China hopes to increase its domestic consumption by increasing workers wages. Workers conditions in China has been well-documented, with the nickname “Sweat Shops” given to companies who mistreat workers and give them minimal survival conditions to work and live in. Unfortunately, this problem is not only isolated in smaller factories, but it is also found in various production and manufacturing lines from global corporations. With a culture of workers oppression, Hu’s target of doubling income per capita by 2020 could only be reasonably achieved via implementation of minimum wages.
However, that would actually decrease China’s competitive advantage with regards to lower skilled workers, which consist of a large bulk of her employment force. An imposing minimum wage bill will certainly bring down corporate profits, and potentially slowing down the ailing Chinese Economy further.
Despite this concern, such a move would actually be welcomed. As China continue to grapple with inflation issues, an increased in wages will help to ease that. That may come as counter-intuitive, as an increase in wages should theoretically increase spending power and hence demand for goods and services. However, this would certainly make sense if we consider what is the current driving force of inflation in China – Foreign Investment. With such a move, we could potentially see investments being flushed out of China into the next cheap labor haven, lowering housing and other asset prices. This will also allow the Chinese economy to be less dependent on foreigner spending, making herself more immunity against global economic shocks.
Nonetheless, one cannot simply flick a switch to increase wages. Many factors come into mind: Quality of labor, Costs to Corporations, Social-Political balance etc, and it seems that the Chinese Government 1st hurdle to tackle would be to balance overall economic growth with the increasing wage.
China’s wage gains have moderated on weaker corporate profits, capping consumer demand as the government seeks to sustain a rebound after a seven-quarter economic slowdown.
Average urban salaries rose 12 percent in the first nine months from a year earlier without adjusting for inflation, slowing from 14.4 percent for all of 2011 and 13.3 percent in 2010, government data show. Restaurant operator Yum Brands! Inc. reports smaller pay increases, and labor ministry data show the same for minimum wages.
Deeper declines in wage growth would undermine efforts by China’s new leadership under Xi Jinping to boost consumer spending and shift the world’s second-biggest economy away from dependence on investment and exports. Overcapacity in manufacturing is weighing on profits, with the latest reading due tomorrow when the statistics bureau releases industrial companies’ net income for this year through October.
“Given the poor profit picture, wage growth is bound to slow down in the coming quarters and this is set to reduce the robustness of consumption,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong, who formerly worked at the World Bank in Beijing. “The expected slowdown will impact the rebalancing in the sense that it will reduce the relative role of consumption in the short term.”
Li Keqiang, the second-highest ranked official in the new Communist Party leadership and set to take over from Wen Jiabao as premier in March, said last week that household spending is key to boosting domestic demand.
Minimum wages rose an average 19.4 percent in 18 provinces this year through September, government data show. That follows nine-month gains of 21.7 percent in 21 provinces last year and 24 percent in 30 provinces in 2010. China has targeted an annual average increase of 13 percent for 2011-15.
Consumption, which includes government and household spending, fell to 49.1 percent of gross domestic product in 2011 from 59.6 percent in 2002, when Hu Jintao began his decade as Communist Party chief. Last year’s figure was close to the lowest contribution since China’s reform and opening up policy started in 1978, government data show.
“Changing this model has become of paramount importance if China is to avoid a disruptive bust in investment in the next one to two years and lapse into a middle-income trap in the medium term,” George Magnus, senior economic adviser at UBS AG, wrote in a Nov. 22 report, referring to growth slowdowns in developing nations after incomes rise.
Via – Bloomberg
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