A blog on Chinese economy & society

Posts Tagged ‘wage

Andy Xie: Inflation exported from the US will come back to haunt it

leave a comment »

In an interview on Bloomberg, Andy Xie explains how US stimulus is causing inflation in emerging markets and how this will be re-exported back to the US via higher commodity prices.

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Before you scream traitors, please bear in mind it’s only natural that capital seeks growth, real growth that comes from either productivity or population growth. And within the developed economies, both are in short supply. Japan’s stagnation is NOT due to any policy failure or “stimulus not big enough”, but rather because it has seen both peak productivity and declining population.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.

These words are so true. I have blogged about wage increases in all kind of places before.

However, he then went on to explain how unemployment will not be able to check this imported inflation, and here’s where I disagree with him. While I do believe in imported inflation for the matured economies, I don’t think the workers in these economies are in a position to bargain for wage increases. Instead, inflation will have a double whammy on the average Joes as their assets prices and wages keep falling while everyday living expenses increase. The only spin you can put on this nightmarish scenario is that being squeezed on both sides, the painful adjustment will be quicker, or as Xie put:

The West must wait for the Wangs and the Gandhis to become rich enough so that they demand Western wages and spend like the Smiths and Gonzalezes.

It is a long and painful process for the West. And there is no way around it.


Written by Cindy Luk

August 19, 2010 at 3:14 am

Wage hike…in N. Korea

with one comment

Something interesting from the S. Korean Yonhap news agency: pay raise for N. Korean workers.

True, 5% wage hike isn’t much. But I think it highlights the problem of raging inflation throughout the developing economies. Only a few days ago, garment workers in Bangladesh protested violently over wage demands, despite an 80% pay rise. With soaring food prices, there’s no way to avoid further rises in wages.

What does this mean? First of all, exporters may be less inclined to leave China for other countries, as wages are rising across the board. More importantly, exporters will demand higher prices to compensate their rising costs. While individual exporter may have minimal pricing power in the global market, developing countries on the whole do have the power and inflation will be exported to the developed economies in the form of higher prices for consumer products. Yes, all that mountains of printed money is coming home to roost in the developed economies.

What about all that invincible deflationary force? It will be there too, QE2 or not. It’s just that inflation and deflation will occupy different sectors of the matured economies. A scenario from hell.

Written by Cindy Luk

August 6, 2010 at 5:48 pm

Posted in Macro

Tagged with , ,

Chinese labor disputes and consumption

leave a comment »

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

Foxconn to relocate to inland China

leave a comment »

Hong Kong media has reported that Foxconn is to close most of its Shenzhen (that’s the suicides factory located along the eastern coast) operations and relocate to factories more inland, like the one up north in Tianjin and to the southwest in Chongqing. There are also reports that it’s reviewing opportunities in India. So perhaps some operations will eventually move out of China all together.

Company spokesperson maintains that the relocation has been in planning for a long time, and is in accordance with Guangdong government’s plan to upgrade coastal industries. However, while the upgrade proposal has been out for two years, it’s only recently that Foxconn is seriously considering relocation. So this is clearly driven by increased costs along the coast. Wages at inland factories located in Tianjin and Wuhan, for example, are only half of that at Shenzhen.

This type of relocation will most likely be welcomed by the government (the central government anywayz. Not sure about that of Shenzhen) which is busy rebalancing the economy, both geographically and structurally. It also helps put a lid on coastal workers’ wage demand to less than explosive and hence more adaptable for the exporters.

Besides wage concern, China’s pending new trade agreement with Taiwan, which will eliminate most tariffs, prompt some Taiwanese companies ling Ting-Yi to consider relocating back to Taiwan to cut down on transportation costs to Southern China.

So all in, major shifts in economic make up is at hand right now.

Written by Cindy Luk

June 13, 2010 at 4:18 pm

Posted in China, Macro

Tagged with , , , ,

The beginning of a new era

leave a comment »

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

leave a comment »

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

Runaway inflation in China

leave a comment »

China is to release April CPI today and the consensus is about 2.7%. While this seems well within the 3% target, actual inflation on the ground is quite another story. One telltale sign is that PPI is forecast at a scary 6.7%. How long will it take for this to be transmitted downstream, or should we look for the factories bellying up instead?

The inflation story is so worrisome that even the PBoC has repeatedly cautioned against “heightened inflation expectation,” which it sees as a result of excess domestic and global liquidity, raging commodity prices, and rising wages and other domestic costs.

Since China’s growth relies heavily on investment, i.e. capital intensive, it is more sensitive to commodity price swings. The trade figures released yesterday largely confirmed this. Although China reported a surplus in April, as opposed to the slight deficit expected by many economists, it’s still down 87% YOY, despite decent recovery in global demand. The main culprit was surging imports, especially of commodities. Iron ore import was up 27% YOY, soya beans was up 13%…you get the picture. Considering the massive hikes in wages I blogged about earlier, unless China succeeds in reigning in its economy, commodity-induced inflation will eventually be transmitted to CPI, as early as May according to the pessimists.

And CPI may breach the 3% threshold even if  China succeeds in its endeavor. This is because China is mainly relying on policy measures to surgically cool down the property market, which is seen as the main problem, instead of truely mopping up liquidity. As such money squeezed out of property market simply flows to other sectors of the economy like farm produce. After a 40x (!!!) run up in price last year, garlic has gone from RMB9 per kilo in Q4/09 to RMB12.2 in April. 80% of farm produces monitored by the National Bureau of Statistics are seeing similar price increases and this is causing great consternation among the general public. Yes there are climate issues, but speculation definitely plays a significant part.

I had thought that China would hold off interest rate hike for much longer given the uncertainties in the global economy. I’m still of this belief but the Chinese government is now having rapidly diminishing room for maneuver, and might actually be forced into an unilateral hike in Q2, especially now that the ECB has entered into the competitive printing business as well.

From Bloomberg: Europe Rescue Lets China Tackle Asset Prices, PBOC Adviser Says

The European initiative will enable Chinese leaders to “focus more on containing risks in the domestic economy instead of worrying too much about the global risks,” said Li, appointed in March as one of three academic advisers to the People’s Bank of China.

He’s being nice. Helicopter Ben x2 means that China will be submerged in a tide of liquidity if it doesn’t act decisively.

Written by Cindy Luk

May 11, 2010 at 2:33 am