This chart from the Financial Times raises questions about China’s future as an economy based on cheap labour.

Click to enlarge

Based on a United States Bureau of Labour Statistics report, it shows that between 2002 and 2008, real hourly wages in China’s manufacturing sector doubled, while they rose by barely 20 percent in the United States. Nevertheless, despite the increase, wages in Chinese manufacturing in 2008 were still only about 4 percent of those in the United States

Countries like Greece and Ireland which are part of the Eurozone and hence tied to a fixed exchange rate are talking about an internal devaluation – reductions in real unit labour costs relative to trading partners – to regain competitiveness.

China is experiencing the opposite phenomenon – an internal revaluation – which substitutes, at least in part, for the revaluation of the yuan that the United States has urged upon it.

Of course the increase in real wages in China has been based on increases in labour productivity which have assisted in maintaining export competitiveness.

The Financial Times reports that:

Chinese labour productivity has been rising sharply at about 10 percent a year since the early 1990s and even more quickly in the past decade, due to technological progress, increased capital investment and rising human capital … From exporting mainly footwear and clothing in the 1990s, China’s largest exports have shifted to computers, computer parts and telecommunication equipment. According to the World Bank, the overall proportion of high-tech goods in Chinese exports rose from about one fifth at the beginning of the decade to almost a third in 2008.

As a result, China is becoming less appealing to multinationals producing cheap low-value-added goods, but much more appealing to those making cheap high-value-added goods, both finished and intermediary.  The industries China is exiting are moving to lower income countries such as Vietnam and Indonesia.



  1. Roger:

    Thanks for the forwarded stats. Two issues to consider are 1) the inevitable Chinese turn inwards to develop a consumer market that weans it off of export-led dependence, which will in turn accelerate wage increases (which are already contributing to inflation in the PRC); and 2) the fact that lower wage countries like Indonesia and India are nominally democratic, which means that electoral and the other host of vicissitudes of (immature as well as mature) democratic governance must taken into consideration (as inhibitors on capital flight from the PRC–Vietnam has no such issues).

    Continued devaluation of the yuan is only a stop gap measure given the pressures you mention, but freeing it can arrest the wage/inflation spiral while promoting domestic consumption. At that point the key regulatory mechanism could well be selling USD, of which the PRC has plenty.

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