Rising labor costs will not affect China's attractiveness for foreign investments

16:20, September 09, 2010      

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The coastal areas in China have suffered from labor shortages since last year, which contributed much to the considerable increase in workers' salaries in 2010. This year, companies in eastern China have raised workers' salaries, and local governments in central and western regions have raised the minimum wage standards as well. Overall, labor costs are going up in China.

The rise in wages has prompted two questions in regard to China: how much longer can the country maintain its competitive advantage based on cheap labor? Will the rising labor costs affect China's attractiveness for foreign investments?

First, we should have a rational understanding that the wave of salary increases this year is a natural result of the changes in the Chinese labor market as well as the rapid economic growth and social progress.

In addition, the increased salaries are also overdue payments for common workers. For example, the Pearl River Delta region has maintained annual GDP growth rates of over 10 percent for a long time, and the profits of companies there have also increased quickly, but the workers' salaries seldom, if ever, rise.

Since the beginning of reform and opening up, Chinese workers have provided goods with low prices and high quality to the entire world, but their own salaries are almost the same as more than 10 years ago. China is also faced with increasingly severe environmental problems. In a word, it is unjust and unsustainable to simply count on cheap labor to promote economic development.

Second, the increase in labor costs is a “double-edged sword,” and will produce a profound impact on the Chinese economy. In the short term, salary increases will exert direct adverse influence on companies' profitability, especially the profitability of certain manufacturers that only rely on cheap labor to gain competitive advantages.

However, in the long term, the rise in labor costs will help adjust China's economic and industrial structure, reduce the economy's over-dependence on low-value-added export products and foreign investments, narrow the wealth gap, stimulate domestic demand and bring great benefits to the Chinese people.

Third, despite the rapidly-rising labor cost, China's labor cost still has a competitive edge around the world.

According to the data from the White Paper on International Trade released by Japan, the share of the average labor cost in total product cost in Asian countries and regions stands at 4 percent compared with 3.5 percent in China. This indicates that although China's labor cost is on the rise, it generally still stands at a relatively low level in Asia. It is far less than that of developed countries, such as Japan, South Korea and Singapore.

Furthermore, there are still about 150 million surplus laborers in China who may enter the labor market at any time. The "Lewis turning point" is unlikely to occur in China over the next 10 years and demographic dividend will take a long time to disappear in China.

Fourth, labor cost is just part of the investment cost in investment environment evaluation. A questionnaire survey on several hundred multinational companies shows that the top three factors determining multinational companies' investments are market opportunities, political risk and legal environment. Wage level ranked fifth, close to employer-employee relationship and tax preference.

Another survey on 1,500 foreign-funded enterprises in China shows that to deal with the rise in labor cost in coastal regions, most foreign-funded enterprises have still chosen to shift their production to China's inland regions.

Obviously, China enjoys an overall competitive advantage in terms of market opportunities, market depth and breadth, regional development room, economic growth, industrial supporting capacities, labor quality, political risk as well as policy and legal environment. Without the erosion in the overall advantage, the moderate wage rise will not result in the remarkable decrease in foreign investments.

According to data from the Ministry of Commerce, the actual foreign investments in China in the first seven months of 2010 rose 21 percent to 58.4 billion U.S. dollars.

Nevertheless, it is clear if China seeks to maintain its comprehensive competitive advantage in introducing foreign investments, it needs to continue to further enhance the guidance and services of the governments for foreign-funded enterprises, further advance the quality of macroeconomic factors, widen market openness, keep raising labor quality in order to create an open and better investment environment.

By Shi Jianxun, translated by People's Daily Online. The author is the special commentator of People's Daily and a professor at School of Economics and Management under Tongji University


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