International | Mar 05 2010
By Greg Peel
These days we all have a bit of a giggle about a “Made in China” label on any imported good. It has immediate derogatory implications, suggesting something thrown together in a Shanghai sweat shop by locals working for a bowl of rice. Never mind, of course, that we don't mind jumping all over cheap Chinese fridges and plasma televisions (and even cars now).
The younger generation might find it amusing that us oldies once applied the same assumptions to a “Made in Japan” label. In the sixties and seventies, Japan was racing out of its post-war depression to become the world's second largest economy. Electrical goods and cars (which we called “rice-burners”) were Japan's forte, and now Japanese goods are readily considered among those of quality (except maybe Toyotas). China, forty years ago, was a mystery in a Communist shadow.
Japan's is now a mature, and it seems perennially deflated, economy, and China is the big mover. Up until the GFC, China's wildfire economic growth was all about selling cheap manufactured goods to the West. China's domestic consumption was still relatively dormant. The reason why China could sell cheap economic goods to the West – apart from its currency being pegged to the US dollar – was the abundance of cheap labour. There were over a billion Chinese who, we presumed, thought a bowl of rice a day was luxury.
That's why the West moved its costly, risky and labour intensive manufacturing operations to China early this century, keeping the cheaper but much higher-margin design and sales operations at home. At first, China manufactured goods under licence from Western firms, and cheap labour was simply exploited to greatly improve net profit margins in the West. But handing over the design schematics to the Chinese proved not such a good idea, because the next step was for China to flood the world with Western rip-offs that were again that much cheaper.
And so the Chinese economic miracle of the twenty-first century powered on. While the West was not oblivious to the fact improving living standards in China would one day mean Chinese wages would close the gap on Western wages, everyone assumed that day was still a long way off.
No one quite appreciated just how fast China's economy was about to grow. And then when the GFC hit the West, China turned inward to stimulate its domestic economy. More money at home meant upward pressure on wages at a time when Western wages were under pressure from lay-offs. The wage gap was already closing.
When the Chinese ended this year's recent week-long New Year celebrations, and factories and building projects fired up once more, an unusual thing happened. In the coastal cities, where most activity is centred, there was a shortage of labour. In a country teeming with people there were not enough workers to be found. Guangdong province reported being short by two million migrant workers. In China, “migrant” workers are those who move in from the agricultural inland areas to seek riches on the more industrialised coast.
There has been a steady stream of migrant workers heading towards the factories since the Chinese miracle began. Subsistence farmers downed tools and headed east. It seemed that flow might never end, but apparently now it has.
Barclays Capital notes there are several reasons for this.
Firstly, when an economy is growing that fast and new projects are being commenced every day, it stands to reason the demand for workers is constantly accelerating. Another problem is that migrant workers tend to be transitory but a bit disorganised. They attempt to keep moving to where the work is but often head in the wrong direction.
Secondly, when new projects want to attract workers away from other new projects one way to do so is to offer higher wages. Just think of the Australian resources industry pre-GFC (and recovering fast) where truck drivers were earning investment banker money. And given Chinese government stimulus money is driving new projects its previous abundance meant there was room for employers to move.
Thirdly, there is a flipside to all of this. So rapidly have coastal industries been growing that they are sucking away workers from not only regional industries but also agriculture, and the Chinese government has become alarmed. All the farmers can't just up and move to the cities or there'll be nothing left to eat. Thus the government has attempted to balance the equation recently by offering regional and agricultural incentives aimed at stemming the tide.
So given all of the above, Chinese wages are on the rise.
This is a two-edged sword. From a domestic economy point of view, more money in hand means more spending power, and China has been desperately trying to kick-start domestic consumption so as to address the economy's previously overweighted reliance on exporting goods to Western consumers. Currently Western consumers are reluctant to spend. So higher wages mean more goods will be consumed locally.
Barclays sees this as a positive development. However, one must also not forget that for thirty years China has had a one-child policy in an attempt to stem over-population. This policy has now come back to bite the Chinese government on the backside. While today's younger generation in China is better educated, and thus likely to be more productive, the ratio of young and productive to old and unproductive is on the decline.
The risk is further pressure on wages at a time when the welfare drag is growing. This is a point not missed in little Australia as well, where parents have in recent decades settled on two children rather than the four of the baby boom years. Two kids for two parents means zero population growth, and that's why Australia is accepting immigrants like never before. (It's also why Treasurer Costello once encouraged us to have one for mum, one for dad, and one for the country.)
As we have so often been reminded by politicians and economists lately, zero population growth means zero economic growth, unless there are enormous advances in productivity. China has a long way to go before productivity levels match those of the West in its heyday, so there is a bit of a safety valve. And with Chinese economic growth running at 10%, it seems somewhat foolish to contemplate a fall to zero at this stage. Urbanisation in China still has a very long way to go.
But recent evidence suggests that while China is still a way off matching the ultimate urbanisation of Japan achieved from Japan's earlier economic miracle, China's working population growth is already beginning to peak well before the equivalent Japanese peak.
So wage growth brings with it certain pros and cons. We needn't panic, for Barclays suggests the drag factors ahead on the Chinese economy mean that the next decade is likely to see only a tepid 9% GDP growth rate in China rather than the rapid 10% average of the decade just passed. It doesn't seem anything to keep one lying awake in bed at night, but we must remember that an awful lot of faith is being placed on the Chinese miracle to drag the world out of the GFC mire. And no more so than in Australia.
