China's rising wages push investors inland (Feature)

By Bill Smith Aug 2, 2010, 8:06 GMT

Beijing - A series of high-profile strikes and double-digit wage rises have highlighted China's rapidly changing labour market, prompting some to predict the imminent end of the country's status as a powerful magnet for investment.

But despite a trickle of manufacturing operations away from China, many analysts say it is too soon to expect an immediate flight of foreign capital to nations with even cheaper labour.

'It is entirely premature to declare an end to the global labour cost arbitrage that has worked in China's favour,' Stephen Roach, non-executive chairman of Morgan Stanley Asia, wrote in the China Daily newspaper this week.

China's foreign direct investment soared by 20 per cent year-on-year in the first six months of 2010, rebounding from a slowdown last year.

Lu Zhengwei, chief economist at the China Industrial Bank, forecasts an initial shift of investment from China's booming coastal areas to its relatively poor, overpopulated inland provinces in the next few years.

'Moving to inland areas will decrease costs. We calculated that salary levels in population-intensive areas such as Zhengzhou, Wuhan, Xi'an and Chengdu are less than 70 per cent of those in Dongguan,' Lu said, comparing four major inland cities with one of southern China's biggest manufacturing bases.

'That means if factories move inland, they save 30 per cent of their costs,' he told the German Press Agency dpa, adding that wage costs could drop by 50 per cent for firms moving inland from Shanghai.

Recent strikes that hit foreign-invested factories in southern China linked to Honda Motor Co, Toyota Motor Corp and other global firms are just a few of the tens of thousands of labour disputes annually, according to estimates by social scientist Yu Jianrong.

The strikes followed a period in which wages had lagged behind economic growth as the government suppressed wages during its efforts to recover from the global financial crisis.

'The new phenomenon of these strikes in a sense reflects the success story of China's economic development,' said Chang-Hee Lee, an industrial relations specialist with the International Labour Organization in Beijing.

'Workers are gaining more and more power because there's a [skilled] labour shortage,' Lee said.

The wage rises complement the government's policies for narrowing income gaps and encouraging investment in central and western regions.

Wage rises are a 'key ingredient of China's pro-consumption growth strategy' and are 'largely going according to the script' of labour reforms launched in 2004, Roach said.

'China has become one of the most unequal societies in terms of income distribution,' Lee said.'The government is trying to redress income distribution issues by policy intervention.'

There are already signs that the policies are succeeding, with several major firms reportedly planning to build new plants in poorer areas, although concerns remain about transportation and other infrastructure.

Taiwan electronics giant Foxconn Technology Group announced wage rises of up to 65 per cent for hundreds of thousands of employees in southern China after an investigation of working conditions prompted by the suicides of 10 workers earlier this year.

Foxconn is considering building a plant in Zhengzhou, the capital of Henan, a relatively poor province with 100 million people, according to state media reports.

That plant could employ up to 300,000 people, while other reports by local governments say Foxconn also plans to employ 100,000 people in Chengdu and is in negotiations over plants in Wuhan and the northern city of Langfang near Beijing.

Foxconn and Hewlett Packard Co have announced plans for a joint plant in the central city of Chongqing to make 20 million laptop computers annually by 2012, while Dell Inc is reportedly considering moving its main plant from south-eastern China to an inland city.

In the longer term, some low-technology, labour-intensive manufacturing is likely to leave China for lower-cost Asian nations.

'I think in the next three years, this trend could be very obvious if the renminbi (yuan currency) continues to appreciate and wages continue to rise,' Lu said.

Shoes made in Vietnam are 5 to 6 dollars cheaper than those made in southern China, said Chen Chin-hsiung, the manager of a plant in the south-eastern city of Putian for Taiwan's Xiefeng Shoe Company, a contractor for Nike Inc.

Xiefeng had set up two larger factories in Vietnam and was considering plants in India and Bangladesh, Chen told state media last month.

Lu said some textile firms had already moved their plants from China to countries such as Bangladesh and Kazakhstan.

But Lu said the loss of factories in industries like textiles 'does not matter' because China is trying to shift to higher technology manufacturing.