It Takes a Family… To Live in a Chinese Village

Part of the puzzle of China’s conspicuous consumption, when seen against still-modest average incomes, can be explained by rising urban salaries -- especially in first-tier cities like Shanghai or Beijing

In Shanghai, for example,

·        A senior finance officer might be making around $50-55,000 a year plus a contractual bonus of $6-7,000.

·        A sales/marketing manager might earn about $35-40,000.

·        An executive secretary’s salary is approaching $25,000, including contractual bonus.

The constant inflow of multinational firms setting up headquarters in Shanghai (including many from Hong Kong, Taiwan and Singapore) is creating fierce competition for executive talent. As a result, salaries have been steadily catching up to international standards.

[On top of these salaries, companies pay about 40% in charges, covering a (capped) medical coverage and a compulsory retirement scheme; but employees themselves are taxed at a rate of only 15%-20%.]

Since I am told that a local could live “fairly well” in Shanghai on $100 a month, these young, 25-30-year-old executives are left with a significant amount of discretionary income, even when they are servicing a mortgage on their new apartment or even a car loan.

Of course, Shanghai is not China. In Nanjing, for example, executive positions would probably command salaries only half of those in Shanghai.  And even in Shanghai itself, salaries at purely local firms would also be lower than those quoted above. But, everywhere, competition for talent is heating up and white-collar salaries are rising.

In contrast with the experience of the growing population of golden boys and girls, however, wages for unskilled labor have increased little in recent years, because of the constant flow of migrant workers into the cities. Factory workers in Ningbo or Chengdu, for example, reportedly are still making little more than $1,500 a year. Farmers’ incomes, as we chronicled in previous papers, are not materially different, though most of the villagers we met agreed that their lot had improved in the last few years.

No “Great Leap Forward”

Before this trip, I had become intrigued by arguments that recent changes in the law, establishing clear ownership and transferability of long leases of farmland (30 to 50 years) would usher in a revolution in farming and unleash tremendous spending power pent up among the village populations. Richard McConnell, a friend and colleague, even pointed to the promising experiment of a company called Chaoda Modern Agriculture, of which we, too, met the management:

“Chaoda… has a simple and compelling method of creating large tracts out of dozens of small individual farm plots. The company contracts with local leaders in villages, offering to rent the local farms it desires on a long term basis. The village elders, realizing the advantages to the community, readily persuade the local farmers to pool their lands. The farm families receive lease payments roughly equal to the money they would have received if they toiled to grow their own crops. Some of the more ambitious ones are hired by Chaoda to work on the enlarged plot of land at attractive wage rates… This development promises to transform Chinese peasant life by reducing the number of small farms and raising food production to new heights.”

The excellent team at CLSA, which performed several in-depth studies and surveys of rural China, also pointed to the revolutionary effect that the emergence of “quasi-property rights” would usher in, including the ability to borrow on the value of one’s long leases, either to invest in the farming operation or to free up capital for other undertakings.

But, while I do think that the long term impact of this change is potentially awesome, it now seems to me that the transformation will come later and more progressively than the optimists believe. Indeed, the most striking thing about the farmers we met was how individualistic and poorly informed they were.

Chinese Farmers Are “From Missouri”

Each family works its plot: there is no cooperation or consultation with other villagers. Farmers don’t even get together to sell their production on the market or to wholesale buyers from nearby cities. They thus have no bargaining power and, of course, no benefit from economies of scale that would allow investment in machinery or even fertilizers. The mere mention of a village “cooperative” seems to bring back, among the elders, unpleasant memories (I assume of Mao’s Great Leap Forward and its eventual failure).

We also found the people we interviewed to be totally ignorant about the new laws. No one seemed to believe they “owned” anything and everyone, instead, talked about “renting”. Questions about the possibility of selling land (or rights) to neighbors or buying land from them seemed to puzzle our hosts, who clearly had never considered this an option. Generally they felt that, in any case, no one would want to dispose of their plot, and several also believed that selling their land would be illegal and might bring reprisals. The feeling was reinforced by the fact that most villages had undergone an arbitrary re-allocation of land among families only a few years ago. Needless to say, borrowing, which already is foreign to many elders in the cities, would be even more so here.

Change will require a tremendous and sustained effort to inform and educate China’s farmers. In addition, nothing sells in China like success, so that if experiments in farm capitalism are successful, they will be emulated – keeping in mind that there is very little communication between villages, so that this process may take time.

If one believes, as I now do, that transforming China’s rural culture to embrace property rights and all their implications will take years, the question becomes: what can the government do, in the shorter term, to raise the incomes of farmers and their propensity to spend?

Unfortunately, it seems, very little. Absent economies of scales (as in the Chaoda experiment), the trading of property rights, and/or the freeing of underlying asset values through lending and borrowing (which would also promote investment in machinery and fertilizers), the only way farmers can get richer is through higher crop prices. These are inherently unpredictable and not very pliable to policy actions.

Of course, mandated cuts in local taxes and various subvention schemes may sustain a feeling of slow improvement in the farmers’ lot. In fact, we found President Hu and, particularly, Premier Wen to be extremely popular. But a quantum leap in the conditions of farmers seems unlikely to happen overnight.

To Get Rich, Migrate

In the meantime, the key tool for enriching the village populations will remain “urbanization”, e.g. the steady migration of village workers toward cities – both old and new ones. This, however, raises another question: How will the migration of workers to cities, where they won’t earn much more than they did on their farms, stimulate spending in rural China?

Initially, and probably for a number of years still, migration to cities will generate its own jobs, in a somewhat circular and self-feeding fashion.

New suburbs are constantly being added to existing cities, and entirely new cities are also being built. All this requires the construction of housing, sewers, roads, transportation facilities and other infrastructures. My impression, on this trip, was that many villagers are under-employed. This explains how sons often can go away to work in the cities without jeopardizing current production from the small family farms. [This would certainly be even truer with the use of some equipment]. Thus, migrant construction workers in the cities may not earn much, but their wages come as an addition to their family’s overall income and spending power. If, as I guess, there is room for more exodus from the countryside, rural family incomes and discretionary spending should continue to grow, slowly and somewhat precariously, but steadily.

Eventually, however, jobs will have to originate in new sources of demand for goods and services, which will boost manufacturing employment.

Foreign direct investment may slow down, but is giving no signs of drying up, as outsourcing in China remains attractive. Local sources pointed out that even if the Renminbi were revalued, Chinese labor costs would remain globally attractive. In addition, Chinese manufacturers have built “clusters” of nearby, qualified and low-cost suppliers that would be difficult – or at least lengthy – to replicate elsewhere.

The big hope, of course, lies in the development of China’s potentially huge consumer market. As I have pointed out, the growth of consumption already has been explosive among city white-collar workers: this increasingly prosperous population will likely continue to grow and their wages will probably continue to rise.

In the smaller cities of rural China, consumption has already begun to change as well – not only is it growing, albeit from very low levels, but it is also changing qualitatively. The shelves of even small and modest supermarkets are stocked with products that were not available only a few years ago. I mentioned earlier the examples of powdered milk for children and women’s shampoo, which have now become must-have items even for families with modest budgets. Making and selling these new products require factories, packaging operations, transportation and selling organizations. All these create new jobs.

So far, job losses at state-owned enterprises (SOEs) being privatized or restructured have partly obscured the powerful job creation in China’s private sector. (I mentioned earlier the 30 million jobs destroyed by the SOEs over the last five years.) When this restructuring phase ends, probably within a few years, the private sector will be better able to absorb the migration of workers from villages to cities (which is encouraged by the government).

As infrastructure continues to improve, companies will move farther away from the big industrial centers and the upward pressure on wages will spread to the rest of China and, eventually, from white collar jobs to blue-collar ones.

* * *

So, change is happening in rural China, with enormous implications for the country’s consumer market. The evolution may be slow by Chinese standards and disappoint the rash optimists, but it is unstoppable and it is gaining both momentum and critical mass.

What I find most encouraging is that many local entrepreneurs, who have so far eschewed the domestic market in favor of the more immediate opportunities in exporting, are now developing plans to attack their domestic market “within a couple of years”.

The China story is not over yet….

François Sicart

June 27, 2004

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