China Striking It Rich

06/24/2010 3:00 pm EST

Focus: MARKETS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says recent labor unrest in coastal manufacturing centers will speed the rise of China’s middle class.

Big changes are happening in China—and the nation is increasingly echoing the Industrial Age in the United States. So let's take at how higher wages will impact China's economy.

In 1914, Henry Ford doubled the wage of his assembly line workers to $5 a day—about $115 in 2010 dollars. This act indirectly increased American factory wages as a whole and eventually lifted countless blue-collar workers into the American middle class.

Now, nearly 100 years later, a similar chain of events has been playing out in China during the past few weeks. These pivotal changes in worker wages will accelerate China's transformation from factory of the world to market of the world.

Because of sharply rising property prices and cost of living in cities such as Shanghai and Shenzhen—average property prices shot up by over 100% in both cities since the end of 2008—many migrant factory workers in both cities feel impoverished and hopeless.

An increase in wages will help ease income gaps between the rich and poor, which are higher than those in South Korea and Taiwan at similar stages of development, as well as cut back on general social unrest.

For the most prevalent example of a wage increase in China, take Foxconn. The company is the world's largest electronic contract manufacturer and an export powerhouse, making products ranging from Apple iPhones to parts for Hewlett Packard PCs.

Recently, the company made headlines due to a series of employee suicides at the Foxconn Shenzhen plant. Partly in response, Terry Guo, the Taiwanese billionaire chairman of the company, announced last week that he was increasing the wage of workers by a whopping 30% to 122% at the company's gigantic Shenzhen plant that employs some 300,000 workers. This massive jump in wages will have a significant impact on the local economy.

As the leading export manufacturer in China, Foxconn's wage hike is also spurring workers across the country's vast manufacturing belt to seek higher pays and greater benefits.

This has all happened rather suddenly. Over the past several weeks, a series of strikes and stoppages to demand double-digit pay rises have spread across China, including a large-scale strike at a Honda Motor parts plant in Zhongshan. And although only a few large strikes have been examined in depth by the media, there are strikes every day in China that go unreported.

Overall, these changes are a necessary step in the country's economic development. However, Foxconn's move to increase wages by as much as 122% this year is truly remarkable and has accelerated long-term changes. Already, the wage jump has set off an escalating bidding war for skilled labor in major Chinese export centers near Shenzhen and Shanghai.

In the past, the Chinese government mostly sided with employers during labor strikes, sending out police to arrest or dispel striking workers. But this year, both the government and government-controlled media have actually supported workers against the largely non-state-owned export manufacturing sector in coastal cities such as Shenzhen. There are three reasons why policymakers in Beijing want higher wages for Chinese manufacturing workers, even at the expense of its export sector:

To enhance social stability. Since 2009, the Chinese financial system has pumped nearly $2 trillion into the economy, fueling a rapid surge in urban property prices and domestic investments. The move created huge wealth for government/SOE officials, urban property investors, and government contractors. In fact, it is likely that the number of Chinese US dollar millionaires has doubled in the past 18 months.

All that wealth creation at the top is causing resentment among the masses, and now Beijing is pushing for wage increase to create wealth at the bottom. Two weeks ago, China's labor ministry put out a policy goal to increase wages by as much as 15% per year over the next five years—essentially more than doubling existing wage levels during the period.

To increase domestic consumption in China and decrease reliance on exports. Prior to 2006, China largely relied on cheap labor to enhance its export sector. As China became increasingly prosperous, Chinese policymakers realized that it is important to develop domestic consumption. Domestic consumption currently accounts for about 35% of China's gross domestic product, compared to about 70% in the US. So there is definitely significant room for it to grow.

After the global financial crisis, US and European consumption stalled, and Beijing realized that strong domestic consumption can create far more jobs in services than export manufacturing. And the Chinese government wants to see higher wages, put more money in people's pockets, and stimulate domestic consumption.

To develop Chinese interior cities and better balance economic growth between its coast and heartland. In the past, China's coastal cities, led by Shanghai and Shenzhen, prospered through export-driven growth. Yet, the population in central China is more than twice as high as in coastal cities. To solve employment problems, China wants to transfer some of the growth from the coast to the interior.

By allowing wages to increase sharply in the coastal cities, many export factories are forced to move to interior cities, where wages are lower and newly built transportation infrastructure is now available. Foxconn, for one, is moving a large number of its less profitable business units from Shenzhen to interior cities such as Wuhan and Tianjin.

Subscribe to China Strategy here…

Related Articles on MARKETS