China wage growth slump good for seafood processors, bad for seafood sales
Much was made last week by Chinese government officials of a 14.2 percent rise in annual household incomes for fishermen in the easterly province of Anhui, which has become a big freshwater production base. But the RMB 12,247 (USD 1,959) annual income reported for fishing (the figure includes those in aquaculture and wild catch) suggests China’s fisheries sector is a low-income domain.
It’s not surprising that so many Chinese have left fishing and rural areas for jobs in factories where annual income is at least double the figure reported above. And yet there is now a new conundrum for China, which has sought to encourage higher wages to meet its goal of shifting the economy away from reliance on government investment to make it an economy where GDP is instead driven by private consumption.
After a decade of double-digit annual income growth, China is on course for the lowest year-on-year income growth seen in the past decade, as overall GDP growth slows. Likewise, disposable income growth is in single digits for the first time in a decade, threatening robust consumer spending and potentially holding back spending on seafood in retail and catering establishments. It remains to be seen if annual growth in China’s retail sales of 13 to 15 percent over the past four years can be repeated in 2014 (data isn’t yet in) or indeed in 2015.
Seafood processors and exporters in China in recent years complained about labor costs and an appreciating currency being the two biggest threats to their competiveness, and they’re not exaggerating. Real wages have risen 400 percent since 2001 in China, according to Ernst & Young, while U.S. unit labor costs have fallen by 12 percent since 1995. Didier Boon, head of Beijing-based trader-processor East China Seas, notes his average per-employee wage bill increased over 20-fold between 1998 and 2014. While this helps explain much of the extra money to spend on seafood in supermarkets and food service outlets, it has made life difficult for seafood processors supplying cost-sensitive overseas buyers.
There are increasing signs that wage growth has plateaued, with the government worrying that its long-term goal of raising incomes through statutory minimum wage programs is in fact reducing the amount of new jobs being created. Central government has pushed local officials to lift minimum wages by 13 percent a year up to 2015 in their territories as a way of promoting consumption. The westerly city of Chongqing lifted its minimum wage from RMB 870 (USD 139) in 2013 to RMB 1,000 (USD 160) in 2014 while Guangzhou hiked its minimum wage from RMB 1,470 (USD 235.20) per month to RMB 1,661 (USD 265) in the same time frame.
My recent chats with locals in different parts of China offered plenty of signs that central government is allowing local officials to quietly put those targets on hold. China is shifting from a bid to drive productivity to being more worried about job growth, explained Gordon Orr, a director at the Shanghai office of McKinsey, the management consultancy. “Next year will likely see the lowest annual income growth in China in at least a decade,” says Orr. This is partly because Chinese factories, he says, have in recent years taken advantage of lower costs of mechanization to replace jobs.
Over the past decade China’s seafood processors struggled to hold workers; a pool of rural labor was being tapped by government infrastructure programs in the country’s interior and western regions, keeping would-be migrant workers at home. That forced employers in the wealthier and more industrialized east coast cities like Dalian, Qingdao and Guangzhou to lift wages to compete for fewer workers. Compounding the challenge for processors, the country’s Labor Contract Law, in force since 2008, guaranteed workers fixed contracts and job protection. Under the new Labor Contract Law employers must pay 38.5 percent of workers’ wages in social insurance and housing funds. In a bid to hold onto investors and jobs, wealthier southern cities have scaled employers’ contributions back — to 19.6 percent in the case of Zhongshan in Guangdong, a manufacturing heartland.
Meanwhile, it’s worth noting that in the five years after the law’s introduction the city’s average annual disposable income saw an increase of 10.2 percent yearly from RMB 11,760 to RMB 17,175. This was the government’s intention when introducing the law. They wanted to give workers a sense of security that would allow them to open the purse strings and spend.
Some officials will be worrying that this strategy is no longer sustainable; however, numerous respected economists have projected generous long-term income growth in the crowded interior provinces, which are traditionally a step behind coastal cities like Shanghai and Guangzhou in earnings.
Indeed between 2013 and 2018 average annual income in Henan and Sichuan provinces are set to go from RMB 60,000 (USD 9,600) to RMB 90,000 (USD 14,400) per year, according to projections by the Economist Intelligence Unit (EIU). These will still look cheap next to RMB 130,000 (USD 20,800) average annual incomes in Shanghai currently. But meanwhile the population of Chengdu will have risen from four million in 2000 to 11.2 million in 2020, with a similar growth in the central city of Zhengzhou, projects the EIU. Ongoing urbanization is a key driver of growth and incomes, claims government, and a big source of sales growth for retailers.
All of this points to the need for more sophisticated sales and distribution strategies in China’s deep inland regions, which look like the sources of the highest growth in incomes and consumption in coming years. But in the meantime, China has some tricky adjusting to do and it’ll be worth watching this year if slower wage growth will also mean a slowdown in the spending we’ve been seeing in restaurants and packaged seafood in recent years.