China Business

China Inflation and Your Business

The end of Cheap China

Two related economic issues are of primary importance to ordinary Chinese people. The first is inflation in prices of basic necessities such as housing and food. The second is the lack of wage growth in the manufacturing and service sectors. Today’s China Daily (January 4, 2011) featured five separate articles dealing with these issues.

1. The headline article of today’s China Daily reports that the PRC All China Federation of Trade Unions (ACFTU) is pushing for legislation that will establish the formal rules for mandatory collective wage bargaining in China. While China mandates that all businesses permit the formation of unions, there is no corresponding set of national laws or regulations concerning mandatory collective bargaining. However, a number of local governments have adopted local rules and “guidance” concerning mandatory wage agreements. The ACFTU assert that where collective bargaining has been used over the past 10 years under these local programs, worker’s wages are 15% higher on average than wages for workers in the same sector without collective bargaining. In a related article, the China Daily reports that the Beijing Municipal Federation of Trade Unions has adopted a three year plan to establish collective wage bargaining in 80 percent of the city’s unionized enterprises. Once Beijing takes the lead, other local governments are certain to follow, even without any national legislation on the issue.

What is the target of this collective bargaining effort? As you might expect, the target is privately owned Chinese companies and foreign owned companies. As the China Daily states:

The ACFTU will also guide enterprises, especially private and overseas-funded, to conduct collective negotiation . . . About 80 percent of enterprises in China are privately run or foreign funded, employing about 75 percent of the country’s total work force. . . By the end of last year, 79 percent of overseas-funded companies and 78.5 percent of private companies had set up trade unions.

One factor that has attracted North American and European companies to China has been freedom from unionized worker organizations.

Over the past several years, unionization has increased. However, foreign companies have not reacted strongly due to the impression that unions are relatively weak in China. With the rise of a push towards mandatory collective bargaining, this situation will change. The inevitable result: a dramatic increase in wages in the manufacturing and service sectors for the next decade.

2. One phrase that has become common in China is “worker draught”. This refers to a lack of laborers that has become a major issue in three areas: the Pearl River Delta (Guangzhou), the Yangzi River Delta (Shanghai) and Shandong Province. However, the issue is not lack of available workers. This is shown by today’s China Daily article reporting that over 10,000 recent college graduates attended a recent job fair held in Tianjin where only 2,000 job posts were being offered. The reality is this. At the top end of the scale there is a severe shortage of jobs, not workers, for entry level positions for college graduates in China. This is particularly true for graduates in any discipline other than engineering. At the bottom end of the scale, there is no shortage of workers for low skill labor jobs in the manufacturing, manufacturing and service sectors. The issue in those sectors is that workers are no longer willing to work for the low wages typical in China for those industry sectors. Companies have found that when they raise their wages and improve working conditions, they find no problem in finding semi-skilled laborers all over China. I know this from the many conversations I have had with our clients on this issue.

The amount of wage increase required to fully staff a factory in China has been substantial. Reports we have received indicate that many of the traditional outsourcing based manufacturers have been required to double their wages to attract workers. Then when they do that, their already employed workers expect pay raises not just equal to the new hires, but to a level that reflects their greater seniority. Foreign owned manufacturing and service sector companies that have reported to us that they started raising wages several years ago also indicate that they have had no problem finding and retaining workers. This will certainly be the trend for the future.

3. Two articles in the China Daily today illustrate why wages must rise. In the first, the China Daily reports that housing prices in Shanghai are roughly the same as in Hong Kong. However, the average wage in Hong Kong is ten times higher than the average wage in Shanghai. This means the average person is simply shut out of the housing market. In a second story, the Daily interviewed a worker in a factory that assembles notebook computers. The worker stated that he will never purchase one of the computers he assembles because the retail price is equal to four months of his salary. The only real solution to these wage-price disparities is higher wages. In that same article, Zhang Yansheng, director of the Research Institute of Foreign Economic Relations at the NDRC is quoted as saying:

China is now under pressure due to rising costs of labor, land, resources, energy and other factors of production, undermining the low-cost advantage of “Made-in-China” products. In about five to 10 years such low-cost advantages will be over for China.

The price/wage issue will not go away in China. It must become a central focus for all foreign companies who invest in China or who purchase product and services from China. The China Price will soon be resigned to the dustbin of history.

5 responses to “China Inflation and Your Business”

  1. There is definitely labor cost pressure in large metropolitan areas such as Beijing, Shanghai, Shenzhen etc. However, the overall labor cost is still quite low in China, especially in the less developed cities. In a lot of second-tier cities, the salary for hiring a comparable worker is about 1/3 to 1/2 of those in large cities. That is why many companies have moved “inland” to seek more competitive cost. Foxconn, the maker of Apple iPhone, is a prime example of moving massive manufacturing plants to the second tier city of Zhenzhou.
    I completely agree with the author that there is definitely a shortage of jobs for those newly graduated from colleges. Due to the massive over-expansion of the college system, by either merging lower-level colleges into accredited universities or by increasing the student admissions, the tens of thousands of new grads each year just saturate the supply side of the labor market. Many computer and engineering graduates cannot find jobs suitable to them, ending up with doing labor work such as waiting tables or making deliveries. It is a rather sad reality and should be addressed partly by the education system and partly by restructuring of China’s economy to move towards more up-stream services. My company is acutely aware of this problem and we try to address it with our effort.

  2. I believe it is demographics that is the main driver of wage increases in China. Certainly, economic growth is a large factor as well, but not the only one – and not even the largest. China’s Gov’t-directed, top-down economic management and the politicization of all business means that there will be a relatively thin strata of very highly-paid workers/entrepreneurs/business-owners/political operators. The average Chinese will see wages lag behind or just keep up with inflation, and wage-growth for this group will lag well-behind the wage-growth of the elite group. That means that wages for them will always be relatively low.
    Rather, china’s demographics have inverted the family-tree. Even a lower-class child can be supported by 1 or 2 parents + grandparents + aunts and uncles well into adulthood, which means simply there will be fewer workers available, and those young workers will be much more choosy which jobs they take.

  3. It seems both of you have been writing many posts lately with the underlying theme that businesses need to at least be considering countries other than China for their manufacturing investment. If I am correct on this, I would greatly appreciate your setting forth the other such countries and why.

  4. I agree, but what then are we to do? We (both my company and just about everybody else) are already here in China and it would cost way more to leave than to just keep paying the rising prices. I can tell you that we are intentionally not considering China for our next factory. We are deciding between Vietnam and Indonesia.

  5. Thanks for the post and comments. I would argue that the day of the low wage in China manufacturing is already gone. I estimate it was already trending out before the 2008 global recession, as at that time I was already seeing many low wage / low skilled manufacturing jobs in textiles, light manufacturing, etc. leave China and flow to Vietnam, Thailand, Malaysia and Indonesia (in that order).
    Chinese News in 2008 (even before the well-publicised issues at Foxconn, Honda, Toyota, etc.) reported skilled / professional workers in Beijing and Shanghai expecting and receiving salary increases averaging 15-20% per year in 2006-2008. While that dropped in 2009, it was still in the high single-digits, and has risen again in 2010. Similarly, I recall Chinese news reporting that even construction workers in Shanghai expected (and received) raises of 15% or so in 2007-2008, due to the Expo construction boom. While that specific wage increase may arguably be a one-off, I recall the news also reported that construction costs were rising elsewhere in China because the drain resulting from workers leaving other cities to work in Shanghai.

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