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How China Deals With Deflation: A 60% Pay Raise For 39 Million Public Workers

While the rest of the developed world, flooded with re-exported deflation as a result of now ubiquitous money printing, scrambles to print even more money in hopes of stimulating the economy when all it is doing is accelerating a closed deflationary loop (at least until the infamous monetary helicopter drop), China - which still has the most centrally-planned economy in the world even if the US is rapidly catching up - has a more novel way of dealing with the threat of deflation: a massive wage hike across the board for all public workers. Two days ago, at a press conference, the Chinese vice minister of human resources and social security Hu Xiaoyi said that China’s 39 million civil servants and public workers will get a pay raise of at least 60% of their base salaries as part of pension plan overhaul.

The hope is that just like in the US where the Federal government would love to be able to do just that and more, surging wages would stimulate the Chinese economy which over the past year has had to content with the double whammy of surging bad loans and the collapse of shadow banking, as well as the burst housing market.

The pay raise “will make sure that the overall incomes for most of these workers will not decrease after the reform, and some of them could actually earn a bit more,” Ziaoyi said, even if he did not provide details of the plan, which will cover civil servants and public workers, such as teachers and doctors.

According to Caixin, top civil servants, including President Xi Jinping and Premier Li Keqiang, will see their monthly base salaries rise to 11,385 yuan from 7,020 yuan (to $1,833 from $1,130), starting in October. Of course, both are billionaires with hidden money around the world, but the raise is all about optics and boosting confidence. The base salaries of the lowest civil servants would more than double to 1,320 yuan. It is unclear if the plans Caixin saw are final.

The impact of the pay raise will be dramatic: according to China's State Administration of Civil Service, China had nearly 7.2 million civil servants and more than 31.5 million public-sector workers employed by institutions such as schools and hospitals at the end of 2013. Those workers do not contribute to their pension fund, meaning taxpayers fund their retirements.

Caixin has more details on the parallel pension reform:

A reform announced on Jan. 14 by the State Council, China’s cabinet, will see civil servants and public workers start to contribute to the pension program in October. They will make contributions similar to those private-sectors workers, who have been paying in since the late 1990s.

 

Government agencies and public institutions will pay 20% of their workers’ base salaries to the pension fund on behalf of their employees. The employees will contribute 8% of their salary.

 

The reform plan says government agencies and public institutions should also introduce an income annuity program for employees. That change will see employers contribute 8% of their employees’ salaries to an annuity fund, while employees pay 4%. The annuity program will provide retirees with another monthly payment.

And while the pre-funding of pensions from current income will provide a small offset to the wage hikes, the net effect will still be one of significant increase in disposable Chinese income. 

Hu Jiye, a professor at the Center for Law and Economics at the China University of Political Science and Law in Beijing, said the annuity program and pension scheme will ensure government employees and public workers enjoy the same level of benefits after the reform. That assurance will help the reform make smooth progress, Hu said.

 

Data from the China Statistical Yearbook show that in 2011 the average government pension paid 2,175 yuan a month per retiree. A private-sector pension paid 1,508 per month.

 

Pension reform is partly aimed at closing this gap. However, the version of the annuity program for private-sector employees will only cover 6% of them because it is not compulsory, Zhang Chewei, a labor economics expert at the Chinese Academy of Social Sciences, told the Oriental Morning Post.

 

Some analysts say that the gap will remain an issue in the near term, but over a longer period the authorities could narrow it by pushing more employers to join the annuity program.

What is left unsaid, is that while this wage boost is masked as part of pension reform, what it really is, is an under the radar stimulus for some 39 million Chinese, the bulk of whom will end up with a big net take home pay when all is said and done.

A far more important question is how this move will impact not only inflation in the coming months, but wages for the private sector, whose workers will likewise clamor for a comparable pay rise, and also what the consequences on internal labor migration will be in the near future, now that China's Lewis Point is assured to be hit far sooner than most had expected.

Last but not least, if China has decided to tackle the inflation, and thus growth, problem from the bottom up instead of top down via rate cuts, this may mean that all those sellside notes that even the smallest drop in the Shanghai Composite means an imminent RRR-rate cut, can be used for kindling.