Good news from China?

After all the brouhaha surrounding China's beggar-thy-neighbor weak-yuan policy, there have been some sprinkling of good news out of China in recent weeks.

The latest was the announcement by the People's Bank of China, that it would allow greater flexibility in the value of renminbi in relation to an unspecified basket of currencies, the clearest sign yet that China would allow its currency to appreciate gradually against the dollar and other currencies. However, in a note of caution, it warned explicitly that "the basis for large-scale appreciation of the RMB exchange rate does not exist". This raises doubts about the extent of re-balancing and apprehensions that it would be similar to that was done in 2005 when the renminbi was allowed to appreciate slightly (from 8 to 6.83 yuan) and then re-pegged.

Apart from the mounting pressure not only from the US, but also from other emerging economies like India, the announcement may have also been triggered off by the steep rise in renminbi (along with the 15% rise in the value of dollar) against the euro in the last two months. As the Times reported, that has made Chinese officials nervous about the future competitiveness of Chinese sales to Europe, the biggest market for Chinese exports.

This exchange rate decision comes in the wake of mounting labor unrest in Chinese factories, especially in the auto industry, demanding higher wages. Poor and deteriorating work conditions and standards of living have been attributed as the reasons behind this unrest among industrial workers. A report in the Times writes about conditions at a Honda factory in Guangdong province,

"Workers at the factory here said that their jobs required them to stand for eight hours a day at their posts, and that pregnant women were allowed to sit only in their last trimester. Workers also complained that they were not allowed to speak while working — a common requirement in Chinese factories — and that they had to obtain passes before going to the bathroom. They said they were criticized if managers thought they took too long getting a drink of water."

The workers are also demanding the right to form trade unions separate from the government-controlled national federation of trade unions, which has long focused on maintaining labor peace for foreign investors and acted as a vent for pent up frustrations over pay and work conditions. The Chinese government has so far not allowed unions with full legal independence from the national, state-controlled union, though it has permitted workers choose their factories’ representatives of the national union and allowed the creation of "employee welfare committees" in parallel with the official local units.

Most of these strikes are led by migrant workers from the hinterland, who accuse the local governments of not doing enough to regulate work and living conditions. Unlike their parents who formed the first wave of migrant factory labor, the new generation are motivated less by the poverty of the countryside than by the opportunity of the city, and therefore are not averse to demanding atleast living urban wages.

As Yasheng Huang points out about China's spectacular emergence as the factory of the world in the last 20 years, through the creation of tens of millions of jobs in the export sector, in relative terms the Chinese labor has been the big loser. He writes,

"The labor income share of Chinese GDP declined from 57% in 1983 to only 37% in 2005, and the ratio has stayed at that level since then. This is to say that hundreds of millions of Chinese workers have lost relative to government and corporations, which, in terms of head counts, represent a tiny fraction of China’s massive population... Now labor wants its legitimate due from economic growth and workers have every right and the moral high ground to demand it."

Strengthening the workers hand is the resurgence of economic growth after a brief lull in 2007-09, which in turn has increased demand for labor and exposed labor shortages. This has increased the leverage of industrial workers whose salaries have not kept pace with inflation and soaring food and housing costs.

There have been an eruption of strikes in many locations across the country. Recent strikes at Toyota and Honda factories follows those at suppliers to consumer electronics makers Apple and Dell. Foxconn Technology, maker of products that include Apple iPhones and Dell computer parts, announced plans to raise the salaries of its 800,000 workers in China, beginning in October, by 33%. It also decided to double the salaries of some of them to a monthly average of 2,000 renminbi ($300). Thanks to these interventions, the basic salary for an assembly line worker in Shenzhen is expected to rise from 900 renminbi ($132) a month to atleast 1,200 renminbi ($176).

Honda has agreed to give about 1,900 workers at one of its plants in southern China raises of 24 to 32%. Further, in response to the labor unrest and offset inflation and rising food, energy and housing costs, Beijing has directed local governments early this year to raise the minimum wage in the regions — which is set locally and is around $130 to $150 a month in big coastal cities. Many cities have already responded by raising the minimum wage by about 10 to 15%, to about 750 to 1,100 renminbi. The average hourly wage in southern China is only about 75 cents an hour and the minimum monthly wage in Shenzhen is 900 renminbi, about 83 cents an hour. China has the world’s largest manufacturing workforce - more than 112m people at the end of 2006, and this workforce is still cheap, costing $0.81 an hour, or just 2.7% of the cost of their American counterparts.

The combined effect of a revalued renminbi and increased wages would certainly lower the competitiveness of Chinese exports and increase that of imports. The rise in wages and cheaper imports would have the effect of increasing the purchasing power and thereby the consumption demand among Chinese consumers. Besides, it would also help contain inflationary pressures (which have been surfacing in recent weeks) arising from decades of China's export-driven growth. It will also encourage the penetration of development from the coastal provinces to the still-backward hinterland areas.

For the world economy, it would help economic growth among China's trading partners - by increasing opportunities in the Chinese domestic market (especially in the high-end consumer goods sector) - and competitors (especially other emerging economies) - by helping them mitigate the unfair competitive advantage enjoyed by Chinese exports. This would go a long way towards re-balancing the prevailing unsustainable global macroeconomic imbalances.

Additionally, it would help China manage the build-up of massive foreign exchange reserves more effectively. The Times reports that China has been "spending nearly one-tenth of its annual economic output to buy Treasury notes and bonds and other foreign securities while printing and selling renminbi, all in an effort to prevent the renminbi from rising against the dollar".

Update 1 (21/6/2010)

The renmibi strengthened to the highest level in nearly two years in the biggest one-day move since 2005. More evidence of rising labor unrest. But Tim Duy is not sure whether real change is underway and feels it may be more "smoke than fire".

Update 2 (13/7/2010)
In a reflection of the growing supply squeeze for workers, factories are now competing to attract workers.

Update 3 (1/8/2010)
Excellent articles in the Economist tracking the latest emerging trends in the Chinese labor market and its implications for the world economy.

Update 4 (6/8/2010)
At $0.81 an hour, the cost of Chinese workers is just 2.7% that of their American counterparts.