In 2009, when a Chinese worker was declared runner-up in Time magazine's ‘person of the year' roll call, there were embarrassed editorials in local dailies.

It dawned on policy-makers and media commentators, that in the rush to position China as the world's factory, the country had short-changed its workers.

It took ten suicides at the Shenzhen plant of Taiwan-based electronics giant Foxconn International, and a smattering of other strikes, for manufacturing units in China's coastal areas to start raising wages by as much as 15 to 20 per cent.

The beleaguered Foxconn, which makes computers, game consoles and mobile phones for companies like Apple, Hewlett-Packard, Sony and Nokia, rushed a wage hike of at least 30 per cent for all workers, much higher than market expectations.

Of course, the stock markets couldn't stomach it. Trading in shares of Hon Hai, the parent company of Foxconn, had to be suspended last week in Hong Kong after falling 5.5 per cent. In Taipei it fell as much as two per cent.

Other stocks also suffered in China's ‘great wage churning,' with automobile companies the worst hit. After the strike at a Honda plant in Guangdong and a subsequent salary hike, a slew of auto stocks bore market lashings and downgrading.

Among the automobile shares traded in Hong Kong, BYD (Build Your Dreams) was down 4.5 per cent, Great Wall slumped five per cent, Brilliance dipped 0.8 per cent and Dongfeng Motor Group plunged 6.9 per cent.

Shares of SAIC Motor Corp fell 2.8 per cent in Shanghai, while FAW Car shed 2.9 per cent in Shenzhen trading.

Moreover, BYD was downgraded as was Brilliance China Automotive Holdings and Great Wall Motor which went from ‘buy' to ‘hold.'

Analysts said that wage inflation for auto manufacturers had increased significantly and they would not be able to pass on the labour cost to the consumer.

No longer cheap

A number of factors have combined to lift China out of its cheap labour reputation. In 2008, the Chinese government introduced tougher labour laws and minimum wages.

The authorities have raised the minimum monthly salary in Beijing by as much as 20 per cent, while other provinces and municipalities have increased wages raging from five per cent in Hunan province to 27 per cent in Ningxia province.

The general increase is in the range of 15 to 20 per cent.

Companies like Ningbo Yongsheng Electrical Appliance or Ningbo IFNET Electronics technology, which produces washing machines and auto parts in the prosperous Zeijiang Province of east China, have had to increase their wages by 20 to 25 per cent this year, yet they suffer from severe labour shortage.

This sharp increase in minimum wages across several parts of China is raising worries about squeezed profit margins at manufacturing firms.

Inflation additives

And while local manufacturers will still retain their competitive edge vis-a-vis global counterparts because of the relatively low base of wages in China, the sharp salary increase is expected to add to inflation.

A Royal Bank of Scotland China economist said that the minimum wage increases are "inflationary" and that companies would struggle to fight the margin squeeze, especially in sectors that face intense competition.

However, the ‘Made in China' label is far from being tattered is getting a makeover. According to a Morgan Stanley report, there is no need to fear a rise in cost of labour.

"Despite the seemingly large minimum wage hikes, it should not be treated as leading to broad-based wage pressures or substantial erosion of low labour cost competitiveness in China," the analysts noted.

The wage issue has finally triggered a long-delayed restructuring of China's labour-intensive industries. Now is the time for the low wage production model in China to change.

 

The writer is a freelance journalist based in China.