Counting the cost of rising wages in Chinese industry

08:01, June 30, 2010      

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Editor's note: While China's economy continues to expand at a rapid pace, the wages of its tens of millions of migrant laborers have not increased at the same rate. The recent suicides at electronics manufacturer Foxconn and the strikes in a number of auto parts factories have led to rapid rises in wages as well as hot debate across the country as to how this new trend will impact on the Chinese economy.

Economists said that although this trend will continue, foreign companies are unlikely to move out of China due to the many other advantages that the nation offers them.

Liu Yihui, economist with Institute of Finance and Banking, Chinese Academy of Social Sciences

Southern China recently witnessed several strikes calling for wage increases, which indicated that the nation's cheap labor advantage may have come to an end.

In my opinion, this wage pressure lies in the fact that "the bubble economy" has eaten into and will continue to eat into Chinese labor dividends.

Because ample supplies of money has flown into capital goods and led to the rapid rise of land and property prices in recent years, urban living and business costs have surged. At the same time workers' real financial abilities have declined, which is bound to boost wages.

Rising labor costs mean the opportunity costs of farmers will also rise, thus leading to rising agricultural product prices.

On the other hand, industrial profits have become more modest, forcing capital to flow out of the real economy and into the financial investment market, which helps raise the prices of capital goods at a faster pace. This is a self-reinforcing cycle.

Wage rises caused by asset bubbles are set to lower labor productivity growth or even stop it. This is a major source of stagnation.

On the other hand, for fear of the impact of the bubble bursting, there has been a marked reluctance to substantially tighten money supply, which has caused a rise in production costs and could even lead to stagnation. This does not mean the Chinese economy will witness zero or even negative growth, but that the momentum will gradually weaken.

Peng Wensheng, research head of China economy at Barclays Capital

The recent developments in labor issues involve workers in the manufacturing sector in some coastal areas, most of them migrant workers from rural, inland areas.

An immediate explanation is to relate it to the so-called Lewis Turning Point, a highly stylized model of economic development in a labor surplus economy. After reaching the turning point, surplus labor disappears, the job market tightens and real wages rise rapidly, forcing structural changes in the economy.

There are possible reasons for seeing the Lewis Turning Point effect earlier than would be suggested by the urbanization rate in China.

China is a huge country, and differences in regional development and incomes are wide. This implies a differentiated labor market with imperfect mobility. The disappearance of the labor surplus is likely to start in coastal areas where the modern urban sector is most developed. In other words, the turning point may take place at different times in different regions.

Another important factor is changing demographics. China's working age population is approaching its peak. One difference between China and Japan is that Japan's urbanization largely ended in the 1970s, but its working-age population peaked only in the early 1990s. In China, the working-age population will peak much earlier than the completion of urbanization. Therefore, surplus labor is likely to disappear earlier in China's urbanization process.

Moreover, many of the new generation of workers have grown up in one-child families (the one-child policy started in the early 1980s, initially in urban areas, but the policy was also much strengthened in rural areas in the 1990s). They are much better educated and have greater aspirations than their parents.

As a result of the disappearing labor surplus, China's economic growth may decelerate, as the rate of labor force growth falls and the rate of investment slows.

Wang Tao, head of China Economic Research, UBS Securities

Labor disputes and wage increases in southern China have recently hit the headlines. These have triggered concerns about widespread labor disputes and a profit margin squeeze in China's export sector, as well as a big jump in inflation or even a wage-inflation spiral.

The latest wage concerns follow reports of labor shortages in the Pearl River Delta earlier this year. Linking these together, many believe they are reflections of a shift in China's demographics - fewer young people are entering the labor force - and that is the end of China's cheap labor and associated growth story.

In my view, these concerns are over exaggerated because people, for one thing, are mixing a cyclical upswing in labor demand with structural demographic changes, and they are not putting the latest wage increase within the context of past wage increases and the growth of productivity and the overall economy. They are also overlooking the positive aspects of gradual wage increases.

With regard to China, growth is certainly decelerating while inflation has not yet peaked. However, we believe that the recent increased wage pressures mostly reflect cyclical demand-supply factors in the labor market, as well as rising living costs. In the short term, profit margins will be squeezed, but inflationary pressure will be limited. I do not think China is entering a wage-inflation spiral.

Moreover, gradual wage increases will help China move to a more consumption-based economic growth model.

In the medium term, however, demographic changes and shrinking surplus labor are expected to be an important factor pushing up relative labor costs and inflation.

Tao Dong, chief Asia economist of Credit Suisse

The recent suicides at Foxconn, the Taiwan-owned electronics manufacturer, signaled the end of an era on the mainland. Its role as the world's factory and the export-driven model of economic growth are being challenged by rising wages and a labor shortage in coastal areas.

This "world factory" status has been built with the sweat and blood of those migrant workers, who, through their hard labor, have earned themselves a basic standard of living, but brought exorbitant profits for US and European brand owners.

Unlike their parents, those young migrant workers who were born in the 1980s and 1990s have higher expectations and they will no longer put up with poor living conditions. This trend has fundamentally changed the country's labor market where cheap labor is no longer an inexhaustible resource and labor shortages are becoming an increasingly common phenomenon.

It is estimated that the wages of Chinese migrant workers will rise by 20 to 30 percent in the next three to four years. Policymakers are attaching more importance to safeguarding workers' interests and dignity.

The Chinese government is gradually shifting its focus from rapid economic growth to a better distribution of wealth, which is vitally important as it increases consumption and thus benefits economic growth.

It has become a must for China to restructure its economy. In the coming years, China has no choice but try to increase consumption; otherwise, its growth rate will drop.

Chen Gong, chief economist of Anbound Consulting

Rising wages have sparked concerns over what impact this will have on China's export processing industry and whether it will lead to large-scale industrial transfer within or outside China and policy adjustment.

We should face the fact that China's low-wage era is over. Data shows that the minimum wage for unskilled labor in Vietnam is between 400 and 500 yuan ($59-74) per month, and is lower than in Bangladesh. Chinese workers' wages - generally around 800 yuan per month - exceed those in countries such as India and Malaysia. We think it's a trend that wages in China's manufacturing industries will rise more strongly in the next 10 years.

Industrial transfer is inevitable in such a scenario, especially among low-end, small-scale processing industries.

According to a survey by the Federation of Hong Kong Industries, 37.3 percent of 80,000 Hong Kong companies based in the Pearl River Delta are planning to transfer part or all of their production capacities out of the region, and 63 percent of surveyed companies are prepared to move away from Guangdong province.

Soaring costs such as the rising wages have forced them to turn to areas with lower costs, they said.

However, rising wages are unlikely to lead to large-scale industrial transfers. Companies such as Foxconn and Honda not only have manufacturing bases in Guangdong, but also need the local environment of industry agglomeration, including factors such as the market, logistics, efficiency, tax policies and living conditions.

Given China's comprehensive advantage such as logistics, foreign companies exporting from China are unlikely to move their Chinese operations to other countries.

Source: China Daily


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