Wages rising, productivity gain largely kept pace so far
China’s urban wages per capita have been rising at mid-teens CAGR over
the past decade, but have lagged nominal GDP growth. We expect steady
wage growth to come as the share of labor compensation should move to
keep pace (in order to rebalance the economy), and China faces medium
term demographic challenges. We think wage growth will be fastest for
low-income and blue collar workers, private enterprises, secondary
industries, and less-developed regions. Productivity gains have offset >80%
of wage increase impact over the past decade, so unit labor cost increases
were only low single digits. In the future, more structural reforms to boost
productivity (innovation, automation, migration policy, education, etc.) will
be essential to keep unit labor cost increases low.
China listco earnings impact may rise; beware in a few areas
We analyzed the GS offshore coverage universe (2006-2011) — while total
personnel costs grew rapidly, listcos’ wage/capita CAGR of 8% was far
below the urban average. More importantly, listcos’ wage/revenue and the
wage/opex ratios have also remained flattish overall, signifying limited
impact on their profitability thus far. Looking ahead, earnings risks may
rise — we believe the potentially highest risk sectors are those that could
face rapid wage growth, limited productivity gain, and low margin/high
labor costs to opex. These include hardware, staples, retail and transport.
We find the lowest risk sectors are banks, property, utilities and insurance.
We identify 15 stocks that may pose higher earnings risks from wage rises.