Is China loosing her sheen as a low cost destination?
June 17, 2010

The recent spate of strikes and unrests followed by huge pay hikes in South China’s manufacturing belt has shed light on the rising wages across the country. According to statistics released by China’s labour bureau, wages have risen dramatically over the past two years up around 20 per cent in most of the region’s factories this year, and up by 16 percent last year. The Beijing Bureau of Human Resources and Social Security recently announced that from July 1, the city’s minimum wage will rise by 160 yuan (US$23.50), or 20 percent, from the current 800 yuan (US$117.30) per month. Beijing which increases its average wage rate by 10 percent annually is one of about 30 provinces or municipalities that have raised or will raise their minimum wage this year, according to figures released by the Ministry of Human Resources and Social Security.

After recent raises, Shanghai currently has the highest minimum wage across the country – 1,120 yuan per month (US$164.20) – and Guangdong Province claims the crown for the highest minimum wage per hour, which stands at 9.9 yuan (US$1.44). Managers in Shanghai and Beijing, are now demanding salaries equivalent of up to two-thirds of salaries paid in Hong Kong and Singapore. Chinese managers on average earned 2.5 times more than their Indian equivalents.

Foxconn the company that makes the iPad and other hi-tech gadgets increased worker salaries by 30 percent two weeks ago following a row of suicides. Honda also raised salaries by up to 24 percent after a high-profile strike at a components factory. So does this signal the end of China as a low-cost destination? The question throws up several answers …

Many managers feel that China is already on the cusp of change, with supply of skilled labour low, salaries are set to rise substantially not only in cities but also in smaller towns. As the trickle down effect is felt, and consumption and inflation rates rise, companies fear they will have to move out to lower cost destinations. As such, Vietnam, Cambodia, Thailand, Indonesia and India are raising as very viable options.  Companies are also weighting the costs of moving further into the Chinese mainland, away from the economic centers of the Yangtze River Delta in the East and the Pearl River Delta in the South.

The situation is expected to worsen for the Chinese as this year as China’s demographic dividend is expected to peak. From this year on, because of the one child policy, the population of China’s elderly will overtake the number of working children, meaning there will be less people supporting a larger population, adding to demographic stress and lower growth rates. This will also mean that there will be greater competition for those few working children to earn higher salaries to support their ageing parents.

In order to reduce social unrest as a result of competing for higher salaries, In May, officials of the National People’s Congress Financial and Economic Committee carried out a study of income distribution in different localities and made a suggestion to cut taxes of enterprises in order to make room for a wage increase for workers. The changes will be part of an income distribution reform that Beijing will implement by the end of this year.

On the macro economic front, if salaries continue to rise, superseding productivity, inflation will rise, overheating an economy that is already feared to bust. On the brighter side, higher salaries will lead to higher consumption which will mean a lower dependence on exports and foreign investments. Which hopefully for the rest of the world will lead to a global re balancing of trade.


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