China focuses on wage increases, social stability

China lendFeb12.pngChina’s bank lending fell 7% in 2011, following a 17% decline in 2010. As the chart shows (red column), the government is clearly trying to stabilise the position, after the panic increase in lending in 2008/2009. (January lending, impacted by Lunar New Year, was down 29% vs 2011).

Electricity consumption growth (blue line) also seems to be stabilising. It is a lagging indicator, as it takes time to expand electricity production. But the ending of subsidies for rural home appliances helped to push their sales down 33% in January versus 2011.

The reason for the government’s caution is that food price inflation remains out of control. It was up 10.5% in January, reversing recent declines. In a country where 96% of the population earns less than $20/day, food prices matter a great deal.

Those analysts with a purely financial outlook seem to have missed this critical point. They have been forecasting further stimulus programmes for some months. But very little has yet happened. Instead, the government remains focused on maintaining social stability.

This is particularly important in the run-up to the major changes that will take place in politburo membership this year. Thus, instead of reductions in interest rates, the government has instead announced minimum wages will rise 13% a year until 2015:

• In Beijing, it is currently $200/month, and $140 in urban Chongqing
• The aim is for it to be at least 40% of average wages by 2015
• At present, it varies between 20%-30%, depending on region

This will boost domestic spending power. But, as we argue in our Boom, Gloom and the New Normal eBook, affordability will be the key factor. Those companies who focus on meeting the population’s basic needs for food, water, shelter, health and mobility should do very well indeed.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

2 Responses to China focuses on wage increases, social stability

  1. Regan Hartnell 5 May, 2012 at 9:33 pm #

    Hi,
    What happened to these monthly updates of china elec capacity? After all wouldn’t a non-storable, capital intensive commodity be the ultimate bellwether measure of economic levels?

  2. Paul Hodges 7 May, 2012 at 7:47 am #

    Hi Regan

    I think you’re forgetting its a blog, not a journal of record.

    Electricity consumption was indeed telling us something very important over the past couple of years. But now, the story has moved on. China’s economy is clearly slowing, and so my interest (and hopefully that of blog readers) is primarily around the chances of a hard landing.

    Thus the blog is now following key products such as polyethylene, in the expectation they will proivde us with clues as to what is happening. In addition, political developments such as the Bo Xilai affair also need to be monitiored very closely as we move towards the politburo changes in October.

    But I will include electricity consumption when I update later this week on China lending – promise!

    Paul

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