Han Zheng, the mayor of Shanghai, has just delivered a pleasant surprise to the city’s workers: their minimum wage is to rise by more than 10 per cent in April.
No one will be getting rich – the new rate amounts to a less than princely Rmb1,232 ($187) a month. But Mr Han’s announcement is part of an emerging trend. Chinese officials are seeking to head off a repeat of last year’s labour unrest amid fears that persistent and rising inflation could provide a further irritant in wage discussions.
In a rash of disputes between May and August, employers were hit by strikes or other problems, including Honda’s Chinese subsidiary and some of its China-based Japanese suppliers, such as Omron.
The outcome was a wave of pay rises, notably a 30 per cent increase at Foxconn, the Taiwanese owned manufacturer of electronic products such as Apple’s iPad, after a spate of suicides drew attention to working conditions.
Shanghai is not alone in moving early to head off further unrest this year. Beijing’s municipal government raised minimum wages by 21 per cent in January, and the southern province of Guangdong is also considering a rise.
The increases are likely to reignite debate about whether China’s rising wages will prompt companies to shift production to other locations in emerging Asia. Plenty of business leaders think they may.
Matt Rubel, chief executive of Collective Brands, the US footwear group that owns the Payless shoe stores chain, is shifting a chunk of production from China to Indonesia, south- east Asia’s largest economy.
“The utopia for one stop sourcing for quality and low price has been China . . . but utopias never last,” says Mr Rubel.
Harry Lee, chief executive of Tal Apparel, a Hong Kong garment maker, takes a similar view.
“Five years ago, if you asked me the best place to set up a factory, first would be China, second would be China and third would be China,” he says. “Today it’s very different.”
There is substantial room for doubt, however, about the long-term impact on China as an Asian manufacturing centre.
Rising labour costs in China are not a new phenomenon. Research by the International Labour Organisation suggests that Chinese wages have been outpacing the rest of Asia for at least a decade.
Chinese workers received real wage rises averaging 12.6 per cent a year from 2000 to 2009, compared with 1.5 per cent in Indonesia and zero in Thailand, according to the ILO.
At about $400 a month, Chinese workers are now three times more expensive than their Indonesian counterparts, and five times as costly as in Vietnam, although they remain considerably cheaper than in Taiwan and Malaysia.
However, that simple calculation takes no account of changes in relative productivity. Stephen Roach, chairman of Morgan Stanley Asia, says World Bank data indicate productivity growth in Chinese manufacturing of 10 to 15 per cent a year since 1990.
That averages out at close to the same level as annual real wage increases over the last decade, suggesting unit labour costs may have risen very little, if at all.
Accenture, the global management consultancy, concluded in a report published on Monday that a minimum wage rise of 30 per cent would cut margins by just 1 to 5 per cent for companies with a large Chinese manufacturing base.
Accenture said that such a small change in margins could be offset by higher productivity, cost cutting and better supply chain management, and was likely to have “no significant impact” on demand for Chinese made goods.
That might explain why foreign direct investment in China continues to soar. Research by fDi Intelligence, a Financial Times unit, shows that China won 1,314 new green field projects in 2010, up 13 per cent on the previous year. That compares with a 6 per cent fall for Asia as a whole.
Separate figures from the United Nations Conference on Trade and Development show that FDI into China remained fairly constant throughout the global financial crisis, compared with wild gyrations in many other Asian countries between 2008 and last year.
Noticeably, much of the discussion about production shifts relates to labour-intensive, low-margin sectors such as footwear and textiles, which have been relocating for years to Vietnam, Bangladesh, Cambodia and elsewhere.
Life in China may well be getting tougher for these companies. Ronald Van der Vis, chief executive of Hong Kong’s Esprit Holdings, Asia’s third biggest garment retailer by market value, said that the company planned to switch more sourcing to Bangladesh from China.
Earlier, Victor Fung, chairman of Hong Kong based Li & Fung, the world’s biggest sourcing company, revealed that some of his Chinese customers were making unprecedented requests for supplies of such products to be sourced from other countries.
There is little talk, however, of shifting more complex manufacturing such as silicon chips and flat panel screens, for which labour makes up as little as 2-3 per cent of total costs.
Intel, the US chipmaker, recently opened a $1bn plant in Vietnam, and Hon Hai and Compal, the Taiwanese equipment manufacturers, have also set up assembly plants there.
However, manufacturing experts doubt that many high-tech companies are planning to abandon China – not least because many rely on suppliers who have co-located in southern China’s vast technology clusters specifically to be near their customers.
Bhavtosh Vajpayee, head of technology research at CLSA in Hong Kong, says: “It is not possible for these high-tech companies to shift much of their production to Asean countries; they just don’t have the skills and the infrastructure that is needed. It just cannot be done.”