Chinese labor disputes and consumption

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.

The beginning of a new era

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.

Labor movement in China

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.

Migration changes drive labor shortage in China

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.

Guangdong to hike minimum wage by a whopping 21%

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.