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Editorial, issue no.367, May 12, 2008
Original article: [Chinese]

Is it feasible to let salaries increase in accordance with the rise of Consumer Price Index (CPI)? As the index has been climbing since the last quarter of 2007, how to ensure a rise in Chinese' real income has become a major public concern.

Despite that the country has enjoyed stable yearly economic growth of over 10%, most Chinese feel their living standards have failed to improve correspondingly, especially in the face of recent inflation.

A drop in living standards during recession is easier to comprehend, but when it occurs during a boom, then it is a typical example of "wealth transfer" by "levying taxes on the poor" through continuously rising prices.

To people in the lower income brackets – whose earnings are mostly spent on basic necessities – their purchasing power decreases as prices rise. This is especially true for those with a high Engel's coefficient, whereby a large proportion of total family income is spent on food. As food prices are growing much faster than CPI, the main victims are wage-earners in urban areas, migrant workers, and farmers.

Now that the government has considered inflation control a top priority and a lasting challenge, providing subsidies for these victims are quite necessary. But how to subsidize requires deliberation.

In considering measures on subsidies, we believe two principles should be adhered to. First, as the Chinese saying goes, the wools must come from the sheep.

As inflation is akin to "taxes on the poor", the government should not attempt to transfer the burden to the business communities or another third party. Instead, the government should be the one footing the bill for the subsidies, and that can be done through its financial transfer payment system.

Based on the above principle, the call for compelling companies to keep salaries in line with the rise in CPI, or to raise the bar for minimum wage, is in fact a classical example of transferring the cost of inflation to a third party.

The second principle should be giving priority to the most affected social groups. Though there is a huge gap in wealth and costs of living between the Chinese rural and urban areas, the price surges in recent months known no such boundaries. Farmers in the rural areas and the urban poor are both hard pressed as prices for food and basic necessities skyrocket, and thus they should be the target groups for subsidies.

In reality, no amount of subsidies could cover everyone in need. Many of the most affected are not under a fixed or standard salary system, thus, the move to up salaries or the criteria on minimum wages would have no impact on them. The only way to ease their burden would be bringing down the prices of commodities.

Therefore, we believe, granting subsidies is just an emergency measure to alleviate hardships rising from inflation. However, we have little expectation on the impacts of such measure, which can neither curb inflationary pressure nor ease the sense of urgency.

The core of the problem presently is to lower inflation, in order to minimize the harm and distortions brought upon the economy. Persistent inflation not only hurts the interests of low-income groups, but it also severely distorts market activities and behaviors.

The most typical examples is that investments by businesses and individuals alike are going in for negative interest rate, thus the entire market has caught up in a vicious cycle: inflation - overheating investment - overheating of economy – inflation.