SAN FRANCISCO (MarketWatch) — In an effort to calm grousing consumers as prices rise to 11-year highs, China is raising minimum wages across the country, a move analysts fear could further stoke inflation.Guangdong, China’s richest province, said it plans to raise minimum wages by as much as 18% in some cities starting April 1. The decision followed similar actions in other areas, notably the major cities of Shanghai and Beijing. Tibet, an autonomous region administered by China’s central government, raised minimum wages by nearly 50% at the beginning of this year.The wage increases, aimed at relieving food and other price pressures, could instead fuel inflation, analysts said. Higher wages are also likely to raise prices of U.S. imports from China, and possibly reduce China’s attraction as the world’s manufacturing center.
China is wrestling with consumer inflation that accelerated to 7.1% in January, up from a 6.5% rise in December, the National Bureau of Statistics reported last week. …China’s dilemmaSince last year, Chinese residents have seen prices of food and other staples increase more than their pay checks, a factor analysts said could potentially unleash social unrest. In light of that, some fear the minimum wage increase came too late.“It’s a dilemma for China,” said David Riedel, president of overseas-stock specialist Riedel Research Group. “The reality of higher food and fuel prices has to be offset with higher wages. This is more wages catching up to where the market is today.”The wage increases could feed inflation, he said, explaining that companies absorbing higher wages have to pass those costs onto their customers.Guangdong will increase the province’s minimum wages by an average 13% on April 1, the province’s labor bureau said in a news release last week. The southern China province produces about 13% of China’s economic output, the most among the country’s 32 provinces.Minimum wages in the capital city Guangzhou will rise to 860 yuan ($120) per month from 780 yuan, an increase of 10%. Wages of other cities in the province will also get a boost, with those in some inland cities up nearly 18%.China’s other provinces took similar actions earlier this year. Starting Jan. 1, four provinces hiked their average minimum wages by more than 20%, with the increase in Tibet topping the list, according to data collected by Citigroup. Five other provinces increased average wage caps by more than 10%.Beijing and Shanghai, China’s two biggest cities, last year raised their minimum wages to 730 yuan and 840 yuan respectively, in the face of rising consumer prices.Average minimum wages in China have risen 15% in 2007, Citigroup said in a report, and 21% in 2008 based on available data.Higher inflationThe wage hike came as some analysts were already reconsidering their estimates for Chinese inflation.“The current consensus view is that this year’s inflation should peak in the first quarter,” said Lan Xue, an analyst at Citigroup, in a separate research note. However, Xue said “we are getting nervous that not only may we not see a moderation in the second quarter,” but that inflation could even continue rising into second half or even 2009.Recent inflation has even spread to home appliances, one of the most oversupplied goods in China.Haier, China’s biggest appliance producers and an exporter of mini refrigerators and other appliances, said last week it will raise domestic prices of refrigerators and washing machines by 7% to 10% in response to higher producing costs.The prices rises are notable because winter is usually the slowest season for selling appliances, according to Citi’s Xue, who added that it is “probably the first time in the past 15 years that we have seen price increases” in that sector.
Guangdong province, whose minimum wages will be the country’s highest as of April, is China’s largest manufacturing center for home appliances. That could put even more upward pressure on appliance prices.
Vindication for those of us who have never trusted Chinese statistics. “7.1%” Chinese CPI is a total fabrication. When the China myth has collapsed, common sense and a smidgen of on-the-ground experience will have trumped Wall Street’s credulous, all-too-fashionable quants and permabull prophets yet again.