Commentary: China’s economic troubles run deeper than civil servants’ pay hike

AUCKLAND: China is pulling out all the stops to bolster domestic consumption.

In January, millions of civil servants across China reportedly received their first significant pay raise in a decade, with their monthly basic salaries bumped up by at least 500 yuan (US$68), backdated to mid-2024.

This is reported to be the first time since 2015 that China has adjusted government worker salaries. Then, about 40 million civil servants and staff of government-sponsored institutions received a monthly salary increase of about 300 yuan each on average.

The timing looks to be deliberate.

At the Central Economic Work Conference in December 2024, China outlined boosting consumption and domestic demand as its key tasks for 2025. “A special campaign dedicated to stimulating consumption should be implemented, and efforts should be made to increase the incomes and alleviate the burdens of low- and middle-income groups”, it said.

With trade tensions expected to escalate following the return of Donald Trump to the White House, expanding domestic demand is seen as an effective strategy.

A TIMELY PAY HIKE

The civil servant pay hike aligns with this strategy, arriving just before the Chinese New Year - a period synonymous with spending. Multiple cities have launched new rounds of consumption vouchers to stimulate demand during the festive season. By putting money in the pockets of government workers, perhaps China hopes to boost morale and ignite a much-needed spark in consumer confidence.

Last year, the world’s second-largest economy achieved 5 per cent gross domestic product growth, driven largely by strong exports and policy stabilisation efforts. While this met the annual target, warnings are mounting that China's economy could face a slowdown in 2025. Trump has threatened to impose more tariffs on Chinese goods. Already, 2024’s GDP growth was the slowest since 1990 outside of the COVID-19 pandemic.

Adding to these concerns is the notable slowdown in retail sales, a key gauge of consumer sentiment. Retail sales expanded by just 3.5 per cent in 2024, a sharp decline from 7.2 per cent the previous year. This underscores the urgency of Beijing’s measures to stimulate domestic demand, but whether they will be sufficient to offset mounting external and internal challenges remains an open question.

Civil servants represent only a fraction of China’s 1.4 billion population. Given the size of the Chinese economy (US$17.52 trillion in 2023), any extra spending by the civil servants is unlikely to provide the broad economic boost Beijing needs.

UNDER PRESSURE

Adding to the challenge is China’s fiscal health.

According to available data, China had about 7.17 million civil servants at the end of 2015, but the broader group of employees working in state-linked agencies and public institutions number more than 38 million. Estimates suggest the total number of fiscally supported personnel may have exceeded 80 million in 2023.

Based on that figure, the recent pay hike could amount to about 480 billion yuan annually - around 1.75 per cent of the government’s total expenditure of 27.46 trillion yuan in 2023. However, fiscal revenue came in at about 21.68 trillion yuan. The additional outlay would certainly add to the deficit in 2025.

In fact, none of the 31 provincial units had a positive budgetary balance. Guangdong, the richest province, logged a deficit amounting to one-third of its revenue. Meanwhile, poorer regions like Tibet relied heavily on the transfers from the central government, with expenditures exceeding revenue by more than tenfold.

MORE MEASURES NEEDED

Civil service jobs in China are highly coveted, as evidenced by the record 3.4 million applicants who sat for the annual civil service exam last month, competing for just 39,700 positions. These jobs are often seen as an “iron rice bowl”, offering stability and security.

However, the layered structure of civil servants’ salaries makes it challenging to determine how much they actually earn. During the previous pay hike in 2015, it was reported that monthly basic salaries ranged from 1,320 yuan for the lowest-ranked civil servants to 11,385 yuan for national-level officials. In addition to basic pay, civil servants also receive various allowances and subsidies according to their seniority and rank.

The latest pay raise is likely intended to emphasise that civil servants are critical for the proper function of the government and that their welfare and loyalty are important. But the optics of it risk alienating the broader population, particularly private-sector workers who face rising job insecurity.

This tension explains the relative secrecy surrounding pay raise for civil servants, as a transparent policy could backfire by inviting public scrutiny or triggering additional demands.

In his New Year message, President Xi Jinping expressed his confidence in China's economy but acknowledged the Chinese government faces “new conditions”, including challenges internally and externally.

To address these challenges, China must adopt long-term reforms that go beyond one-off pay adjustments.

Internally, the Chinese government needs to take measures to establish the rule of law based on the fundamental rights of private property to retain and encourage private investment.

Externally, China will have to work more closely with its major business partners such as the United States and the European Union to strengthen their existing cooperation and to build strategic trust.

As Xi said: “Dreams and wishes may be far, but they can be fulfilled with dedicated pursuit.”

Professor Bo Zhiyue is the founder and president of the Bo Zhiyue China Institute, a consulting firm providing services to government leaders and CEOs of multinational corporations, and an author on China’s elite politics.