It seems China may have to hand off its manufacturing mantle now that its one-child policy is coming to fruition, which is good news for its regional neighbors, writes Ben Shepherd of Investing Daily.
The conventional wisdom is if China sneezes, the rest of Asia comes down with a serious case of pneumonia, and the only prescription is a steady drip of fiscal stimulus.
That’s the wage of almost exclusively single-partner trade, which has largely been the case throughout much of Asia for the better part of two decades. As China’s economy has grown and its manufacturing business has taken off, the country has shown a voracious appetite for Asian resources.
This time around has been different, though. To be sure, China’s gross domestic product growth has slowed and most indicators are flashing warning signs for its manufacturing and export businesses. However, with the exception of a few countries such as Mongolia and Laos, the rest of Asia is growing apace.
So what has changed? For one thing, while demand for Chinese exports has slowed thanks to weak growth in the US and the festering European debt crisis, Chinese manufacturers aren’t simply folding up shop and going home.
Labor costs in China have on average surged by 20% a year for the past four years. Wages in China’s coastal provinces, the country’s manufacturing and export hubs, have been rising even faster, as factories have been struggling to attract cheaper labor from the country’s interior.
As the central government has stepped up its spending in the country’s previously neglected hinterland, rural Chinese have been able to make a better go of life at home, negating the draw of factory life. And since most families already have at least one relative working in a coastal factory and are sending money home, there just isn’t an urgent need for cash.
While that’s created a virtuous cycle as far as the average Chinese is concerned, it’s made life tough for manufacturers who moved their operations to China to take advantage of cheaper labor in the first place. So rather than simply going out of business, manufacturing is leaving China at a quickening pace, bound for countries like Sri Lanka, Vietnam, Bangladesh, the Philippines, and Thailand.
While securing financing has been a challenge for many companies making the move, due to an underdeveloped banking system, metal works have been moving to Sri Lanka given its proximity to supplies of tin, aluminum, and other key inputs. Labor costs also happen to be just a third of those in China.