The single biggest question facing the global economy

Rising wages continue to scare businesses daring to tackle the Chinese market.

Wage inflation is listed as the single biggest concern of multinational agribusiness companies active in China (including firms in the seafood sector) surveyed by the American Chamber of Commerce in China.

The survey showed that 59 percent of businesses surveyed expect wages to rise by up to 10 percent this year, while 41 percent of companies expect a jump in average wages of between 10 and 20 percent. Two-thirds see high expectations of pay as the foremost challenge to their business, while only a third of those surveyed see their revenues in China growing by 10 percent or more this year, which means wage costs are clearly outstripping any rise in revenue.

The trend of rising wages is rooted in China’s demographic challenges, which aren’t going away. China’s fertility rate stands at an average 12.1 babies per 1,000 people, lower than the rate in the United States of 13 babies per 1,000 people and much lower than the 23.3 to 1,000 ratio recorded by China in 1987. This manifests itself in higher labor costs, as the workforce shrinks by 10 million in the next five years.

As any student of economics can calculate, fewer workers means higher wages, and rapid rise in incomes risks causing real damage to economic growth in China.

It’s a sobering fact that 36.5 percent of China’s population will be 60 years old or older by 2050, while that number stood at just 15.2 percent of the population in 2015, according to United Nations projections. If the numbers play out as expected, the days of cheap labor in China, which fueled the country’s rise as a manufacturing hub, are over.

Rising incomes do generate some positives – and for the seafood industry, the list starts with greater consumer spending in restaurants and supermarkets. It’s no surprise there has been an increase in the number of convenience stores opening in urban China and supermarkets selling niche and imported product to the Chinese middle class.

Tourism is also growing more popular, as China’s outbound tourists in 2015 surpassed inbound travelers for the first time, and that trend looks set to continue as airlines, hotels and tourist promotion agencies target China’s middle class.The ongoing expansion of multinational hotel chains in Asia is driven by an urgency to cater to Chinese tourists at home and abroad. Such efforts also make these chains a useful way for seafood suppliers to tap into the changing Chinese domestic economy.
China aims to have 45 percent of its population categorized as registered city-dwellers in 2020, compared to 35 percent in 2012. This will continue to feed the rise of retail and hotel chains, which can easily be turned into new sales channels for seafood.

There are some factors, however, which will impact Chinese wage patterns. Key is how the government’s promised reform of the country’s economy impacts wage growth. China is vowing serious “supply-side” economic reform, which will see the private sector liberated by the opening up of financial services and utilities price reform. If it means what it says, highly influential state-owned enterprises will lose power and financial backing and the government is likely to shrink or close the numerous “zombie companies” that have hitherto survived on government supports and soft loans. Doubtless, there are many large seafood processors and fishing companies among the state-owned giants that may face the harsh reality of the market economy.

In the past, the result of the reforms – massive layoffs and the inevitable social and political upheaval that will follow – has always tempered the reform ambitions of China’s one-party state.

This time, however the Communist Party’s feet are being held to the fire because of China’s debt situation. Overall debt across the economy stands at 200 to 250 percent, according to various informed estimates, and that is causing worries and wobbles among the global investment community regarding the fate of China’s economy. That, in turn, is feeding into downward pressure on the country’s currency. So far, Beijing has spent around USD 500 billion (EUR 452 billion) of its currency reserves defending the yuan since last summer’s badly planned intervention by the People’s Bank of China to reform the country’s method for setting the value of the yuan.

In this scenario, Beijing doesn’t have the luxury of deferring a fix for the structural issues in the economy. The elimination of massive redundancies may be imminent, which will have a hard impact on wage growth and consumer sentiment. If the private sector isn’t able to replace the jobs lost with the closure of zombie, state-owned companies, economic turmoil is certain. The big question facing the seafood sector – and those with a stake in the global economy – is: will China go that far?


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