Ex­porters ad­just­ing to ris­ing wages

The Pak Banker - - Front Page - Mark Wil­liams

FOR years, the abid­ing view of China has been of a work­shop pow­ered by waves of young mi­grants able to out-com­pete work­ers else­where in the world be­cause of their low wages. This im­age is be­com­ing in­creas­ingly wide of the mark. The wage of an av­er­age mi­grant worker in China has quadru­pled in US dol­lar terms since China joined the World Trade Or­ga­ni­za­tion at the end of 2001. The av­er­age Chi­nese fac­tory worker now earns more than twice as much as his or her

in coun­ter­part Viet­nam.

Av­er­age wages are in­creas­ing at a dou­ble-digit pace even to­day, though the Chi­nese econ­omy is on course to record the low­est an­nual GDP growth rate this cen­tury. If rapid wage growth con­tin­ues - and for­mer Com­mu­nist Party of China gen­eral sec­re­tary Hu Jin­tao's re­cent pledge that peo­ple's in­come will dou­ble this decade sug­gests the Chi­nese gov­ern­ment thinks it will - wages in China will soon sur­pass those in Mex­ico and start get­ting close to wages in Brazil.

Many peo­ple are wor­ried about the strains the wage in­creases are

In­done­sia

or putting on ex­porters, who are al­ready strug­gling ow­ing to slug­gish global de­mand. There are signs that China's dom­i­nance in cer­tain sec­tors is start­ing to slip. For ex­am­ple, its share of the world's textile mar­ket started de­clin­ing re­cently.

But a closer look at the shift­ing pat­terns of trade sug­gests this is the re­sult of a wel­come move by en­ter­prises into sec­tors where mar­gins are higher rather than a fail­ure to com­pete. In fact, China's share of over­all global ex­ports has con­tin­ued to edge up, with Chi­nese com­pa­nies be­com­ing in­creas­ingly im­por­tant play­ers in more tech­ni­cally ad­vanced in­dus­tries.

There are three se­crets to China's ex­port suc­cess. First, by en­gag­ing in re­gional pro­duc­tion chains, Chi­nese en­ter­prises have been able step by step to ab­sorb ad­vanced tech­nol­ogy and up­grade their skills. Ac­cord­ing to the World Bank, more than a quar­ter of China's man­u­fac­tured ex­ports are hi-tech, one of the high­est pro­por­tions in the world. As a re­sult, work­ers these days are far more pro­duc­tive than they were a few years ago, with their in­creased out­put help­ing make up for the higher wages they are paid.Sec­ond, the sheer size of China's man­u­fac­tur­ing work­force plus a fo­cus on in­vest­ment in facto- ries and the in­fra­struc­ture that sur­rounds them al­lows Chi­nese en­ter­prises to re­spond quickly to shifts in de­mand and ship their goods to mar­ket faster and at lower cost than their over­seas ri­vals.

Third, many en­ter­prises ben­e­fit from gen­er­ous gov­ern­ment sup­port in the form of cheap loans and a sup­port­ive cur­rency pol­icy. Opin­ion is now di­vided on whether the ren­minbi is close to "fair value". But ex­porters in China have the lux­ury of know­ing that the Peo­ple's Bank of China will in­ter­vene if needed to pre­vent a sharp ap­pre­ci­a­tion in the Chi­nese cur­rency. The clear­est ev­i­dence of the com­pet­i­tive­ness of China's ex­porters is their con­tin­ued abil­ity to un­der­cut com­pa­nies' else­where in the world. The prices of the goods that China ex­ports to the United States, still its most im­por­tant mar­ket, have barely in­creased since the start of 2009 (they are up just about 2 per­cent). This is all the more re­mark­able be­cause the ren­minbi has ap­pre­ci­ated sub­stan­tially against the dol­lar over the same pe­riod. Most sig­nif­i­cantly, the prices of man­u­fac­tured goods im­ported by the US from else­where in the emerg­ing world have risen four times as fast. This abil­ity to raise pro­duc­tiv­ity enough to keep prices low ex­plains why China's ex­porters have con­tin­ued to ex­pand their share of the global mar­ket, even though they no longer have the ad­van­tage of cheap la­bor.

Of course, to­day's suc­cess pro­vides no guar­an­tee for the fu­ture. If ex­porters are to suc­ceed against a back­drop of con­tin­ued rapid wage in­creases, they will have to continue grind­ing out im­prove­ments in pro­duc­tiv­ity.

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