China has had some catching up to do to address income equality, but it’s certainly on its way. Minimum wages in China continue to grow as the economy develops.
Through the first 11 months of 2018, 15 provinces, directly-controlled municipalities, and autonomous regions have increased their minimum wages: Beijing, Guangdong, Guangxi, Hainan, Henan, Jiangsu, Jiangxi, Liaoning, Shandong, Shanghai, Shenzhen, Sichuan, Tibet, Xinjiang, and Yunnan. Chongqing also jumped on the bandwagon as its wage increase was announced before Christmas.
In the year of 2017—a politically important one—20 out of the 31 regions in Mainland China increased their minimum wages. In 2016, only nine regions increased their wages, while 19 did so in 2015.
China’s minimum wage: Understanding regional variation
Local governments in China are required to update their minimum wages at least every few years but have the flexibility to adjust wages according to local conditions. Most provinces set different classes of minimum wage levels for different areas depending on the given region’s level of development and cost of living. For example, a higher class for the provincial capital and the most developed cities, and a lower class for smaller cities and rural areas. In 2018, Guangdong, Jiangsu, and Shandong—three of China’s wealthiest coastal provinces—were among the provinces that increased their minimum wages. While Jiangsu and Shandong also increased their minimum wages in 2017, Guangdong is notable because it is the first time in three years that it has done so.
Although Guangdong is China’s wealthiest province by GDP, the province had previously frozen wage hikes in an attempt to strengthen its competitiveness. Guangdong—commonly referred to as “the factory of the world”—has a heavily manufacturing-driven economy, but rising land and labor costs in recent years allowed Southeast Asian countries like Vietnam and Indonesia to emerge as competitors. Nevertheless, leading cities in Guangdong—along with Jiangsu—have now surpassed the 2,000 RMB (US$287.62) mark for monthly minimum wages, joining the ranks of Beijing, Shanghai, Shenzhen, Tianjin, and certain areas of Zhejiang. These increases have exacerbated regional disparities, with minimum wages in the most developed regions at more than double those in the least developed. Shanghai continues to have the highest minimum wage in China, at 2,420 RMB (US$348.02) per month, followed by Shenzhen (2,200 RMB/US$316.38) and Beijing (2,120 RMB/US$304.87).
At the lowest end, the minimum wage in certain areas of Guangxi province is 1,000 RMB (US$143.81), with rural areas in Liaoning (1,120 RMB/US$161.07), Hunan (1,130 RMB/US$162.5), and Anhui (1,150 RMB/US$165.38) slightly higher. However, while China is still among the most unequal countries in the world in terms of income inequality, it has made some progress over the past decade. According to China’s National Bureau of Statistics, the country’s Gini Coefficient dropped from 0.491 in 2008 to 0.465 in 2016, where a higher number denotes larger inequality.
Impact on China’s labor costs
Minimum wages only tell part of the story of labor costs in China. As China’s economy moves up the value-chain and transitions to innovation and services, most workers employed by foreign-invested enterprises earn above the minimum wage. For example, workers in Beijing made an average of 8,467 RMB (US$1,217.62) per month through the first half of 2018—about four times the local minimum wage. Moreover, employer social insurance and housing fund obligations add an additional 37.25 percent to an employee’s salary on average. This is partly explained by China’s labor pool which, while enormous, is gradually shrinking. After peaking at 787.07 million in 2015, last year China’s labor pool shrunk to 786.74 million. This trend is exacerbated in China’s wealthy coastal regions—the traditional hotbed for foreign investment and manufacturing—which migrant workers are leaving in favor of Inland China. According to the National Bureau of Statistics, in 2016 the migrant worker population in coastal provinces fell by 0.3 percent, while that of Western provinces grew by 5.3 percent.
For foreign investors, rising wages are an unavoidable feature of doing business in China. Nevertheless, when other factors like productivity, infrastructure, transportation costs, and access to a massive domestic market are considered, China may still emerge as the more cost-efficient option compared to countries with lower statutory labor costs. When comparing locations for foreign investment into China, minimum wages are a helpful barometer to gauge labor costs across different regions. From there, identifying industry-specific wage levels, availability of talent, and access to regional incentives offer a more nuanced view of ultimate labor costs within a given region.
This article was first published on China Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at email@example.com. Further information about our firm can be found at www.dezshira.com.