Can India Benefit From Rising Labor Costs in China?

Chinese labour costs have soared this year despite a slowdown in the broader economy, according to new official data that showed an average 22 per cent rise in minimum wages.

The government, which has made it a policy priority to boost incomes, welcomed the development, but economists warned that it would add pressure to companies already struggling against weak global demand.

As of the end of Month, local authorities in 21 of China’s 31 provincial-level regions had increased minimum wages by an average 21.7 per cent, the ministry of human resources and social security said. Several more have also promised to raise minimum wages before the end of the year.

Compared with developed markets, labour costs in China are still low. The highest minimum wage is in Shenzhen, an export hub next to Hong Kong, at Rmb1,320 ($207) a month. In hourly terms, Beijing workers are the best paid, with the floor set at Rmb13 ($2.05) an hour.

But compared with other emerging markets, China is quickly getting more expensive. The hefty increase in minimum wages this year comes on top of similar gains over the past two years.

The effects are beginning to show. China’s share of low-end manufacturing imports in the United States has peaked and is now declining, according to UBS. Cheaper countries in Asia, especially Vietnam and Bangladesh, have been the main beneficiaries, eating into China’s market share.

Increasing the minimum wage is, in part, a method used by the Chinese government to nudge exporters up the value chain, encouraging them to produce more sophisticated goods.

It is also seen as a way to narrow the country’s yawning wealth gap and to stimulate more domestic consumption. The government has declared that it wants average incomes to grow more quickly than nominal gross domestic product over the next five years.

Market forces are playing an important role as well. Although there has been much talk about a looming labour shortage in China, the real issue is a mismatch between demand and supply, said Haibin Zhu, chief China economist with J.P. Morgan. Industries are looking for skilled manual labourers, but colleges are producing vast numbers of graduates who are not willing to do low-end work, he said.

The stiffening global headwinds have started to hit China in recent months. The economy grew a robust 9.1 per cent in the third quarter, but that was the slowest in more than two years and analysts expect the slowdown to accelerate.

Smaller companies have fared especially poorly. After a series of minor bankruptcies, the government has encouraged banks to give small companies more financial support, though rising labour costs present an even bigger challenge for them.

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