A low-cost work force has helped to drive China’s economic growth for some time. But as salaries rise, can the momentum be sustained?
　　
　　“The price advantage of the Chinese labor force will disappear in five to eight years,” said Hua Ruxing, professor at the School of Economics and Management of Tsinghua University, in a recent speech. His comments were widely quoted by the media as confirmation of the view that China is losing its labor cost competitiveness.
　　In fact, this view originated from a report released by a foreign research institution in late 2005. An analysis by Germany’s Nuremberg Research Center predicted that China’s labor cost advantage could only last three to five years.
　　An important reason the Chinese economy has maintained its rapid growth is the abundance of inexpensive laborers who have basic work skills. This factor has been cited by some local governments to attract foreign investment. Hence, many people worry about the development of the Chinese economy once such an advantage disappears.
　　This idea has been taken up by some economists as well, who agree wages are an important component of labor costs. Li Jian’ge, Deputy Director of the Development Research Center of the State Council, noted at an international seminar that an improvement in workers’ salaries should be in line with an enterprise’s ability to bear such an increase. If salary levels are raised too much, investors will transfer their investments to neighboring low-wage countries such as Viet Nam, costing Chinese workers their jobs, he warned.
　　Although Li’s remarks have been accused by opponents of trying to achieve high economic growth by sacrificing workers’ benefits, some argue his concern is necessary and reasonable in certain respects.
　　Guangdong Millennium Group Ltd. is a manufacturer for U.S.-based Nike Inc. For many years, most of the Nike footwear sold in the Chinese market were produced by Millennium. However, since the beginning of this year, Nike has transferred many of its orders to Viet Nam. It has also begun to expand its four production lines there and invested more than $16 million to build a new plant. It is reported the sportswear giant plans to make Viet Nam its largest overseas production base by the end of 2007.
　　A major reason that Nike is withdrawing its production base from China is that the cost of labor in Viet Nam is much lower than in China, according to sources familiar with the situation.
　　For many years, a cheap labor force has been the main reason that Chinese products have enjoyed a competitive advantage in the international market. However, in recent years, Chinese labor costs have shown a steady increase, especially in coastal provinces and big cities.
　　Foreign corporations that have invested in China feel the impact of those rising costs directly. Statistics from Japan’s Unix Electronics Co. Ltd. show, when the company invested in a factory in Shenzhen in 1992, the average salary of its workers was about 8,000 yen ($67) a month, but that has risen to 18,000 yen ($150) this year. Despite the increase, fewer candidates apply for vacancies in the factory than several years ago.
　　It is not just the cost of average laborers that is the issue. The salaries of high-caliber managers have also risen continuously. According to a German machinery equipment company, before 2000, the monthly salary of an experienced manager was about 5,000 yuan ($616), but that has risen beyond 15,000 yuan ($1,847) this year, excluding the year-end bonus that is equivalent to 40 percent of annual salary.
　　
　　A disappearing advantage?
　　
　　A report in Financial Times Deutschland said that from 1998 to 2004, the annual growth in the average salary in China was between 8 percent and 12 percent, higher than in Malaysia, Thailand, Viet Nam, Indonesia and the Philippines, indicating that the cost advantage of Chinese workers may be fading.
　　Yet, Tang Kuang, professor at the School of Labor Relations and Human Resources of Renmin University of China, said there is a misunderstanding in the view that rising labor costs will decrease a country’s attractiveness to foreign investment.
　　Tang said that if an enterprise’s labor costs increase at a rate faster than workers’ productivity, its competitiveness will decrease; otherwise, its competitiveness will increase. He noted that in the 1970s, while labor costs in the United States rose sharply, the economy still grew strongly because productivity rose at a faster pace. During the same period, the Italian economy slowed down, as labor costs climbed more rapidly than productivity.
　　Still, for those labor-intensive enterprises where labor costs make up a large proportion of total expenses, increases in this field will influence investment decisions. Nike’s investment in Viet Nam is one such example. However, when a multinational company decides to make an investment, it will consider all factors, including labor costs, labor productivity, infrastructure, the quality of human resources and R&D capacities. The cost of labor is not the only decisive factor.
　　A market analyst from the German Chamber of Commerce pointed out that German enterprises have accommodated to China’s policies and regulations so that they will not think about transferring their factories to other countries for the time being. Besides, China’s huge market potential is a big attraction to those German companies.
　　Recently, South Korea’s Institute of Global Economy surveyed 58 Korean entrepreneurs in China, finding that only 33 percent said they invested in China in order to obtain cheap labor, while 52 percent of the respondents admitted that their investment projects were aimed at the huge local market.
　　A researcher at the Samsung Economic Research Institute agreed that China’s labor productivity is showing continuous improvement. Despite growing labor costs, he said, China’s comprehensive advantages, especially the huge market potential, have a strong attraction to international investors. The researcher believes that while such countries as Viet Nam and India are highlighting their cheap labor forces in order to attract foreign investment, they cannot overtake China’s status in and effect on the international economy in near future.
　　Japan is a country that has massive investment in other countries, and thus it pays great attention to labor costs in Asian countries. Data from a Japanese Government’s white paper on international trade show that while labor costs account for 4 percent of total production costs on average in Asia, the proportion is only 3.5 percent in China. This indicates that while labor costs in China are increasing rapidly, they are still not only lower than those in Japan and such newly rising economies as South Korea and Singapore, but also the average level for all of Asia.
　　
　　Adapting to change
　　
　　Though low labor costs can be an advantage in export trade, economists emphasize they are not an entirely positive factor. On the contrary, they may contribute to a vicious circle: Workers cannot get the salaries they deserve so they lose many opportunities to be trained and further educated and this can lead to low productivity and a decrease in international competitiveness.
　　Thus, while developed countries continuously strengthen industries offering high salaries and gradually become production centers for capital-intensive products with high added value, China’s adherence to low-salary strategy could only attract low-added-value industries.
　　Take textile disputes between China and the United States and the EU in the last couple of years as an example. Chinese textiles were blamed for disrupting the market because many people in these countries thought that China gained an unfair advantage because of its low production costs. In fact, Chinese producers have earned meagerly through processing the raw materials, while nearly 90 percent of the profits go to multinational corporations that own brands and marketing channels.
　　Concerned departments in China have paid close attention to this situation. A study report released by the Institute of Salary under the Ministry of Labor and Social Security last November says that with the rapid growth of exports of Chinese products, trade frictions between China and such developed economies as the United States and the EU have become increasingly severe so that “the space for China to compete with other countries by using low prices and low labor costs becomes smaller and smaller.” Besides, exporting mainly labor-intensive products is not helpful in improving workers’ welfare, so the low-salary strategy must be changed.
　　The report indicates that the current ratio of labor costs to total production costs of Chinese manufacturing industries has reached an all-time low, being 2.2 percent of those of the United States, 2.1 percent of Japan’s and 2.8 percent of Germany’s. Even compared to the Czech Republic and Poland, which are lower-cost producers in Europe, China’s cost is only 15-20 percent of theirs.
　　The report also points out that for a long time, the so-called labor cost advantage in China was based on sacrificing reasonable salaries, working and living conditions and the social security of workers.
　　From 1998 to 2004, China’s labor costs, consisting of salaries, social security and welfare benefits, and other related expenditures, increased 6.4 percent each year on average while per-capita gross domestic product grew an average of 11.4 percent annually.
　　In early 2005, the monthly salary for a farmer-turned-worker in the Pearl River Delta was about 600 yuan ($72), only increasing 68 yuan ($8) in 12 years. Among all workers of this group in the area, 46 percent have to work 12 to 14 hours every day and 47 percent have no weekends off.
　　There is little doubt that low labor costs can create competitiveness for a time, but such competitiveness is always awkward and may even become a barrier to the development of society because, over the long term, low labor costs can lead to a distortion of the labor market.
　　Given an open international market, capital is seeking an innovative labor force and a market environment that is beneficial to the development of such a labor force, not simply cheap labor. Some data show that four fifths of international investments flow to developed countries. For example, China brought in more than $340 billion in foreign investment in the 20 years after launching its reform and opening-up policy in the late 1970s, while the United States attracted $313.2 billion in investment in 1999 alone.
　　Hence, some economists argue that there is no need for China to feel anxious about the rising labor costs. The key is how to appropriately deal with the change. If succeeded, they said, the extensive price advantage of the labor force could be changed into an intensive technological advantage to guarantee the smooth development of the economy.
　　In this respect, Japan’s experience is very valuable. In the early 1960s, Japan began to change its development strategy and moved onto the high-wage and high-productivity path. Higher labor costs drove Japanese enterprises to adopt advanced technology and improve their productivity. Subsequently, Japan’s economy went through rapid development, where the use of industrial robots is the highest in the world.

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