An inflated outlook - China

Post date: Apr 19, 2011 3:36:34 AM

......three factors mitigate the potential effect of China’s rising wages, according to some economists.

First, more pricey Chinese labour still represents only a fraction of the final price of goods sold in Europe and the US. Prof Prasad says the value of goods exported from China that is actually created in the country is just 10 to 15 per cent. “The low value-added share implies that even a significant rise in China’s labour costs won’t add much to the final costs of processed exports.”

Second, Chinese productivity levels are not standing still. They have soared in the past 20 years, allowing companies to increase pay rapidly without significantly raising final prices. Gavekal Dragonomics, an economic consultancy based in Beijing and Hong Kong, says China’s exporters have moved up the value chain, and its ports and highways are almost as sophisticated as those in the developed world, allowing exports to rise despite rapid wage increases.

Third, as Chinese wages rise, some production will shift to lower-wage economies, keeping the global price low. Li & Fung, for example, reported in late March that it had moved some of its clothing production to Bangladesh, Vietnam, Indonesia and India.

But sourcing goods in lower-wage economies is not always easy. Michael Austin, chief financial officer of Top Form International, headquartered in Hong Kong, says the company is moving some of its mass-market bra-making to Thailand, but China still accounts for about half of its production. More expensive bras requiring detailed lace work must stay in China, he says, as worker productivity is much higher and “the learning time is so much less in China. In China, people work to live,” he says.

Michael Enright of the University of Hong Kong says he was asked by a client considering sourcing manufacturing from Asia to compare Chinese and Indian transport, electricity and labour costs. “They would have had to pay a negative wage to manufacture [the product] in India. People don’t understand how much ahead China is in infrastructure,” he says.

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[for full article: http://www.ftchinese.com/story/001038061/en]