Higher wages won't blunt China's edge
One of the most widely accepted economic notions of our time - that a vast pool of cheap labour gives China an unbeatable cost advantage in manufacturing - is coming under attack.
An increasing number of analysts are warning that rapidly rising manufacturing wages are bumping up the cost of mainland-produced goods and eroding China's competitive edge.
But although wages are indeed rising quickly, the low cost of labour is only one component among many of China's comparative advantage in manufacturing. Even at the current high rate of wage increases, it will be a long time before China's factories lose their edge.
To some outside observers, however, higher labour costs are a symptom of inflationary pressure at home and a warning of declining export competitiveness abroad.
According to a study by Judith Banister for the US Bureau of Labour Statistics, between 2002 and 2004 total hourly compensation costs for manufacturing workers in urban China - where the mainland's export industries are concentrated - increased by 25 per cent. Anecdotal evidence indicates that the trend continued through 2006, with export sector manufacturing wages rising anything between 10 and 20 per cent last year.
'China's economy has overheated,' Diana Choyleva of Lombard Street Research warned clients last week, 'with wage inflation running ahead of productivity growth and being passed on to overseas consumers.'
Although the prices of some electronic goods exported by China are still falling, prices of many low-value consumer products are rising. For example, prices of Chinese consumer goods imported to Hong Kong - what Jonathan Anderson of UBS calls 'the closest thing we have to a factory gate price series for the low-end export sector' - are now rising at around 2 per cent a year.
That is certainly a turnaround from the period between 1996 and 2003 when Chinese export prices were falling, but it does not necessarily mean China's competitive position is under threat just yet.
According to a recent study by the Merage School of Business at University of California-Irvine, even adjusted for China's relatively poor productivity, labour costs in Chinese factories are still just 18 per cent of the US level. Moreover, 'the productivity of Chinese workers is considerably higher than many other lower wage nations'.
In addition, the Merage study emphasises that low wages are just one of China's advantages as a manufacturing centre. Labour costs, the study estimates, make up less than 40 per cent of China's competitive edge.
Other important factors including access to cheap capital, a highly developed and efficient supply chain, a cheap currency, the galvanising influence of foreign investment, and the benefits of lax intellectual property, environmental and health and safety standards together contribute over 60 per cent of China's economic advantage.
None of those factors are going to disappear overnight. Despite rising wages, China will remain competitive for a long time yet.
