China’s Economic Woes Force Government Worker Pay Cuts

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Peng, an employee at a Chinese state-owned media outlet in Beijing, is grappling with her second pay cut in less than a year, a consequence of the country’s economic struggles impacting even government enterprises.

“I can barely live on this,” she lamented. “The work keeps increasing, but the money keeps decreasing.”

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Peng’s plight is a reflection of a broader issue across China, where the economy is struggling to recover from a property crisis and the pandemic. This presents a significant challenge for President Xi Jinping’s administration as it gears up for one of the Communist Party’s most critical meetings this month.

Historically, the third plenary session of the party’s central committee—a key leadership body—has been used to tackle significant economic issues. In 1978, Deng Xiaoping famously used this meeting to launch the “reform and opening up” drive that marked China’s post-Mao Zedong era.

Some experts argue that similarly bold measures are now needed to boost domestic demand and prevent the world’s second-largest economy from slipping into a deflationary spiral. However, Premier Li Qiang recently signaled at the World Economic Forum’s “summer Davos” in Dalian that no drastic measures would be taken.

Li likened the economy to a patient recovering from a severe illness, suggesting that “strong medicine” was not the answer. “We should precisely adjust and slowly nurture [the economy], allowing the body to gradually recover,” he said.

In the first quarter, China’s growth appeared strong, with a 5.3 percent year-on-year increase driven by manufacturing and industrial output, although consumer spending remained inconsistent.

Analysts are closely examining recent speeches by Xi and other leaders for hints of Beijing’s policy direction over the coming years, ahead of the plenary session from July 15 to 18. Potential areas of focus include advanced technology, green energy industries, upgraded manufacturing, fiscal and social welfare reforms, adjustments to the hukou household registration system, and efforts to reinvigorate private sector confidence.

The central committee, currently comprising 205 full members and 171 alternates appointed at the party’s 20th congress in October 2022, typically convenes seven plenums over its five-year term. The third meeting garners significant international attention due to its historical pronouncements on economic policy.

Analysts Andrew Batson and Wei He from Gavekal suggested that this plenum is unlikely to deviate significantly from Xi’s established course. They noted that the official agenda aims to study “advancing Chinese-style modernization,” which emphasizes technological self-sufficiency and national security over economic growth.

One notable term from Xi’s strategy is “new quality productive forces,” which connects industrial production strategy—focused on electric vehicles, batteries, semiconductors, and biotech—to total factor productivity, a measure of economic output not solely driven by increases in inputs like capital and labor. This has raised hopes for a more market-driven approach, although Gavekal pointed out that there’s no evidence the state will lessen its economic role.

Fiscal reform is one area where analysts in Beijing anticipate changes. The central government accounts for about 10 percent of total government spending, compared to a global average of 20 percent. Yet, it controls a disproportionate amount of revenue compared to local governments, many of which are in debt due to the property crisis. Economists at a government-linked think-tank suggest reforms could aim to increase the central government’s spending percentage.

Businesses will be eyeing potential pension reforms closely, especially any indications of delays to the retirement age, which is currently one of the lowest in the world. With China’s population shrinking for the second consecutive year, policymakers face mounting pressure to alleviate the fiscal burden of pension payments.

There could also be further relaxation of the hukou household registration regime, potentially spurring more urbanization and aiding the struggling property market. However, experts believe Xi is unlikely to dismantle hukou entirely, as it helps prevent overcrowding in major cities like Beijing and Shanghai and allows the party to control population flows.

Private sector stakeholders hope for incentives such as lifting foreign shareholding limits in certain industries, aiming to revive spirits dampened by crackdowns on the property and ecommerce sectors. There’s also a call for decisive action on the property crisis, with some speculating that the third plenum could be the platform for a major announcement.

Yifan Hu, chief investment officer at UBS Global Wealth Management, suggested that in an optimistic scenario, the third plenum might hint at or even introduce forceful policies. Nonetheless, most observers expect continuity as Beijing shifts from a debt-fueled, high-growth model to one centered on high-tech industries and green transition.

A prominent economist at a government think-tank advised that expectations for the third plenum should not be too high, as markets are already anticipating a muted meeting. The Shenzhen and Shanghai stock indices have dropped 1.6 percent since Li Qiang’s comments in Dalian.

For Chinese citizens like Peng, seeking relief from salary cuts and job losses, this is not promising news. She noted that austerity measures are evident at all levels within her organization, mentioning that one of her bosses had his salary cut by 35 percent, leaving him unable to keep up with his mortgage payments.