No more eating bitterness

Chinese wages are rising. What impact will this have on the success of the country's export machine and global inflation?

Do the work of two and do two days in one. That was the ever-inspiring motto of Lishui Economic Development Zone in Zhejiang Province. And it wasn't unusual. In the early 2000s, migrants hoping to gain employment in the province's factories were expected to "eat bitterness", a Chinese phrase for enduring hardship in order to power the country's economic growth.

No more. At the most recent National People's Congress, the leadership of the Communist Party reiterated its desire to forge a "harmonious society" by ensuring that all Chinese workers taste the fruits of the country's economic success.

Allied to this, the new decade is witnessing a reversal of the greatest migration of people in human history. China's 150 million plus migrant workers are progressively returning to their hometowns and cities, abandoning the factory floors of the original Special Economic Zones (SEZs).

They're doing so because the country's economic development means they have more choice of jobs in the inland provinces. And as many media outlets have reported, the result has been widespread labour shortages in the SEZs. The export orders have been picking up again, but the migrants haven't been flocking back after Chinese New Year. Given that they account for nearly a quarter of the overall workforce, that's not good news. Some reports suggest that factories operating at the bottom of the manufacturing scale -- shoes, toys and textiles -- have been the worst hit, with 40% to 50% of the workforce failing to return.

Geoff Crothall from the Hong Kong-based non-governmental organisation China Labour Bulletin says migrant workers are steering clear of low paid factory jobs in the SEZs, with many younger workers opting to go to college instead. "I've heard there are 1 million to 2 million unfilled posts in the Pearl River Delta alone," he said. "I'm not sure if the figure is quite that high, but it's abundantly clear that migrants are no longer interested in moving across the country to do labour-intensive, factory floor jobs."

So how have factory bosses responded? Crothall says plenty have carried on stipulating that workers need to be of a certain age or height. "They've got away with this system for three decades and it's a hard mindset to change," he added. "That's why there are labour shortages and plenty of factories will go bust."

The more proactive have come up with three solutions. Some have opted to move their operations further inland where they can still pay cheap wages; some are moving to neighbouring low-cost countries such as Vietnam; and some are putting wages up and increasing employment benefits. Hong Kong's South China Morning Post recently quoted one factory owner who was offering workers an extra Rmb300 ($44) if they recruited a friend. Others are offering complimentary food for the first month, air conditioning, libraries and leisure facilities.

Since the beginning of January, all of the big export-oriented SEZs have increased the minimum wage. Regulations governing a minimum wage were first introduced by the central government in 2004, with each province free to set its own rate. After big increases in 2008, most provinces did nothing in 2009 when an estimated 45 million migrants were laid off in the space of about two months at the very beginning of the year.

But how much leeway do manufacturers have to raise wages before their factories become unprofitable? Margins are notoriously thin at the bottom end of the manufacturing scale, with two-thirds of Chinese textile manufacturers said to be subsisting on margins below 1%. Added to this are the constant pressures of increasing raw material costs, unstable energy prices and the impeding threat of a renminbi revaluation, which will make their products more expensive.

Some economists believe Chinese manufacturers will be forced to put their prices up and that the country will start exporting inflation to the wider world. If they're right, this won't be good news for central bankers in the West who have been trying to keep interest rates pressed on the floor to revive their economies.

Most, however, disagree. As CLB's Crothall says, "I'd really question to what extent labour is a significant factor in manufacturing costs." And indeed, it is only about 10% in China compared to something in the region of 50% in the West.

Others point to the vast central and western hinterland, where big infrastructure projects are bringing down the transport costs of moving goods and there's ample room to relocate low-end manufacturing and pay low wages for years to come. As a result, provinces such as Henan and municipalities such as Chongqing have stopped becoming net exporters of migrants and started developing their own domestic economies.

Economists such as Standard Chartered's Stephen Green have also pointed out that while wages have been rising, so has productivity and so far this means Chinese factories have been able to remain competitive. The original SEZs, such as Shenzhen, have also been moving up the value chain. Their success in developing new strangleholds over higher-value manufactured products such as cars and white goods means they could continue exerting deflationary global pressure.

One positive benefit of higher wages for factory workers is that greater disposable income -- after accounting for inflation -- will boost domestic consumption and help reverse China's enormous trade surplus.

However, commentators point out that this needs to be kept in context. "The gap between rich and poor in China is still widening, not closing," said Andreas Lauffs, an employment expert at law firm Baker & McKenzie. "The gap between the top 10% and bottom 10% has tripled in 20 years." And Chinese workers still earn a fraction of their counterparts in the West -- 4% of the average US manufacturing wage, according to figures compiled by the International Labour Organisation.

As CLB's Crothall concluded, "In percentage terms, workers have seen big increases to the minimum wage this year. But what does an extra Rmb200 a month actually buy? Probably little more than one single visit to a doctor." 

This story was first published in the May 2010 issue of FinanceAsia magazine.

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