Impact of higher Chinese wages

The successes of workers at Foxconn and Honda, coupled with tacit support from a Chinese government determined to build a domestic market, have predictably embolden workers elsewhere. What’s surprising is the speed and ferocity of the spread of the labor unrest.

Besides a second strike at Honda, there are many copycat strikes in Guangdong and in the Yangtze River Delta to the north. To the dismay of many foreign investors, the unrest has even touched provinces like Jiangxi and Shaanxi,  inland areas that previously were considered as possible sites for relocation in order to lower costs. Now they are investigating opportunities at other countries. Foxconn is looking at India, and Vietnam is already a hot destination for lower end manufacturers.

So, does this mean China’s days as world’s factory is numbered? Not likely, as labor make up only a small portion (7% by some estimate) of total costs. The lower end manufacturers are likely going to move elsewhere, and the rest simply are going to move up the value chain, following the same path of Asian tigers like Taiwan and South Korea.

Is iPod going up in price? I doubt it. Foxconn and other manufacturers are just going to eat up the wage hike. Low end manufacturers have slimmer profit margin for cost absorption. But I think they will eventually opt to move out of China to the next low cost mecca rather than raising prices collectively.

Is this going to be a boom to workers in the developed economies? Hello! What have you been drinking? The Chinese are moving UP the value chain, which means that they are going to compete head-to-head with the developed economies which have already reached peak productivity. Feel free to ask Siemens whether the rise of Chinese high-speed train manufacturers is good for their business or not, or quiz Japanese car manufacturers on the impact of Kia and Hyundai.

Hey, Chinese workers with higher income are going to consume more, benefiting some international suppliers eventually, right? Right. But they also consume more natural resources, driving up the costs of practically every commodity. Plus the Chinese market is very difficult to penetrate and China runs explicit industrial policies to promote domestic companies. Japan is exhibit A of how powerful these non-tariff trade barriers can be.

Bottom line is, I just don’t get the euphoria of many western commentators.

China hit by severe drought

China is currently hit by the most severe drought in recent decades, spanning 5 provinces and leaving 18 million people without adequate drinking water.

The drought is affecting China’s two leading sugar producing provinces. According to the Hong Kong Economic Times, sugar prices in Beijing are already close to historic high, at RMB5,400/ metric tonne. The price of rice in Kunming has also increased by 30%.

China is already seeing surging inflation due to its loose monetary policy. If the drought drives up inflation in food, the PBoC might be forced to tighten with more draconian measures.