By Geoff Dyer in Beijing
It feels like the end of an era. The spate of strikes and suicides that has rocked China's southern manufacturing belt over the past fortnight could well mark the time that China stopped being a place of limitless cheap labour. And for the economy, that could be a thoroughly good thing.
The manufacturing hub in Guangdong province has been buzzing with two different but related stories – the suicides at Foxconn, the company that makes the Apple iPad and other high-tech devices, and a high-profile strike at a Honda components plant.
Both events have also resulted in eye-catching wage increases – 30 per cent in the case of the Foxconn workers and a 24 per cent offer at the Honda factory (they wanted 50 per cent).
They are part of a pattern of rising wages across the economy. Dai Qinlan, director of the Careers Information Centre in Wenzhou, another export hub on the south-east coast, said wages are up around 20 per cent in most of the region's factories this year. The city of Beijing announced yesterday that its minimum wage is to rise by 20 per cent.
“Companies in China can still get young workers for their factories, but they are going to have to pay significantly more for them,” says Arthur Kroeber, managing director of Dragonomics in Beijing.
This is not a new phenomenon – there have been reports of staff shortages in parts of Guangdong for several years and wages were heading higher before the crisis hit the export sector in late 2008. And Chinese wages are still equivalent to around a third of Mexican salaries and a quarter of Brazilian ones.
Instead, the salary rises in Guangdong this week symbolise a broader shift in favour of labour that has accelerated in recent months and is likely to carry on for several years. They reflect powerful demographic changes resulting from the “one child” policy introduced 30 years ago, with the numbers of new potential workers entering the economy dropping quickly. Economists say China has passed or is close to hitting the “Lewis turning point”, when the pool of surplus agricultural labour tapers off, sparking big rises in industrial wages.
Cai Fang, a researcher at the Chinese Academy of Social Sciences who has written widely on the phenomenon, says wages for migrant workers increased by between 2 per cent and 5 per cent in the early part of the past decade, and by around 7 per cent in 2004-07. Yet last year they jumped by 16 per cent.
Wage inflation does bring plenty of macro-economic headaches. China was able to achieve double-digit growth over the past decade with minimal inflation, in part because wages grew more slowly than productivity. But if salaries continue to rise, the normal rate of inflation is likely to be higher – and that is in an economy which some fear is already overheating.
Rising inflation would likely lead to higher interest rates, which could cause a lot of stress among the local governments that borrowed heavily last year to finance infrastructure stimulus projects.
Yet wage inflation is a pre-condition for Beijing's main long-term economic goal, boosting consumption and reducing dependence on exports and investment. Raising the incomes of ordinary Chinese is the best way of encouraging them to save less and spend more – and for some observers that is already happening.
“Right now in China we are seeing the opposite of what many people believe in their minds,” says Li Daokui, an economist at Tsinghua University and a member of the central bank's monetary policy committee. “Chinese consumers are beginning to consume.”
Booming consumption will, in turn, lead to smaller external surpluses, as China imports more goods from the rest of the world and helps encourage a rebalancing of the global economy. As long as potential spikes in inflation can be controlled without too much cost, China has a lot to gain from higher wages.
