The Chinese Communist Party recently pledged to boost workers ’incomes and revive household consumption, but this policy goal is facing a massive complication – the country’s slowing economy.

To grapple with the issue, China’s top graft-busting watchdog vowed to eliminate “Western-style hedonism” in the $57 trillion financial sector. The result has been troublesome. To deal with the fund shortage, financial firms and regulators have cut salaries and bonuses of their employees. Some hospitals, schools and private businesses have also followed suit.

But this time, many Chinese are facing a new source of economic hardship – steep cuts in salaries of the country’s millions of civil servants. For instance, in the city of Suzhou, popular for its prosperity, the year-end bonuses of public servants have been slashed by 50,000-60,000 Yuan (approx. USD 7,000-8,500).

Unilateral wage cuts are illegal in China. But complex salary structures offer the employers loopholes. At many places, performance-linked and other bonuses have been dropped, at others, the paychecks are being delayed or employees are being asked to work overtime. Hu Mingdan, a civil servant in Nanchang, Jiangxi province of eastern China, had been working as an accountant for the local government for more than 10 years. Then late last year, for the first time, Hu’s pay check was delayed for three months.

Reports about pay cuts for civil servants started doing the rounds of the media in 2021. Since then, many civil servants have shared their experience of pay cuts on social media. For instance, a viral post stated, “Guangdong province is cutting 25 percent off its public servants ’pay checks.” The Guangdong local government never confirmed or denied the information.

Many public servants are claiming that agencies have been borrowing money to pay their employees. Frank Xie, a professor at the School of Business Administration at the University of South Carolina in the US, even said that in some localities civil servants are not getting any pay at all.

Not only that, cash-strapped provincial and local governments are auctioning off public schools, cutting back on contracts with private contractors, and slashing pensions. According to the National Bureau of Statistics, each one of China’s 31 provinces and municipalities, except for Shanghai, reported fiscal deficits last year.

Many are blaming China’s “Zero Covid” policy for this debacle. Several municipalities are still reeling from the heavy costs of lockdowns, mass PCR testing, and centralised quarantine. Guangdong, Zhejiang and Beijing, three of the biggest economic powerhouses in China, spent more than 140 billion yuan (USD 20 billion) on pandemic control last year.

In Hainan, a popular resort island, pandemic restrictions caused a direct 9.6 percent reduction in government revenues in 2022. China’s imploding real estate market has further complicated the fiscal situation. Revenues from land sales plummeted last past year, leaving unfinished skyscrapers strewn across the country.

Shopping Blues

With extra work affecting people’s social life and less money available to spend while going out, frugality is becoming endemic in the country. Predicting possible job losses, consumers are putting off big purchases. Consequently, retail sales are yet to return to their pre-pandemic level and most families are choosing to save.

New household bank deposits in January-June this year rose 15 per cent to 12 trillion yuan, equivalent to over 50 per cent of the total retail sales for the period. According to analysts, this is a symptom of financial insecurity among consumers.

As it is, household consumption contributes much less to economic output in China than in most other countries. Economists are now worried that these high-profile examples of pay cuts in the world’s second-largest economy might break the already fragile consumer confidence, leading to a self-feeding deflationary spiral.

In the first half of this year, at 11,300 yuan or USD 1,580 per month, Chinese earned 6.8 percent more on average than in the same period of 2022. But according to Economist Intelligence Unit’s Xu Tianchen, it was probably because rural migrant workers returned to work after Covid-19 lockdowns. This increase will be difficult to maintain hereon.

According to a survey by recruitment company Zhaopin, average wages for new jobs in 38 major cities dropped 0.7 percent in the second quarter from the same period of 2022. Also, in the first six months, total household disposable income, which includes wages and other sources of revenue, rose only 5.8 percent, barely surpassing 5.5 percent growth in economic output.

Imports, exports tumble

China’s exports also plunged by 14.5 percent in July compared with a year earlier, as demand for Chinese exports weakened after the US Federal Reserve and central banks in Europe and Asia started raising interest rates to cool record-breaking inflation. Exports fell to USD 281.8 billion, as the decline accelerated from June’s 12.4 percent fall.

Exports to the US fell 23 percent from a year earlier to USD 42.3 billion, while imports of American goods fell by 11.1 percent to USD 12 billion. Exports to the 27-nation European Union slumped by 39.5 percent from a year earlier to USD 42.4 billion. This export contraction has been the biggest since the start of the Covid-19 pandemic, according to Capital Economics. The agency expects the exports to decline further over the coming months.

Imports also tumbled by 12.4 percent, to USD 201.2 billion, widening from the previous month’s

6.8 percent contraction. The development has come as a blow to global exporters that look to China as one of the biggest markets for industrial materials, food, and consumer goods.

Damage control

Apart from the job market, the economic downturn has hit factories too, adding pressure on the ruling Communist Party to take corrective measures. On July 19, the State Council and the Central Committee of the Chinese Communist Party issued a joint statement titled, “Opinions on Promoting the Development and Growth of the Private Economy.” The 7,000-word document listed 31 guidelines aimed at building a more friendly environment for private businesses. On July 24, the National Development and Reform Commission followed up with a “Circular on Further Efforts to Promote Private Investment in an Effort to Mobilise Private Investments.” Clearly, a struggling economy has forced Chinese authorities to look towards the private sector for help. Leaders are promising support for entrepreneurs. But there have been no announcements about
possible tax cuts or stimulus from the government. Understandably, analysts remain sceptical of local governments ’ability to manage their debt and support the country’s economic recovery.