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  • Aug 20, 2014
  • Updated: 12:59pm
Monitor
PUBLISHED : Monday, 15 April, 2013, 12:00am
UPDATED : Monday, 15 April, 2013, 5:08am

No need to worry about China's competitiveness

A shrinking labour pool and rising wages could mean the start of an economic rebalancing act and not a feared loss of manufacturing edge

Fears have been growing recently for China's competitiveness.

On one hand, investors fret that the appreciation of the yuan is eroding the competitive edge of China's factories compared with their rivals in Southeast Asia.

On the other, they worry that the contraction in China's working age population will push wages up to uncompetitive levels.

At first glance, it looks as if their fears are justified on both counts.

The yuan has strengthened by 34 per cent against the US dollar since it was revalued in June 2005.

More to the point, the yuan has appreciated relative to other Asian currencies. Measured against an inflation-adjusted basket of China's trading partners and competitors, the yuan has climbed by almost 40 per cent since June 2005.

Over the same time interval, the Thai baht and the Indonesian rupiah have appreciated by 20 per cent - half as much as the yuan - while the Indian rupee is flat (see the first chart).

As a result, in exchange-rate terms, China has indeed suffered some severe erosion of its competitive edge since the yuan's revaluation.

At the same time, what was once regarded as China's inexhaustible pool of cheap labour has begun to run dry.

Last year, China's working age population began to shrink. Meanwhile, the media have been full of reports about how China has reached the Lewis turning point, at which there is no longer a surplus of agricultural workers to provide a cheap migrant labour force for the country's urban factories.

With wages already climbing at double-digit rates, the result, fear some observers, will be an increasingly tight labour market and a steep increase in labour costs that will further damage China's manufacturing competitiveness.

Happily, however, the worries about China's ability to compete look overblown on both counts.

It is true that China's real effective exchange rate has appreciated sharply since 2005, but, as analysts at HSBC pointed out last week, China's economy hasn't suffered.

Although China is no longer the most competitive producer of some low-margin goods like textiles, the country's factories have moved successfully up the value chain to higher margin products. As a result, China has actually increased its global market share in manufactured goods since 2005.

Similarly, a shrinking working age population and fast-rising wages have done little to dent the performance of China's manufacturing industries. That's because China's economic growth over recent years has been driven by less by the growth of its urban workforce than by rapid gains in the productivity of its workers (see the second chart).

If this improvement in productivity continues - and most observers expect it to - then China's manufacturers will retain their competitive advantage despite rising wages.

That's not to say a contracting labour force and rising wages will have no effect on China's economy. They will have a big impact, but the effects will be largely positive.

As the labour market tightens, rising wages will divert income more towards ordinary households and away from China's corporations.

That will reduce China's high rates of corporate saving and investment, while boosting household income and consumption.

In other words, the much-feared demographic shift towards a shrinking working age population will help China achieve a necessary economic rebalancing away from investment-propelled growth and towards a more sustainable consumption-driven economy.

As a result, China's demographic transition should not be feared as a threat to competitiveness, but welcomed as an aid to economic rebalancing.

tom.holland@scmp.com

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aplucky1
the scale and size of what is going in china is unprecedented
so I continue to laugh at all these giant brained economist that think they know anything other than the last book they read, what a bunch of clowns
xiaoblueleaf
"If productivity increase continues". What nonsense - babbling behind a desk instead of try running a factory in China.
ecswsk
The interpretation of the data could be misleading. Much of the gain in output per worker is caused by reallocation of labor from the rural to the industrial sector and rapid capital accumulation. Both are unsustainable in the long run. There is much less surplus labor in the rural area than a decade ago. Unless there is drastic change in the "hukou" system, reallocation of labor cannot continue at the same rate as in the past 20 years. As for capital accumulation, a major part of it has gone to wasteful infrastructure projects, ghost town construction, etc. Its contribution to long term productivity gain is questionable, too.
 
 
 
 
 

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