...with basing your economy (which is, inter alia, the bulwark for social order) on exports that compete chiefly on price is margin pressure. This would not be as much of an issue if China had a reputation as a vibrant, highly adaptable economy where price signals commanded markets.
Western Profits Wilt On China's Surging Wages
Earnings per share would fall 72pc for Jones Apparel, 50pc for
Maidenform Brands and Dollar Tree, 42pc for Macy's, 39pc for Target,
and 20pc for Polo Ralph Lauren. Reliance on Chinese plants is suddenly
proving double-edged. "We conclude that labour and transportation cost
pressures are a major concern for executives that may be
under-appreciated by investors," it said.
The US industrial giant General Electric raised eyebrows in May with
plans to shift production of its hybrid water heater from China back
to Kentucky next year after securing lower wages from US workers. The
company cited the narrowing pay gap, lower transport costs, and
shorter delivery times.
China's manufacturing wages have vaulted from around $1,000 annually
10 years ago, to $3,900 last year. Pay in the industrial hubs of the
Pearl River and Yangtze River deltas are much higher and likely to
rise further after a wave of industrial disputes at Foxconn, Honda,
Toyota, and Omron.
Bruce Rockowitz, head of the pan-Asian logistics group Li & Fung, said
cost pressures are rippling through the region. "It's not just China
going up: its everywhere," he said.
It is unclear whether this will drive up inflation for imported goods
in the West, reversing the benign phase of globalisation seen over the
last fifteen years, or whether multinationals will adjust to
constrained demand in the US, Europe, and Japan by slashing margins,
or a mixture of the two.
Credit Suisse's survey of executives found that 55pc of foreign firms
in China could relocate plant to Bangladesh, Vietnam, Indonesia or
other low-cost regions relatively easily, though it would be costly.
There are winners too, such as Yum Brands poised to reap the harvest
from rising Chinese consumption.
The changing landscape has major implications for Chinese exporters,
with an average profit margin of just 3pc. High-tech companies in wind
power, solar, and transmission equipment that have recently broken
into world markets will face stiffer headwinds. The Shanghai Composite
Index of Chinese equities has been lagging all year on fears of a
profit squeeze. The bourse is down 20pc since last November.
The erosion of export margins may explain why Beijing is still
dragging its feet on a revaluation of the yuan, despite ever louder
calls for retaliatory sanctions in Washington. China's currency has
fallen slightly on a trade weighted-basis since the dollar-peg was
replaced in May by a crawling band, a clear sign that the authorities
are worried that the economy is cooling too fast. Beijing has tried
cool the property boom with credit curbs but it is hard to use such
tools in a surgical fashion without collateral damage. The growth of
factory output ground to a halt in July, on a month-on-month basis.