China’s rising labour costs – a blessing in disguise?

By Malini Hariharan

With so much happening in petrochemical markets the blog has not had time to comment on the ongoing turmoil in China’s labour market.

But we had noted a few months back that factories in southern China were experiencing labour shortages and preparing to pay more as minimum wages in Guangdong province had been raised.

This trend is fast spreading to other parts with companies under increasing pressure to not only hike salary levels but also improve working conditions.

The recent strike at Honda’s transmission factory and the suicides at Foxconn Technology clearly show that change is inevitable in the workshops of the world that are housed in China. Foxconn, which employs more than 800,000 workers in China, made two quick revisions to wage levels and Honda has said that it will raise salaries by 24-32%.

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Pic source: Marketplace

But Honda now faces another headache as workers at a second factory are demanding higher pay.

Seven Chinese provinces are reported to have raised minimum wages in the first quarter and other provinces are also expected to follow. The People’s Daily reports that wages were increased by more than 10% on average while some provinces increased by more than 20%.

It is easy to link higher wage costs to erosion in China’s export competitiveness and therefore a shift in low cost manufacturing to destinations such as Vietnam and even a decline is capital spending a. But this might take a while as China still offers better productivity and infrastructure. So demand for petrochemicals is unlikely to be hit.

And even if manufacturing drifts out of the country, it may not necessarily be a negative for China, says this report in the New York Times. It would help the government reduce reliance on exports, accelerate the shift to manufacturing of value-added products and stimulate domestic consumption as higher wages should translate into increased spending.

It would also alleviate another longstanding problem – the widening gap between the rich and the poor.

Chinese wage inflation will be a burden for companies and consumers globally but is likely to help China reshape itself in the long run.

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