赣锋锂业 新浪:Global economy: An inflated outlook

By Rahul Jacob and Chris Giles
Published: April 8 2011 22:57 | Last updated: April 8 2011 22:57
 

Onlookers at a Foxconn press conference called following a spate of suicides at the electronics maker last year
TheChinese province of Guangxi might be almost 9,000km from Frankfurt,home of the European Central Bank. But in today’s globalised economy,the two are much closer than they first appear.
Twomonths ago Zhu Xinzhi, head of a lighting manufacturers’ association inthe industrial city of Foshan in southern China, set off for Guangxi onarecruiting trip. Offering a monthly wage of Rmb1,600, he hoped to attract 500 workers; he got 10. Alternative opportunities,high inflationand a recent trend of rising wages made his jobs unattractive. “Theworkers felt the salary was relatively low and that it’s better to stayhome and run their own small business or go to cities with higher pay,”he says. “The salary we offered has no advantage any more. It was a veryunsatisfactory trip.”
The reverberations from China’srising wages,alongside rapid economic growth there and in fellow emerging economies,were felt in far-off Frankfurt this week. That Mr Zhu might have to paymore to recruit workers will raise the price of light bulbs importedinto Germany from China. If the process is replicated in the prices ofother Chinese goods, inflation in Germany and other European nationswill be permanently higher, requiring action by the ECB.
It appears the bank has already begun to take action. On Thursday, the ECBraised interest rates for the first time in three years– initially by only a quarter of a percentage point to 1.25 per cent.Jean-Claude Trichet, president, cited inflationary risks stemming inpart from “strong economic growth in emerging markets”, as well as“ample liquidity at the global level, [which] may further fuel commodityprice rises”.
It is not just the ECB that looks at China and seesa more inflationary future. This week the People’s Bank of China, thecentral bank,raised rates for the fourth time since October, as well as taking other action against price rises. Others are expected to follow suit by the end of the year.
TheInternational Monetary Fund expressed concern in the World EconomicOutlook published this week that oil scarcity combined with rapid growthin oil-intensive emerging economies would continue pushing oil priceshigher year after year. In FebruaryJames Bullard,president of the St Louis Federal Reserve Bank, raised the question ofwhether inflationary pressures might mount in the US despite highunemployment because there was little or no slack in the global economy.
Thepotential worldwide consequences of local trends make it impossible forpolicymakers to ignore the Chinese labour market and its links to theglobal economy.
A new era began last summer after a spate of suicides by workers at the Shenzhen plant of contract electronics manufacturerFoxconn,just across the border from Hong Kong. In response the Taiwanesecompany, which supplies the likes of Apple and Dell, raised wages byabout 20 per cent. This was followed by wild-cat strikes at the factories of Honda parts suppliers in the same province, leading salaries there to rise by a similar percentage.
Untilthat point, says Han Dongfang of workers’ rights group China LabourBulletin, Beijing through its federation of trade unions had alwayssided with employers, helping to keep wage increases in check. In avideo clip widely circulated online, young white-uniformed workers atthe Honda parts plant shouted at representatives of the officialgovernment union for beating them and taking the part of their Japanesebosses.
These strikes, says Mr Han, were a “turning point. Itbecame clear [the government union] was channelling employee anger intoanger against the government”. This year, the government has signalledits determination to raise workers’ incomes by lifting the benchmarkminimum wage by about 20 per cent in Beijing (where it is now Rmb1,232per month); Guangzhou, capital of the industrialised province next toHong Kong (to Rmb1,030); and elsewhere.
One of the catalysts forthe upward trend in wages is demographic, with a falling number of youngChinese entering the labour market. Although employers are shiftingproduction west, where the supply of workers is higher and wages lower,the sudden rise in pay levels cannot be ignored.
Since Chinastarted to integrate into the global trading system in the 1980s, saysWilliam Fung, head of the Hong Kong-based $15.9bn global sourcingcompany Li & Fung, it has “added at least 20 per cent to the world’sworkforce, if not more. China became the world’s factory.” Its low wagelevels allowed the rest of the world to “enjoy a massive labour supplyshock that helped keep inflation tame”, according to Eswar Prasad, aprofessor of economics at Cornell University.
But as China’sshare of world merchandise exports has risen from 1.1 per cent in 1982to above 10 per cent at the end of last year, the moderating effect ofChina on advanced economy inflation is waning. Now that Chinese productsare so important, domestic inflation in advanced economies is no longerimmune from events in China.
Policymakers now fret that thefuture for advanced economies might be one of persistently moreexpensive imports because rapid growth raises both wages and the priceof commodities necessary for manufacturing goods. In such a world,higher imported inflation would have to be offset by lower domesticinflation – or governments have to accept an overall acceleration ofprice rises.
In a speech last month, Spencer Dale, Bank of Englandchief economist, noted with particular concern that inflationarypressures in China were unlikely to be offset by a correspondingdepreciation in the value of its currency. “Where economies operatepegged exchange rate regimes, it is far from clear that this can berelied upon, at least in the near term,” he said.
That said, three factors mitigate the potential effect of China’s rising wages, according to some economists.
First,more pricey Chinese labour still represents only a fraction of thefinal price of goods sold in Europe and the US. Prof Prasad says thevalue of goods exported from China that is actually created in thecountry is just 10 to 15 per cent. “The low value-added share impliesthat even a significant rise in China’s labour costs won’t add much tothe final costs of processed exports.”
Second, Chineseproductivity levels are not standing still. They have soared in the past20 years, allowing companies to increase pay rapidly withoutsignificantly raising final prices. Gavekal Dragonomics, an economicconsultancy based in Beijing and Hong Kong, says China’s exporters havemoved up the value chain, and its ports and highways are almost assophisticated as those in the developed world, allowing exports to risedespite rapid wage increases.
Third, as Chinese wages rise, someproduction will shift to lower-wage economies, keeping the global pricelow. Li & Fung, for example, reported in late March that it hadmoved some of its clothing production to Bangladesh, Vietnam, Indonesiaand India.
. . .
Butsourcing goods in lower-wage economies is not always easy. MichaelAustin, chief financial officer of Top Form International, headquarteredin Hong Kong, says the company is moving some of its mass-marketbra-making to Thailand, but China still accounts for about half of itsproduction. More expensive bras requiring detailed lace work must stayin China, he says, as worker productivity is much higher and “thelearning time is so much less in China. In China, people work to live,”he says.
Michael Enright of the University of Hong Kong says hewas asked by a client considering sourcing manufacturing from Asia tocompare Chinese and Indian transport, electricity and labour costs.“They would have had to pay a negative wage to manufacture [the product]in India. People don’t understand how much ahead China is ininfrastructure,” he says.
The benefits to China of rising wagelevels and productivity are clear. In a lane near a cluster of factoriesin Foshan last month, two 20-something women were reading flyers on anoticeboard advertising vacancies. Wangli, 27, and her friend, Xiaoye,24, were unimpressed by an offer of work at a lightbulb maker seekingworkers with a “serious attitude who could eat bitterness” (whichloosely translated, means the ability to make sacrifices).
Instead,they glanced at another advertisement. A stainless steel factory wasoffering salaries of about $250-$370 a month for “female packagingworkers” to as much as $700 for experienced machine operators. Theinducements did not stop at higher salaries. “We have a brand newdormitory building with air conditioning and hot water ... We canorganise birthday and bonfire parties and trips,” the company promised.
Theimproved prospects for Wangli and Xiaoye are far from a disaster foradvanced economies but it is likely that the days of ever cheaperimported labour-intensive low-wage Chinese goods are coming to an end.
IfChina is no longer exporting deflation, domestic prices in Europe andthe US will have to be kept on a rather tighter rein in future.