A recent editorial in China Daily outlined the risks of unchecked populist minimum wage increases. Eddy Li, vice president of the Chinese Manufacturers’ Association of Hong Kong, warned that the minimum wage is growing much faster than GDP – often as much as 15 or 20 percent a year, with GDP only growing by 7 – 9 percent.
These dramatic increases are raising costs on exporters, jeopardizing economic growth in an environment where overseas orders are already falling. If wage increases continue, Li said, “Gradually, these enterprises will be forced to wind up or relocate, which means workers will lose their jobs and the country’s economy will be harmed.”
Wages in Shenzhen, according to the editorial, are now 1,600 yuan, or $259. Even small cities have seen wages increase by as much as 20 percent.
China’s growth rate has been slowing, but the country is still marred by poverty among its migrant working class. This puts Chinese policymakers in a difficult position – wages need to rise, which has been happening, but the export sector is increasingly unable to pay those wages.
In Dongguan, to cite one example used by Li, there were 8,000 Hong Kong-funded factories at the production peak. There are now only 6,000. Li says that this is because the companies were no longer able to afford rising economic costs in the city and have either closed down or relocated. He points out that the government in Dongguan has suffered as growth has slowed, requesting help from the central government.
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Li calls for a system in which minimum wages rise in lockstep with GDP. This, he says, will reduce the negative effects on employers without shortchanging employees.
A minimum wage increase can cause wages to rise overall, as employers are forced to compete for workers. Costs can spiral, particularly in nested industries such as apparel manufacturing, as companies at every step in the supply chain are forced to raise prices. “The increase in business cost is much faster than inflation and economic growth,” Li says.
The situation in China is still quite strong by global standards, but the country is being dragged down by problems in Europe and the United States, and experts believe it is overly dependent on capital investment for growth. The country may have overbuilt, creating medium-term risks for continued expansion.
Some in China, including many Communist Party leaders, have called for strengthening citizens’ purchasing power, to create more internal markets for Chinese products. Despite a rapidly growing middle class, most Chinese lack discretionary income. All segments of society have a savings rate that dampens consumption, partly due to China’s frayed social safety net.
Li’s editorial in China Daily is politically significant. The editorial page of that paper is an organ of the Communist Party, and editorials are often used to signify a coming policy change. It may be that China’s new government is attempting to limit minimum wage increases in order to keep its lead in export oriented manufacturing.