Why strikes in China are good news for Australian business: Kohler

Amid all the gloom and anxiety in Europe, America and Australia lately, it’s nice to be able to report some good news for once: Chinese workers are going on strike. It’s possibly the best thing to happen in China since Mao Zedong carked it in 1976.

Last week Honda agreed to a 24% wage rise at its Guangdong parts factory to end a damaging two-week strike by 2,000 workers, who were acting without any support from China’s only recognized trade union, the All China Federation of Trade Unions.

The day before, Foxconn, the world’s largest electronics contract manufacturer (and producer, among other things, of Apple’s iPads) had increased wages by 30% after a shocking spate of suicides at its massive plant in Shenzhen.

Elsewhere, TPV Technology, the world’s largest manufacturer of computer displays, has agreed to another 20% wage rise this year, following a 15% increase in January, and Merry Electronics Co in Shenzhen was not so merry on Sunday when it was hit by a two-hour strike. Wages there will rise by 10% next month.

It’s all part of spreading labour shortages and unrest leading to big pay rises across China’s manufacturing sector this year and it’s the best news we’ve had in Australia for some time.

Last year manufacturing payrolls rose 15%; this year they’re likely to go up 20% according to Chinese labour experts.

Two big trends are colliding in China to produce a turning point for its economy.

The proportion of China’s GDP paid as wages has been declining for 22 years. A story in the China Daily this week said the GDP share of wages peaked at 56.5% in 1985 and has fallen to 36.7%.

That makes China the most “capitalist” large economy in history, according to the Financial Times.

At the same time, China’s “one child” policy, introduced 30 years ago, is now resulting in a shortage of labour in the big manufacturing centres of the Pearl River and Yangzte River Deltas, as the number of 20-30 year-olds entering the workforce drops sharply.

Why is this good? Because China urgently needs to rebalance its economy towards domestic consumption and away from exports. The government has introduced a flurry of incentives to get people to buy appliances and cars, and it’s starting to build a social safety net to try to encourage more discretionary spending and less saving.

But the most effective way to distribute wealth and encourage spending is through higher wages, and on this score workers are beginning to take matters into their own hands.

It’s called the “Lewis turning point”, named after Jamaican-American economist Arthur Lewis, who was writing about Jamaica in the 1950s. Lewis describes what happens when a developing economy shifts from labour surplus to labour shortage, and wages start rising rapidly, especially for unskilled workers.

Professor Ross Garnaut described the phenomenon as it applies to China, in a paper in April (you can find it here).

Garnaut wrote: “As China enters deeply into the turning period, there will be large and continuing increases in real wages and in the wage share of income. There will be sharp reversal of the powerful tendency since the 1980s towards increased inequality in income distribution. Consumption and its share of expenditure will rise. There will be a reduction in the savings rate.”

Economic success during this period will require tight monetary policy to control inflation, a rising exchange rate, and rising productivity as a result of good management and economic flexibility.

During a debate last night between Arthur Kroeber of Dragonomics and Marc Faber, broadcast on Reuters about whether China’s economy is on a “treadmill to hell” (it’s not) Kroeber said the decline in the relative supply of labour in China is good thing that will shift the economy more towards consumption.

“Over the last 20 years China’s economic growth has averaged 10% and its wages growth has averaged 8%. I think it’s likely that over the next 20 years that will reverse – economic growth of 8% and wages growth of 10%.”

By the way, his pithy answer to Marc Faber’s assertion that China is an accident waiting to happen because of its over-capacity in infrastructure and property development was: “You have no idea how big China is.”

Anyway, it’s good news for Australia because a more equal distribution of wealth in China through higher wages will mean more stable demand for commodities, since manufacturing output will be more geared to domestic consumption than exports to America and Europe, which may be depressed for a long time to come.

This article first appeared on Business Spectator.