EconoChina

A blog on Chinese economy & society

Posts Tagged ‘labor shortage

Chinese labor disputes and consumption

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The AP has a nice article on the recent labor disputes, in the context of the transition of Chinese economy.

Boosting wages fits in with Beijing’s strategy of closing the income gap and promoting more equal growth in coming years, said Liu Shanying, an analyst at the Chinese Academy of Social Sciences’ Institute of Political Science in Beijing.

“If incomes won’t go up, how can domestic demand be boosted? Strikes for better pay are very much in line with the big trend of Chinese economic development,” he said.

One reason behind the more assertive work force is a shifting job market since China pumped up its economy with massive stimulus spending to fend off the global recession. Manufacturing has begun to expand into the Chinese interior, leaving traditional industrial enclaves on the coast competing for labor and giving workers a stronger bargaining position.

Workers “have the upper hand, and also sense the government is trying to address inequalities, so the workers feel more comfortable in pushing for high wages,” said Lee. [Chang-Hee Lee, a specialist on industrial relations at the International Labour Organization’s Beijing office.]

As I said before, all these are part and parcel of China’s push to rebalance its economy geographically (away from the Eastern coast) and structurally (towards households and consumption). Therefore, China is going down the path of internal revaluation rather than external adjustment via the currency. As a result, we are going to see an explosion of Chinese consumption in the coming decade. But GDP is likely to be more moderated. There already have been discussions on the viability of the current 8% “minimum growth target”. Not that China needs that high a growth rate anymore, with less people entering the workforce due to changes in demographics.

Does this mean the recent change in currency regime is nothing but a hoax? Yes if you are an exporter competing against China. But for China, this is just a necessary step towards turning the RMB into a reserve currency in the future. With substantial internal revaluation and the elimination of many export subsidies, some punters are already calling the RMB overvalued. Li Dao-kui, a member of the Chinese Monetary Policy Committee, suggested that it would take the RMB 10-15 years to be fully convertible and competitive as a reserve currency.

Written by Cindy Luk

June 27, 2010 at 9:31 pm

The beginning of a new era

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The labor unrest in China’s southern manufacturing hub has been finally resolved, with Honda raising wages by 35% and Foxconn by a whopping 66%, in addition to other benefits. These events are watershed moments as China has arrived a turning point where demographics and economic development work together to enable more power and profit sharing to labor. This is essential in gradually nudging China towards more consumption and a more balanced economy.

Of particular note is the attitude adopted by the official media which, despite being rather cautious in the beginning, eventually rallied behind the workers. Since wage-led inflation is congruent with China’s policy goal of re-balancing its economy, I expect more industrial actions going forward.

What does this mean? For starters, China will soon cease to be synonymous with low cost. There will also be more competitors for natural resources. Although China has been the leading commodities importer for a while, a significant part of those are being processed and exported. The rise of Chinese consumers create new demand, with direct consequence on pricing and availability of natural resources. As such, China will become an exporter of inflation to the rest of the world.

Written by Cindy Luk

June 7, 2010 at 4:03 am

Posted in China, Macro

Tagged with , , ,

Labor movement in China

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The spat of suicides at a leading OEM supplier (for Apple, HP etc.) Foxconn has attracted most of the media attention, but it’s the other labor related unrest that will have greater impact over the long term. Or perhaps these are two sides of the same coin.

Media reports tend to focus on Foxconn’s alleged harsh working conditions. The truth is that Foxconn is far from a sweatshop, evident by its having no problem attracting workers in this age of labor shortage. It’s suicide rate, horrific as it seems, is no worse than the national average. But does this mean all’s swell at Foxconn?

The first suicide in this recent string was committed by a worker that lost Apple’s super duper secretive iPhone prototype, and apparently faced a lot of pressure from the management. Scribblings from the other victims seem to point to many vague uncertainties in life, things that do not seem dire enough to push people to the brink. Things that might just blow over had they had someone to talk to.

Foxconn employed about 400,000 people in the vicinity of Shenzhen, large enough to be its own town in a sense. But among all these masses of uprooted migrant workers, there’s no official organization of association. In fact, any form of liaison among workers is actively discouraged, for fear of fostering labor movement. Without a proper support network, vague disappointments in life often turn deadly.

But management’s fear is not unfounded. Just ask Honda China, which has been hit with a strike that paralyzed its four auto plants in China. After 2 weeks of standoff, Honda is now offering 24% raise in a bid to end the strike.

China’s official “union” basically works for the government and businesses in suppressing labor movement. No I’m not kidding. The union actually got into a scuffle with the striking workers over the weekend. The strike is led by second generation migrant workers in their twenties. Compared to their forefathers, they are better educated, more assertive in advocating their rights, and more media savvy. Coupled with a tight labor market, and the fact that Honda China sells mostly domestically (hence cannot move the production offshore under Chinese law), the workers have much higher bargaining power.

What’s more important is the demonstrative effect this strike has in a country that’s already been plagued with labor unrest. 5000 workers have been blocking a textile factory in Henan Province for about half a month. Labor demonstration also broke out in Beijing over the weekend. Honda workers have taped their deeds and post on the internet in an attempt to generate public awareness and support. Their success will embolden a true labor movement in China in the future.

Written by Cindy Luk

June 1, 2010 at 5:17 pm

Migration changes drive labor shortage in China

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China National Statistical Bureau came out with a new report on the migration pattern and offers quite a bit of insight on the recent labor shortage story.

The report estimated that total migrant workers increased by 1.9% to 230 million (yes, this is China after all) in 2009. So why do we keep hearing this labor shortage thing? Well, it seems that the reason these are migrant workers is that they…ahem…migrate. And now the trend is to go west rather than the traditional eastern coastal cities. Total eastern bound migrants dropped by 9%, and Guangdong was hit especially hard with a 26% (!) free fall. Given this background, Guangdong’s announcement on Wednesday of a 21% pay raise isn’t so surprising anymore.

So what have these people been dong in western China? Isn’t Chinese wealth concentrated in the East and the West is just some rural backwater?

Apparently the massive “Go West” project that the government has been promoting over the past decade has finally borne fruit. Between high tech MNCs like Intel and Applied Materials setting up labs to take advantage of amply available cheap engineers and Chinese government’s push for massive infrastructure project that soak up unskilled labor,  western China is finally catching up. So much so that migrant pay in western China is only 10% less than that in the East now. Given the tremendous difference in cost of living between the regions, is it any surprise that the migrants are telling eastern sweatshops to take a hike?  Plus, they get to visit their loved ones a lot more now being employed closer to home, and the eastern city-dwellers generally treat them with contempt. With these social benefits thrown in, it’s almost a no brainer. The effect is so dramatic that Hong Kong Trade Development Center reported recently that more than half of Guangdong’s factories are experiencing labor shortage.

Over the longer term, these changes in migration pattern are unlikely to reverse. The provincial government of Guangdong is planning to upgrade its economy a la South Korea, i.e. by moving up the value chain. The lower end manufacturing is likely to ship out, with Vietnam as a prime location. What does this mean? It means that in a few years, rather than Samsung and Kia making the news, it might be Meide and BYD. And the folks there might finally embrace shopping as a hobby.

Written by Cindy Luk

March 19, 2010 at 9:06 pm

Guangdong to hike minimum wage by a whopping 21%

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China’s Guangdong province, which is the leading export powerhouse, has announced that it will raise minimum wage by an average 21%, effective on the Chinese labor day, May 1. Increases in MW is no news, as other exporter dominated provinces had already announced similar raises. However, most of those raises are in the range of 10%-15%, so this is still surprising in its generosity.

Why are they doing this? Perhaps just a natural response to the recent labor shortage. However, this also gives credibility to China’s efforts in rebalancing its economy towards more consumption. Afterall, only when the folks earn more that they can spend more.

But it also indicates that China will NOT budge in its exchange rate. It has chosen to appreciate internally through wage-led inflation, rather than external currency adjustment. China is trying to reduce the competitiveness of its exporters, and accordingly its trade surplus, by making them less profitable. The benefit of this route vs. external currency adjustment is that profits lost to Chinese exporters will go towards Chinese workers, rather than accruing to exporters in other countries. Smart move, if you ask me, but definitely not welcomed by the debtor nations.

Couple this with the recent rhetoric from Washington, a showdown on trade is looming.

Written by Cindy Luk

March 17, 2010 at 10:18 pm

Posted in China, Macro

Tagged with , ,

Currency War

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You know it’s election year when the media is full of propane gas. After New York Times’ press release yesterday arguing it’s all China’s fault, Martin Wolf at the FT is chiming in as well. He’s also attacking Germany along the way. The article is so dumb I was surprised that Yves Smith at Naked Capitalism chose to highlight it. I’m reproducing the discussion I had with her underneath.

Cindy6 says:

March 17, 2010 at 3:38 am

I can argue just as well it’s the debtor nations that want to have their cake and eat it. If they don’t want these trade deficits, tighten up. There will be no funny money to spend on imports anymore. They can also enhance their competitiveness by cutting prices, which no one on this planet or mars can do anything to stop, and boost exports tremendously. But no…that will be too painful for the civilized people. You see, only Latinos and Asians should be subjugated to stiff austerity programs administrated by the IMF.

Deflation is not really that scary if you’re a creditor (I know, I lived thru one. It’s wonderful, ur purchasing power kept increasing:) Just like inflation is much more palatable to debtor. Yes, China and Germany don’t want to foot the bill for global imbalances. But then, why should they, it’s not like the debtors are doing anything remotely helpful. At least the Greeks tried…

Reply
  • Yves Smith says:

    Cindy,

    The creditor nations are the ones that took steps to keep their currencies cheap and preserve their surpluses. For instance, China has been running a currency peg since 1994.

    Moreover, what is true for you as an individual creditor is not true for a creditor nation. Creditor nations do much worse in deflationary periods. They have to restructure their economies fundamentally, which leads to widespread unemployment. The debtors merely default selectively and depreciate their currencies. The historical record is pretty clear on this issue.

    • Cindy6 says:

      Was the RMB/USD exchange rate considered cheap back in 1994? I don’t think so. In fact, I remember quite well China was under tremendous economic and political pressure to DEpreciate during the ‘98 crisis, as most other Asian currencies did already. Even Japan succumbed, at a great expense to its prestige within Asia. So you see, the peg has never been a tool to accumulate surplus, but a vote for stability. Besides, no one called the RMB cheap back then, why is it cheap now after after a 20% appreciation?

      Basically global imbalances need to the debtor nations to consume less and the creditors to consume more. But now, the debtors are not willing to do anything serious, so why should the creditors care? Of course, this will not end well. So it would become a game a chicken and a war of attrition.

      As for the pain suffered after the endgame, I would postulate that the creditors will last a LOT longer, since their savings will alleviate unemployment. In fact, this is the other side of Keynesian that the likes of Krugman never talk about. Fiscal stimuli should be funded by money saved up during good times. China can keep the factories humming with its reserve, for a while, and give the products to the peasants. In fact, this is the essence of last year’s rural home appliance program. There’s talk of continuing with another rural home improvement program. Given the disaster in SiChuan, I think this will be money well spent.

      Another factor you should bear in mind in your comparison w/ GD1 is that China’s urbanization rate is barely 45% now, about the level of the US in the 1910’s. Worst comes to worst, the migrant workers can just go back to their farm. Unemployment will not lead to starvation. The labor shortage we hear about this year is partly aggravated by workers don’t bother to return to the factories after the economy improves.

      Now, what could the debtors do? They can default of course. Existing debt has never been the problem. The problem lies in their fiscal deficits, that they need fresh, new money to continue their day to day existence. Even if the debtors default selectively, do you think the other investors will continue lending at these rates? And if you think losing an empire, suffering a horrendous war, and losing a reserve currency is actually doing better, then we live in alternate universe.

      The bottom line is if inflation is more preferable to deflation to the creditor nations, then we wouldn’t be having this discussion. China and Germany are only doing what’s in the best interest of their citizens. The same reason why the Fed will continue printing, to the detriment of other nations.

Yves Smith says:
March 17, 2010 at 5:57 am

Cindy,

First, deflation is not a healthy state of affairs. Look at Japan, look at the US late 19th century where there were farmer uprisings, the UK in the early 20s. The deflation imposed on countries at various times is considered to be the prime reason that no one now (save gold bugs) wants to go back to the gold standard. Mild inflation is considered to be the least bad of monetary growth choices, and there is a school of thought that the view that 2% was a good level might be wrong, there is now some thought that somewhat higher levels might be better. I have no idea re the optimal level of inflation, but deflation is destructive to growth.

Any currency peg (if a hard peg, which China’s was, and is still pretty hard) will lead to distortions. I say later in this thread quite explicitly that when China’s peg became too low is subject to debate (some say as early as 1999) but there is no question it was too cheap by 2002.

Re urbanization, the 45% figure you cite is based on China’s own distorted metrics. China has unusually high density thresholds for a community to be classified as “urban”. Many significant manufacturing centers are called “villages” or “towns” when no one from abroad would call them that. Houston and Brisbane would also be “towns” in the Chinese schema.

Your charge re debtor nations is off base. Unless a country goes into a trade surplus, it is impossible for it to lower its outstanding debts on an aggregate level. So China’s insistence that it keep the RMB cheap to maintain its surplus with the US means we will continue to get more into debt. If you want the US to delever, there is no way other than for the US to go into a trade surplus, or at least lower its trade deficit substantially so its GDP growth rate will exceed its rate of debt accumulation.

Cindy6 says:
March 17, 2010 at 3:50 pm

“Any currency peg will lead to distortions.” Bretton Woods led to distortions? Stable currency and prudent fiscal policy are of no use to the world?

“urbanization…figure you cite is based on China’s own distorted metrics” So the US std is the truth and only truth now? The fact that many Chinese towns had higher population density 200 years ago than Houston now should never be considered? For the record, Japan defines its urban area as population density of 4k ppl / 1sq. km. , compared to 1k in China and 386 in the US. I don’t have the corresponding figures for S. Korea & Taiwan at hand, but I bet they converge towards China rather than that of the US.

“China’s insistence that it keep the RMB cheap to maintain its surplus with the US means we will continue to get more into debt.”
Not true. The US (or France or whichever) can always increase exports and depress imports by lowering prices. Yes, this is deflation I’m arguing for. This was how Germany regained its competitiveness in the 90’s, by “internal depreciation”. And yes, it’s painful, which is why the Germans now absolutely refuse to let the debtors whine their way out of the medicine and steal their hard-earned savings.

“If you want the US to delever, there is no way other than for the US to go into a trade surplus”
Not true either. The debtors can delever by good old fashion default. What can China do to a nuclear-armed soverign nation? Not even the PIIGS are pushovers. This is unsecured credit card debts! Trade deficits self-correct. China via UST, Germany thru bank loans. All the debtors have to do is get their fiscal house in order and the threat of higher interest rate would be a hollow one. But then, this would mean Austerity. How dare those sneaky parasitic savers!

So, at the end of the day, trade war is inevitable.

Written by Cindy Luk

March 17, 2010 at 10:00 am

China to increase minimum wage

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China is increasing its minimum wage across the board (the wage rate is set at provincial or even city level) in order to alleviate its labor shortage problem and also to help developing its domestic market. On the heels of recent announcement from Jiangsu to raise minimum wage by 13%, Shenzhen (a leading manufacturing hub down south) is to increase its wage rate by at least 10%. This trend is likely to be replicated throughout the nation.

By increasing labor’s share of profit, China is effectively making its exporters less competitive and reduce its trade surplus to placate the protectionist voices in key markets. The increase wages will go towards enhancing domestic consumption and building a middle class. A much better way to address the global imbalance than revaluing the RMB, which will only benefit China’s competitors.

Written by Cindy Luk

March 3, 2010 at 1:55 am