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Factories Kiss China Goodbye As Government Plans to Raise Minimum Wage

As the income gap grows between China’s rich and poor, the government has promised to boost the minimum wage.

The government plans an increase in the minimum wage of 40 percent of average urban salaries, to be established by 2015.

Wages for Chinese workers have risen over the past ten years by almost 20 percent annually, squeezing profitability from the firms which initially came to this nation because of low cost of manufacturing.

Government and analysts have been worried lately about the ever-widening disparity in income as a source of potential social unrest and political instability.

According to the Gini index, a formula which measures the distribution of income or consumption spending among individuals or households in a nation’s economy, China has now passed a point of inequality in which social and political instability are more likely.

Rising Chinese wages have gnawed away at profit margins for apparel and textile customers, and so China’s formerly long-term clients are taking their business to cheaper manufacturers in Vietnam, India, Taiwan, Thailand, Cambodia and Indonesia.

Minimum wages in China vary depending on the province, with a monthly minimum guaranteed. Shenzhen province currently pays the highest monthly minimum at 1,500 yuan, or about US$240.49 a month. Workers in Beijing generally get paid by the hour, with the hourly minimum wage at US$2.24.

Now, said former investment banker and business owner, Stanley Szeto, quoted in a Wall Street Journal report, “Operating in Southern China is a break-even proposition at best.”

The world’s highest minimum wage is Australia’s $16.91 an hour, or US$15.96.

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Under China’s new initiative to raise wages, state-owned companies will be required to contribute a larger share of their profits to the government. The government has earmarked the anticipated increase in revenue for social security funding.

Not all economists and analysts believe the boost in wages will stem the tide of dissatisfaction with the current inequalities in wealth.

“The plan suggests the government puts more weight on income growth than on income distribution,” said Zhang Zhiwei, chief China economist at Nomura.

Among the defectors are Lever Style, currently exploring the possibility of manufacturing in India for Nordstrom Inc, and U.S. brands and retailers JCPenney, Nike Inc., Gap Inc., PVH Corp., Liz Claiborne, Target Brands Inc. and Perry Ellis.

European brands and retailers include Marks & Spencer, C&A, The Otto Group, Camel, Seidensticker, Pierre Cardin and Jacques Britt; and Japanese brands and retailers include Itochu Corp., Sojitz Corp., Marubeni Corp., Mitsui & Co. Ltd., Seikyo, Mitsukoshi Ltd. and Katakura Industries.

The flight of apparel manufacturers from China is no surprise to the country’s government, which even encouraged it as the domestic economy slowed from its previous spectacular growth. To make up for the manufacturing losses, China plans to ramp up its service sector and generate higher-skilled manufacturing jobs.

But rising wages and costs are an ongoing concern of the Chinese business community and government.

No “explicit target” number for reducing the Gini coefficient has been set by the government, according to Zhang. There is only the government’s goal to “…reduce [the] population in poverty and increase [the] size of the middle class,” Zhiwei said.

“If costs continue to rise, but China is unable to become more innovative or develop home-grown technologies, then the jobs that move offshore won’t be replaced by anything,” said Andrew Polk, an economist for the Conference Board, a global independent business research group with offices worldwide including Beijing.