China’s labor source and the impact of one billion pigs

By Kerry Brown

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.