Economy

Austerity’s for Athens, not us

Chinese leader calls for higher wages as means to boost consumption

Canton Fair: crowds without cash

Have we reached a tipping point where China’s workers finally become consumers? President Hu Jintao’s endorsement of higher wages last week heralds another attempt to re-engineer China’s export-focused economy. But it comes at a time when factories are worrying more about export performance.

Greece may not be China’s most critical export market, but its contracting economy may be a weather vane for the rest of the continent. Despite politicians’ claims to the contrary, many believe that both the European Union and the United States are facing a bleak economic outlook. That’s the message from the exporters attending the 107th Canton Fair last month (for more on which see issue 13).

“The increase in orders, compared with the dismal situation last year, is no more than 10%,” one discouraged toymaker told the 21CN Business Herald. And what orders there are seem to be for cheaper goods. A new report by the Guangdong Toy Association observed a ‘potato effect’ in the US and Europe, with demand for cheap toys rising at the expense of high-end products.

Unemployment in some European countries tops 19% (Spain), and a record 39 million Americans now rely on government food stamps. Europe and the US make up 21% and 17% of China’s export market respectively.

Of course, exports for the first quarter of this year were up nearly 29%. But many manufacturers at the trade fair feared the increase was due to buyers restocking inventories rather than a sure sign of rising demand. A spokesperson for the Fair, Chen Chaoren warned the Herald that short-term orders were replacing long-term ones.

China’s long experiment with export-led growth was partly motivated by the need for job creation, and Peking University Professor Yiping Huang estimates that the economy still needs to create at least 10 million new jobs every year. If factories can’t provide those jobs by increasing exports, a new source of demand must be found. Official media has spilled a lot of ink over plans to boost ‘domestic consumption’, but so far actual changes have been few.

On International Workers Day, May 1, President Hu Jintao told the ‘model worker’ awards ceremony that measures would be taken to lift wages. “A significant increase in wages as a share of [GDP] is the key to addressing imbalance in the Chinese economy,” explained a China Daily editorial on Hu’s speech, “the rise of wages [has been] too slow compared with the expansion of national wealth. As a result consumption has actually fallen as a share of GDP.”

Low wages have been as important as currency policy in turning the country into a manufacturing powerhouse. But, with many commentators expecting the yuan to rise, it could be an inauspicious time to increase wages too. The combination could cost factory jobs before domestic demand is strong enough to replace diminished export volumes.

The competition for export growth through low-cost manufacturing has often been called a ‘race to the bottom’, and China’s leaders may now have decided to try to change direction. If the country can pull off a rise in wages, and a consequent swelling in domestic demand, it could set into motion a virtuous circle that will serve to offset much of any loss of Chinese competitiveness overseas.

It’s a big ‘if’ but, should it materialise, it would be good news for foreign businesses too, whose long-cherished dreams of one billion customers might come a little closer. Recent rises in minimum wages in Guangdong and Jiangsu show it is not just a case of politicians paying lip service to a populist idea. In fact even the timing of Hu’s call for ‘higher wages’ strikes a contrast to the austerity regimes being contemplated by some in the EU. Who has the better economic prospects at the moment: the people of Guangdong, or those in Greece?


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.