Are China's labour costs growing too high after 2019 minimum wage hikes?


Minimum wages in China continue to grow apace. During the first 11 months of 2018, 15 provinces, directly-controlled municipalities, and autonomous regions all chose to increase them: Beijing, Guangdong, Guangxi, Hainan, Henan, Jiangsu, Jiangxi, Liaoning, Shandong, Shanghai, Shenzhen, Sichuan, Tibet, Xinjiang, and Yunnan. Another region – Chongqing – has already announced a proposed wage rise for 2019.

Last year – a politically important one – 20 out of mainland China’s 31 regions boosted their minimum wages compared with just nine in 2016 - although 19 did so in 2015. Here is a comprehensive guide to the country’s current minimum wage levels:

 Understanding regional variations

Local governments in China are required to update their minimum wages every few years at least but have the flexibility to adjust wages according to local conditions. Most provinces set different categories for different areas, depending on their economic development levels and cost of living. For example, provincial capitals and the most developed cities tend to pay higher minimum wage levels, while smaller cities and rural areas generally pay less.

In 2018, Guangdong, Jiangsu, and Shandong – three of China’s wealthiest coastal provinces – were among those that upped their minimum wages. While Jiangsu and Shandong also saw them rise again last year, Guangdong is notable for having done so for the first time in three years.

Although Guangdong is China’s wealthiest province in terms of gross domestic product, the province previously froze wage increases in an attempt to strengthen its competitiveness. Guangdong – commonly referred to as the factory of the world – has a heavily manufacturing-driven economy. But rising land and labour costs over recent years have enabled Southeast Asian countries such as Vietnam and Indonesia to emerge as competitors.

Nevertheless, leading cities in Guangdong – along with Jiangsu – have now moved beyond the RMB 2,000 (US$287.62) mark in monthly minimum wage terms, joining the ranks of Beijing, Shanghai, Shenzhen, Tianjin and certain areas of Zhejiang in the process.

The problem is that these increases have exacerbated regional disparities, with minimum wages in the most developed regions now more than double those in the least developed. Shanghai continues to pay the highest minimum wage in China at RMB 2,420 (US$348.02) per month, followed by Shenzhen (RMB 2,200/US$316.38) and Beijing (RMB 2,120/US$304.87).

At the low end of the spectrum, the minimum wage in certain areas of Guangxi province is RMB 1,000 (US$143.81), with rural areas in Liaoning (RMB 1,120/US$161.07), Hunan (RMB 1,130/US$162.5), and Anhui (RMB 1,150/US$165.38) coming in slightly higher.

Although China is still one of the worst countries in the world in terms of income inequality, some progress has been made here over the last decade. According to China’s National Bureau of Statistics, the country’s Gini Coefficient dropped from 0.491 in 2008 to 0.465 in 2016 - the higher the number, the higher the level of inequality.

Impact of the minimum wage on China’s labour costs

But minimum wage increases only tell part of the labour cost story in China. As its economy moves up the value-chain away from mass manufacturing to become more innovative and service-based, most workers employed by foreign-invested enterprises are now earning above the minimum wage.

For example, workers in Beijing made an average of RMB 8,467 (US$1,217.62) per month in the first half of 2018, about four times the local minimum wage. Employer social insurance and housing fund obligations also add on average an additional 37.25% to the value of an employee’s salary.

But China’s labour pool, while enormous, is gradually shrinking. After peaking at 787.07 million in 2015, its workforce shrank last year to 786.74 million. This trend is most marked in the country’s wealthy coastal regions – the traditional focus for foreign investment and manufacturing – which many migrant workers are now leaving in favour of inland China. According to the National Bureau of Statistics, the migrant worker population in coastal provinces fell by 0.3% in 2016, but grew by 5.3% in western provinces.

This means that for foreign investors, rising wages are an unavoidable feature of doing business in China. Nevertheless, if other factors, such as productivity, infrastructure, transportation costs, and access to a massive domestic market are all taken into consideration, the country may still prove to be a more cost-efficient option than countries with lower statutory labour costs.

When comparing possible locations in China for foreign investment, minimum wages are certainly a helpful barometer in gauging labour costs across different regions. But adding an evaluation of industry-specific wage levels, talent availability and regional incentives into the mix will undoubtedly offer a more nuanced view of the situation.

 

By Alexander Chipman Koty and Qian Zhou

This article was first published on China Briefing.