China wage rising

10 months ago I discussed about the apparently 'unlimited supply of cheap labor' in China, which is coming to an end. I saw this based on what I saw in inland cities a couple years ago, the country girls are no longer traveling to Guangdong or Yangtze Delta. There are sufficient job opportunities in cities close to home.

Recently Businessweek has an update. It discusses turnover rate and quotes a few observed cases. This shows that market force is at work. What needs to appreciate will appreciate (wages in this case). OTOH, some of the steam building on the pressure for RMB appreciation will be let off. It is time for exporters in China to re-negotiate the price. Wait, isn't it easier for the exporters if China simply allow the Yuan to appreciate more instead?

Update: Stephen Roach of Morgan Stanley said
  • China has come a long way in the 27 years since Deng Xiaoping launched the world’s most populous nation on a path of unprecedented reform. There have been doubters at virtually every point along the way. Yet time and again, China has stayed the course. The latest worry is that the land of surplus labor is rapidly running out of workers — leading to excessive wage inflation and a loss of competitiveness, with profound implications for China and the rest of the world. Such concerns, like those of the past, are vastly overblown, in my view.
  • Moreover, this upsurge of Chinese wage inflation appears to have been accompanied by exceptionally vigorous gains in worker productivity — suggesting that unit labor cost pressures remain under good control. That means China’s competitive advantage remains very much intact.
Jen is probably right that the concern is overblown. But the significance of such observation is that it is happening, as it should have long ago. The NYT (and BW) reports only showed labor shortage in the rich coastal areas, where there is a huge gap between migrant workers in factories and local labor (who works in offices, e.g.). There are still plenty of low paid jobs to be filled in less developed provinces. The implications
  1. The trend observed is for coastal China, which is only 1/4-1/3 of the total of China
  2. The overall wage rise will be a very slow process. What we see in NYT/BW is only one end of a long rope. It takes a lot of time when the whole rope moves. But at least the rope has finally started to move. (from 1984-2004 only part
  3. Coast provinces may have to shift upward in the value added
  4. Inland province will be the Guangdong/Zhejiang of 5-10years ago
  5. It is still too early to talk about Bangladesh/Vietnam. (though Vietnam has very similar labor force as Sichuan and Guangxi)
Related: Economist: RMB does not change US trade deficit

Businessweek MARCH 27, 2006


How Rising Wages Are Changing The Game In China
A labor shortage has pay soaring. That is sure to send ripples around the globe.
(archive here)

Labor Shortage in China May Lead to Trade Shift
Published: April 3, 2006

Archived here
"The people coming here are fewer and fewer," said a woman named Miss Li, who works at the Xingda Employment Agency. "All the labor agencies face the same problem. A lot of young people are now going to the Yangtze River area, where there are higher salaries."

In Guangdong Province late last year, the government said factories were short more than 500,000 workers; and in Fujian Province, there was a shortage of 300,000.

Even north of Shenzhen, Zhejiang Province, known for its brash entrepreneurs, is short about 200,000 to 300,000 workers this year, government officials say. The Wahaha Group, a Chinese beverage maker based in the city of Hangzhou, is one of the region's rising corporate stars. But one of the company's 500-worker factories is short by 50.


"Many companies are already moving to Wuhan, Chongqing and Hunan," Ms. Hong said, ticking off the names of inland Chinese cities. "But Vietnam and Bangladesh are also benefiting. We're bullish on Vietnam."


Quan Song said...

Rising wage is much better than simply appreciating Yuan, and is long overdue. Key benefits are: firstly, rising wages would benefit the local with the extra money to improve their life. Secondly, rising wage increases consumer buying power, which would push up the domestic consumption and import. It helps China to balance its economy for sustainable growth in the long run. Thirdly, higher wage would force producers to raise export prices, and then help to reduce the international imbalance and appreciation pressure on Yuan. The key drawback is that the wage inflation may put pressure on the central bank to flight the inflation, but under the current low inflation environment, it is not a key concern for the China’s economy.

Sun Bin said...

I guess there are pluses and minors for both changes.

1. since almost none of the contracts are denominated in RMB (mostly in USD), it would be difficult for the exporters to raise price unless RMB is appreciated.
2. all the commodities import prices will become lower, and that actually contributes to 'deflationary' pressure.

OTOH, the drawback of RMB appreciation will mean
a) undiscriminated deflation in every single item (including those that does not deserve deflation)
b) encouraged spending on imported goods and overseas travelling/etc

but these may not be bad things though, because, if you look at this from the perspective of a family who is, say, sending a child to study in US with its own fund. why should they pay at an (x-rate) premium?

Anonymous said...

Just for correctness. The Morgan Stanley report is from Stephen Roach not Stephen Jen .

Sun Bin said...

thanks, jye.

i just found and corrected that as well. apologies.