China officials hike wages, threatening boost to inflation

May 7, 2008 (AFP)

BEIJING - SOUTH China's Guangdong province is the latest area in the nation to unveil plans to raise wages, state media said on Wednesday, a move economists worry runs counter to efforts to rein in inflation.

Guangdong provincial labour authorities said in a 2008 plan that they aimed to establish a regular salary increase system and raise wages of all employees in the region by 12 per cent or more this year, the China Youth Daily reported.

Other areas in China have announced similar polices, including the financial hub of Shanghai, where a salary rise guideline for this year has called on companies to lift employee wages by five to 16 per cent.

This is meant to help households, especially low-income families, cope with the country's surging inflation, which has fuelled government fears of potential social unrest.

China's consumer price index rose 8.0 per cent in the first quarter of the year. In February, it climbed to 8.7 per cent, the highest in nearly 12 years, before easing slightly to 8.3 per cent in March.

But analysts have voiced concern that salary hikes risk exacerbating the inflation problem that they are supposed to alleviate.

'Salary rises are certainly contributing to inflation,' said Mr Chen Xingdong, an economist with BNP Paribas in Beijing.

If companies are told to pay higher wages, they may have to raise their prices to stay out of the red, the economists argued, warning this could be the beginning of a vicious cycle.

'The problem will get worse if salaries and price rises take turns,' said Ma Qing, a Beijing-based analyst with the think tank CEB Monitor Group.

They argued that it could also add an extra burden on companies that are already under big pressure of soaring upstream raw material prices and might even put them out of business.

'If the requirement goes beyond what companies can afford and therefore forces them to cut jobs or stop production, then the losses may be bigger than the gains,' said Shen Minggao with Citigroup.

The Chinese government has signalled growing concern about the ways in which rising prices might adversely affect the poorest in society.

Since January, it has resorted to freezing price hikes on key consumer items like grain, edible oil, meat, milk and liquefied petroleum gas in order to keep them affordable for most families.

Wage rises may be meant to do the same, but economists warned they could actually lead to more social tensions by widening income disparities.

This is because wage rises by decree are likely to benefit mainly government employees, while blue-collar workers in private companies may get left behind.

'I doubt who will benefit from a policy where the government directs salary increases,' CEB Monitor Group's Ma said.

'In the final analysis, I think it will only raise government employees' wages. This is what happened in 2006 and 2007.' -- AFP

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