Vicious spiral

Chinese wages: Chinese workers are getting a bigger share of the country’s economic gains. That’s good for easing social tensions, but has some unintended consequences. Post-tax urban income rose 14 per cent in the first half, despite moderating GDP growth. Higher wages will make inflation worse. And, as workers start to demand more increases to keep up with higher prices, a vicious wage-price spiral could be the result.

The speed with which China is growing wages is enough to make the rest of the world jealous. The latest rate compares with 10.2 per cent in the same period of 2010. In truth, much of the gain will be absorbed by higher food and consumer goods prices. After adjusting for inflation, incomes were up 7.6 per cent from a year earlier, little changed from the 7.5 per cent increase a year earlier.

Fast wage rises come at an awkward time for Beijing. On one hand, politicians are worried about widening wealth gaps, and income increases help. But inflation, which spiked to a three-year high of 6.4 per cent in June, is a more immediate threat to social stability. Wage increases for the poor are more likely to push inflation up, since lower earners tend to spend more of their income.

Chinese wages have more room to rise. The 7.6 per cent real wage increase fails to keep up with the 9.5 per cent real GDP growth in the second quarter, meaning workers are still not getting their full share of output gains. It's also lower than the 15 per cent to 20 per cent average first-half net earnings growth expectations for Hong Kong-listed Chinese companies, suggesting labour can still demand more.

Demographics are on the workers' side too. China's latest census shows the population is rapidly aging, with a sharp drop in the number of people under 14. That gives future workers more bargaining power. China must also raise income for retirees to help them cope with fast-rising food prices. Beijing should have encouraged wage increases at a time of strength — when corporate profits were growing strongly and inflation remained subdued. Now it has no choice but to let wages rise from a position of weakness instead.