates for subdued white collar wages.
A survey by recruiter Zhaopin showed average white collar wages offered for new jobs in 38 major cities dropped 0.7% in the second quarter from the same period of 2022, having grown only 0.9% in the first quarter.
China’s deflation pushback
The People’s Bank of China pushed back on the China’s deflation thesis last week.
“At this time there is no deflation, and there will be no risk of deflation in the second half of the year,” Liu Guoqiang, deputy governor of the PBOC, told reporters last week.
Chinese banks extended 1.81 trillion yuan ($258.23 billion) in new yuan loans in June, up 22% from May.
Are white collar jobs at risk?
Unilateral wage cuts are illegal in China, but complex salary structures offer ways around that.
There is no white collar jobs at risk, but State institutions are typically keep base salaries untouched but reduce various allowances, public sector workers say.
A Shanghai doctor, Xu said his public hospital cancelled quarterly bonuses and asked staff to do more overtime.
Xu, who works at a public hospital, saw his pay drop 20% over the last two years. While he’s not struggling financially, the extra work affects his social life so he spends less going out.
Frugality is becoming endemic.
Retail sales in China have yet to return to their pre-pandemic trend and households prefer to save. New household bank deposits in January to June rose 15% to 12 trillion yuan, equivalent to more than 50% of the total retail sales for the period.
Analysts call it a symptom of financial insecurity among consumers.
Further downgrades
A raft of other June data has pointed to a weak prognosis. Retail sales slowed to 3.1% in June from a year before, compared to 12.7% in May.
Economists cut their forecast for China’s annual growth, underscoring the depth of the exuberance on China’s economic recovery when it emerged from strict zero Covid curbs late last year.
Citi, Morgan Stanley and JP Morgan now expect China’s annual growth print this year to come in at 5%, while Barclays trimmed its forecast from 5.3% to 4.9%.
