China From the Eyes of a Chinaman

For the uninitiated, The Elephant and the Dragon does a great job of introducing the key concepts surrounding the extraordinary rise of China and India in the last three decades. Key drivers in this economic modernization period, such as the development of a global supply chain in response to information technology linking faraway places in seconds and massive influx of direct foreign investment, are well explained and the repercussions of such developments covered in considerable detail. That being said, having been engaged in business with my family in China since I was a toddler and done considerable concentrated study on contemporary China policy, I feel that certain factors that Meredith attributes to China’s growth need reconsidering. One is the idea that there is an endless supply of cheap labor in the Chinese market.
Since I was five, my parents have been engaged in the “disassembly process” that Meredith details, working as not only a finisher of promotional goods, but also doing distribution here in the United States. T-shirts, duffel bags, backpacks, umbrellas; we do a little bit of everything. In the last five years, if there is one thing we have noticed, it is that labor costs have been increasing by an unbelievable amount annually. On the latest trip back this summer, my second uncle on my mother’s side (who runs the factory), lamented the fact that only a decade ago, workers would be lined up outside the factory seeking to find work. These days, laborers skilled with sewing machines are hard to come by, and small factories like ours that manage to bring some new workers in from Hunan and train them, will usually get them taken away by larger factories with better pay and amenities.
This by no means is a bad thing; China without a doubt needs this rise of standard in living as a country on the rise. However, Meredith tends to overemphasize the fact that cheap labor exists in China. Leninist country or not, the Chinese economy is subject to the same macro-effects of other markets, and the boom in production has led to what is looking to be an acute shortage of trained labor. I think part of this comes from the fact that Meredith is not an academic, but instead a journalist. Her aim is to drive home the fact that China and India are indeed booming, and in that sense she succeeds.
Delving further, I did a little independent research on the current state of investment within China. An interesting article I found in the China Briefing (http://www.china-briefing.com/news/2008/04/11/south-china-factories-on-the-move-%E2%80%93-relocation-has-begun.html), a newspaper dedicated to business in the country, had an interesting article about how South China (Guangdong and Fujian province), once the epicenter of cheap manufacturing (as described repeatedly by Meredith), has now seen a flight of factories away from the area, due to shortage of labor and increased governmental control. Just around our factory in Huadu, by a rough count this summer, I’ve seen about half of the factories close down, mostly those that specialize in secondary production (what we refer to in the industry as 加工 or added production). Having written a paper for this in my China Domestic Policies course with Professor Sutter, I’ve identified four causes for this downturn that really can be applied throughout China.
1. Decline in value-added tax refund- in the past, to encourage investment, the government would provide a rebate on a value added tax for goods domestically used in production. Each layer of production would get a VAT, and if the final good was being shipped out of the country, there would be a fat discount. However, in recent years, to curb inflation, the government cut down most of these rebates. In the recent stimulus package approved by the central government, these rebates are back, but it remains to be seen how much of a positive effect this is going to have in the medium and long term.
2. Appreciation of the yuan versus the dollar- around 2005, after increased pressure from the U.S. government, China finally began to de-peg it’s currency against the dollar. From a standard of about 8.3, we have now seen an increase in value of the RMB to 6.8. This has made Chinese goods much less competitive, and increased the costs of importing inputs from outside of the country (remember, it’s a GLOBAL supply chain).
3. Increased consumption of raw material inputs and the associated rise in costs- well, with so many factories working in China, particularly in fossil fuel related goods (nylon, phlalates or the things used to make rubber duckies and dildos soft) there has been a sharp jump in the costs of inputs. Another issue has been government regulations, which by seeking to damper the rising price of oil, flooded the market with subsidies. This had the effect of resulting in distortion in supply, increasing costs in the market for by-products.
4. Labor costs are going up!- as described before, labor costs are going up. Why? Well, there just seems to be a shortage of skilled workers. As Meredith describes, family workers have sent money home to families in impoverished villages. These amounts, though low by dollar standards, represent the combined income for whole families. Another factor has been the passage of new labor laws by the Chinese government. Ilooked at them this summer; they are confusing, contradictory, and while a step in the right direction, result in rising costs.
From my last point, I have one more quibble regarding Meredith’s book. In one section, she describes the daily wages of laborers in dollar amounts. The effect is that the unknowledgeable reader will voice shock at how low cruel, evil factory owners are paying exploited laborers. Unfortunately, what the fail to realize is that there is the buying power of one yuan in China is the equivalent of one dollar in the U.S., and Meredith’s wages when converted to yuan actually seem pretty reasonable. That $245 a month wage becomes almost 2000 RMB. While this might not be wealthy by any standards, it represents a considerable step up in earnings by workers. Give the market some time, and let China run it’s course. In my opinion, it is only a matter of time before China must begin it’s period of political liberalization. This is for it’s very own survival.