China’s recovery threatened by surging prices, stagnant wages

First the pandemic and now floods are slashing the spending power of Chinese households this year, as stagnant incomes and rising costs undermine the strength of the domestic recovery.

That trend may also be worsening China's already severe income inequality, according to data from the National Bureau of Statistics. The median disposable income – about $1000 per quarter – actually fell as the virus lockdowns hit, and the fact that it is recovering slower than the mean likely indicates a widening gap with wealthy Chinese.

On top of that, food prices are rising faster as the pandemic has slowed imports and flooding in central China damaged food crops and transport links. Food inflation began rising in June after starting to slowing early this year, and that trend will likely continue over the summer.

The combination of pricier food and weak or flat incomes will not only hurt the poor, but may also make the government's goal of eliminating absolute poverty this year harder to achieve. In addition, if consumers continue to hold back on spending it will sap strength from the recovery, which so far has been reliant on the industrial sector.

"High food inflation since last year due to pork prices has indeed further squeezed the income of the low-income households," said Michelle Lam, greater China economist at Societe Generale in Hong Kong. "The recovery in consumption could be held back by the low-income groups."

Spending on food spiked as a share of consumption in the first quarter due to a combination of rising food prices and falling outlays, with rural households even more pressured than their generally richer compatriots in the city.

China's consumer inflation is highly correlated with changes in food prices, especially of pork. The shortage of pigs and pork caused by the African Swine Fever outbreak, the coronavirus and now the flooding have kept prices at an elevated level, and an industry survey showed the recovery of hog production could be slowed by the floods.

The end result is that spending on entertainment or other discretionary areas has taken a big hit, due to rising food prices and measures to control the pandemic, and shows no signs of rebounding yet.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement