The Effects Of Chinese Wage Inflation On Consumers

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April 27, 2011 11:13 AM EST

By Tony D’Altorio , Investment U Research Tuesday, April 26, 2011

A new era began in China last summer. It all started at electronics manufacturer Foxconn’s Shenzhen plant, which supplies U.S. companies like Dell (Nasdaq: DELL ) and Apple (Nasdaq: AAPL ). Workers there began to protest wages and conditions, with some even committing suicide over the struggle. In response, Foxconn raised wages by about 20 percent. Wildcat strikes next hit Honda (NYSE: HMC ) parts suppliers’ factories in the same province. And once again, workers eventually received a substantive pay raise.

But the strikes went much deeper than just those plants; they marked a turning point in Chinese labor…

Keeping Chinese Wages In Check

Until that point, the government – through its federation of trade unions – always sided with employers. This helped keep wage increases in check. But Beijing saw employee anger rapidly shifting its way. So, switching its stance, it lifted the benchmark minimum wage by about 20 percent this year. The government is hardly acting out of the kindness of its heart, though. It knows very well that demographics play a large part in the upward trend of wages. The falling number of young Chinese entering the labor market keeps increasing wage pressures. In addition, those who do exist are demanding a better life than their parents and grandparents.

Employers are trying to shift production westward to places in the country with high supplies of workers and low wage expectations. But they won’t be able to escape the trend for long.

The Importance of Chinese Wages

The sudden rise in eastern Chinese pay levels can’t be ignored. By anyone. With China’s products becoming so important globally, even advanced economies and their domestic inflation aren’t safe from what takes place in China. Many western policymakers now fret about increasingly expensive imports. And the rapid growth in emerging markets, and the resulting raises in wages and commodity prices seem to support those fears.

Only lower domestic inflation can really change those expected results. But if that doesn’t happen, inflation will rise in general, giving global central banks more headaches in setting monetary policy. Jean-Claude Trichet, the head of the European Central Bank – which just raised interest rates for the first time in three years – said as much recently. He explained that one of the main reasons for doing so was inflationary risks stemming, in part, from “strong economic growth in emerging markets” (namely China).

U.S. Economist’s Thoughts on Chinese Manufacturing

Of course, economists in the United States – who are very good at only seeing blue skies – disagree. They say not to worry about rising wages in China. Manufactured goods production, they claim, will merely shift to lower wage economies, keeping global prices low. But sourcing goods away from China to lower wage economies is not always a simple process…

Michael Enright of the University of Hong Kong studied just one example for a client. He delved into the possibility of moving some of his customer’s manufacturing facilities from China to India, while also looking at Chinese and Indian transport, electricity and labor costs. His findings showed that the client would have to pay a negative wage in order to make a profit. Enright concluded, “People don’t understand how… [far] ahead China is in infrastructure [compared to other emerging countries].”

This just emphasizes the tremendous strides China has made over the past 20 years. Its ports, rails and highways are approaching levels seen in developed countries. And China continues to spend billions of dollars more on such projects. With that competitive advantage, don’t expect much manufacturing to leave China anytime soon, no matter what U.S. economists might think.

Imported inflation will continue to rise unabated as wages continue to rise there surely and steadily. This will only add to inflationary pressures in the United States… hardly good news for consumers or, eventually, even investors.

Good investing,

Tony D’Altorio

Reprinted with permission of the publisher. The above story can be read on the website www.investmentU.com. The direct link is: http://www.investmentu.com/2011/April/chinese-wage-inflation.html

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