Photographer: James Leynse/Corbis via Getty Images

China's Workers are Saying Goodbye to Double-Digit Pay Raises

  • Salary increases for hundreds of millions slowed last year
  • Pay moderated while industrial firms reaped bumper profits

China’s workers may be starting to feel like they’re getting a raw deal.

Amid soaring industrial profits, employees in the world’s second-largest economy saw slower wage growth last year -- and many are seeing the smallest raises since 1997.

That’s another sign that the years of pay gains above ten percent and burgeoning spending power are coming to a close, as China confronts industrial overcapacity, mounting debt and waning competitiveness.

Yet while slowing wage growth is bad for workers now, it’s not entirely negative for the economy as a whole – a cheaper labor bill helps China stay lean against the nations like Vietnam snapping at its heels. Where the balance falls will determine whether the workforce continues to see living standards rise –- or ends up finding common cause with peers in developed economies who’ve seen real incomes stagnate.

"Double-digit wage increases won’t be seen again for the foreseeable future," said Tao Dong, senior adviser for Asia private banking at Credit Suisse Group AG in Hong Kong. "More than a decade of continuous wage surges and a strong currency have eroded China’s competitiveness."

The government classifies more than 400 million urban employees into one of three categories: non-private, private, and self-employed. The largest segment, non-private, includes almost 180 million workers at state companies, listed companies, and foreign firms. Their pace of pay gains last year was the slowest since 1997, rising 8.9 percent to 67,569 yuan ($10,166), according to the National Bureau of Statistics.

In the private category, which in practice means mainly smaller domestic employers, paychecks for 121 million employees rose 8.2 percent last year, less than the 8.8 percent gain in 2015. Similarly slowing is the pay of about 280 million rural migrant workers, who saw a 6.4 percent wage gain as of February, down from more than 20 percent in 2011. Those increases are still well above the current rate of inflation.

Read More: Workers Get Smaller Pay Gains Even Amid Ample Openings

The slowdown in salary expansion came even as industrial firms saw the fastest profit gain in three years and nominal gross domestic product picked up. Raw material producers such as steel mills and coal mines were the top beneficiaries. But with many facing debt hangovers or overcapacity, there may now be little incentive to fatten salaries.

"Those companies were probably busy paying off their debts, settling with laid-off workers and upgrading their machinery," said Hua Changchun, global chief economist at Guotai Junan Securities Co. in Shenzhen. "They have not passed on many gains to workers or hired new ones."

China still aims to shed 500,000 jobs from smokestack sectors this year, as part of an effort to eventually trim 1.8 million employees in steel and coal. That’s a small slice of a labor force of nearly 800 million, but it will still weigh on workers’ wages.

Policy makers also have shied away from boosting pay in order to stay competitive against cheaper southeast Asian nations. Just nine of 31 provinces and regions increased the minimum wage last year, the fewest in at least four years and about a third of the number in the prior year. Local governments also issued guidance for companies to slow the pace for raises.

Read More: China Seeks Slow Wage Gains for Lowest Paid to Stay Competitive

"Wage growth in China is very sensitive to policy," said Zeng Xiangquan, a professor of labor and human resources at Renmin University in Beijing. A nationwide public employee salary increase lifted the overall level in 2015, while pay caps and cuts of managers at profitable state enterprises held back increases last year, Zeng said.

The corporate profit boost benefited mainly big and state-owned companies without spilling over to small and medium-sized corporations, Zeng said. "But smaller firms are the ones creating jobs."

Demand for workers has decelerated in recent years as economic growth slows down, said Bai Peiwen, an economics professor at Xiamen University. Still, China has a lot of room to catch up with developed peers on offering workers a larger share in economic growth, he said, because labor costs account for about 40 percent of national income versus as much as 60 percent in many developed nations.

"Labor income growth seems to be stagnating," Bai said. "But eventually we’re going to see abundant capital and a shortage of workers. And workers will have a larger share."

Read Next: Wages for China's Newest College Grads Are Plunging

— With assistance by Xiaoqing Pi

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