Over the last few weeks, the world has watched what China has been doing in the Tibet Autonomous Region. Whereas, in fact, a potentially more serious and immediate threat to China’s economic prosperity and stability, and something that should concern anyone trading in China, or sourcing from China, or seeking investment from China, is the issue of inflation.
At the moment, inflation stands at 8.6%, up almost double from a year ago. The Chinese government, in the recent National People’s Congress, the annual rubber stamp legislature, set a target of 6% inflation this year, on top of 9% to 10% growth.
China’s inflation target now looks ambitious.
Food costs have risen 25%. Fuel costs over 10%. This has all been compounded by a decrease in those working in China’s agricultural sector, and the amount of land allocated to agricultural production.
Last year, China, home to one billion pigs, suffered a serious epidemic wiping out a large number of pigs. Pork meat, a staple for many in the cities and countryside, has now shot up in price…all of this at a time when, because of increased prosperity, more and more people in China are eating meat.
Inflation carries bad memories in China. It significantly contributed to the felling of the previous government, during the nationalist period, in 1949. Inflation was one of the contributing factors behind the turmoil in 1989, when students rebelled in Tiananmen Square. Most ominously, the complaints from Tibetans in Lhasa returning to normality last week was not so much about government repression – for many it was the huge hike in prices over the last month while their shops had been closed.
For those trading with China, this inflation has a number of impact areas. It means that, once more, the fabled Chinese consumer market, just as it was starting to look good, has disappeared.
People just don’t have the money to spend on products, and they’re cutting back. The famously volatile stock market in Shanghai has fallen 40% over the last two months, impacting the 125 million who have stocks and shares of some sort. Business confidence, which should be sky high because of the impending Olympics, is depressed.
There is another issue, which really impacts the bottom line of manufacturers in China.
As Alexandra Harney, former FT journalist based in Hong Kong, has pointed out in her book The China Price: The True Cost of Chinese Competitive Advantage (Viking Penguin), the `infinite pool of cheap labor’ which has been the dynamo behind so much of China’s growth in the last three decades has now become finite. After Chinese New Year in February, when many of those from the inland provinces working in factories along the booming coastal areas return home for a few weeks, factories discovered that many did not return to their jobs.
These people had chosen to remain in their towns and villages and seek work there. Some companies have even set up plants in the less developed hinterland provinces, despite the problems of infrastructure and business support, because they have no choice but to be near the supply of labor. Other companies have upped sticks and gone to Vietnam, or India.
Wage inflation in China has joined commodity inflation. `Cheap’ labor is now, in fact, not so cheap. A new labor law will place further obligations on employees, and is due to be implemented this year.
Chinese workers now know much more about their value, and their rights. And the Chinese government is less interested in an economic model that produces goods at a fraction of the cost they sold through partners like Tesco and Wal-Mart into western markets. The Chinese government wants to go up the value chain.
Those that seek technical co-operation, and are looking to do technology transfer, hi-tech business, and seek strategic partnerships in China are still pushing at an open door.
This is the sort of thing the Chinese now want. But the combination of China’s own economic problems, plus the global downturn, means the boom period for manufacturers abroad investing in China is probably near an end.
In the last two years European countries have, in fact, decreased their investment in China. Both sides are becoming more selective, even pickier. The government will probably keep inflation under control. But they are in a tight corner.
In the months ahead, while feats of sportsmanship occur in the stadiums in Beijing, there will be equally athletic and dextrous moves by the government, as it strives to keep balanced, while a number of problems buffet and unsettle it. But only if it beats inflation, however, can the dragon really hope to gain a gold medal.
What are your thoughts on China’s labor costs and her ‘competitive advantage’? Let others read what you have to say. Share your comments, below.