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China Deflation Risks Deepen as Sharp Pay Cuts Hit Consumption

Frugality is becoming endemic in China as financial insecurity forces the country’s white collar workforce to spend less and save more

People cross a bridge at Pudong financial district in Shanghai
People cross a bridge at Pudong financial district in Shanghai.


Deflation risks in the world’s second largest economy are worsening as sharp pay cuts in China’s white collar sectors have forced the country’s big spenders to tighten their purse strings.

“The cut is severely affecting my life in every aspect,” said Cola Yao who earns 40% less than last year promoting credit cards for a Chinese state-owned bank. Yao said she buys fewer clothes, less make-up and has cancelled her child’s summer swimming classes.

Chinese financial firms and their regulators have made deep cuts to salaries and bonuses of their employees after the country’s top corruption watchdog vowed to eliminate “Western-style hedonism” in the $57 trillion sector.


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Similar pay cuts have been seen in hospitals, schools, and even some private businesses facing a drop in sales. Some local governments, that face tighter budgets thanks to ballooning debt, have also cut civil servants’ salaries.

It is unclear how many Chinese have had their pay cut this year, but economists warn the high-profile examples are further weighing on already fragile consumer confidence.

“Wage cuts will intensify deflationary risks and reduce willingness to spend,” said Zhaopeng Xing, ANZ’s senior China strategist.

The pay cuts, that come at a time when youth employment is already at a decade high of over 20%, complicate the task before China’s top leaders – who pledged this week to boost workers’ incomes to revive household consumption.


Flickering optimism

While Chinese still earned 6.8% more on average in the first half of this year than in the same period of 2022, at 11,300 yuan ($1,580) per month, there is little optimism that pace can be maintained.

The Economist Intelligence Unit’s Xu Tianchen said that increase was likely driven by rural migrant workers returning to factories after Covid lockdowns, which compensates for subdued pay growth in white-collar jobs.

A survey by recruiter Zhaopin showed average wages offered for new jobs in 38 major cities dropped 0.7% in the second quarter from the same period of 2022, having grown only 0.9% in the first quarter.

In the first six months, total household disposable income, which includes wages and other sources of revenue, rose 5.8%, barely surpassing 5.5% growth in economic output.

To fix one of China’s key structural weaknesses, which is that household consumption contributes much less to its economic output than in most other countries, disposable income needs to rise much faster than overall economic growth, analysts say.

But for most of the past four decades it has been the other way around.


Chinese incomes struggle to keep up
Graph: Reuters


Lack of choice

Unilateral wage cuts are illegal in China but complex salary structures offer ways around that.

Yao’s monthly earnings dropped to 6,000 yuan because her employer in the eastern city of Hefei raised her performance goals, linked to usage of the credit cards she sells.

Meanwhile, Shao, a make-up saleswoman in the eastern city of Suzhou, was asked to accept a 50% wage cut or leave her company. She chose the latter, but her colleagues took the hit and also face delayed pay cheques.

“Workers are pressed not only by the company but also by the labour market. Their bargaining power … is weakened so they tend to accept wage cuts,” said Aidan Chau, researcher at Hong Kong-based rights group China Labour Bulletin.

State institutions typically keep base salaries untouched but reduce various allowances, public sector workers say.

A Shanghai doctor surnamed Xu said his public hospital cancelled quarterly bonuses and asked staff to do more overtime. “The hospital said they have no money,” he said.

Xu saw his pay drop 20% over the last two years. While he’s not struggling financially, the extra work affects his social life so he spends less going out.


Recovery at risk

With rising wage pressures, frugality is becoming endemic in China.

Retail sales in China have yet to return to their pre-pandemic trend and households prefer to save.


Retail sales lose momentum as Chinese prefer to save more and spend less


New household bank deposits in January-June rose 15% to 12 trillion yuan, equivalent to more than 50% of the total retail sales for the period.

Analysts call it a symptom of financial insecurity among consumers.

“If weak confidence becomes entrenched, it could be self-fulfilling and derail the recovery,” said Xiangrong Yu, China chief economist at Citi.


  • Reuters, with additional editing by Vishakha Saxena


Also read:

China Sees the Dawn of a New Era of Slower Growth

CITIC’s Hong Kong Bankers Face Shift to Mainland, Pay Cut

Staff Pay Cut at China’s Central Bank and Securities Regulator

Beijing’s Crackdown Wiped $1.1 Trillion Off Chinese Big Tech

China’s Property Sector Will Remain Weak For Years: Goldman

China’s Graduates Face Worst Job Crisis in Generations – SCMP



Vishakha Saxena

Vishakha Saxena is the Multimedia and Social Media Editor at Asia Financial. She has worked as a digital journalist since 2013, and is an experienced writer and multimedia producer. As a trader and investor, she is keenly interested in new economy, emerging markets and the intersections of finance and society. You can write to her at [email protected]


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