W ages are rising in China. In order to assess the scope of wage adjustments, the influence of minimum wage hikes and labour unions, and the magnitude of labour productivity improvements, we carried out surveys of clients of Standard Chartered Bank (China) over the past month. We spoke to Hong Kong manufacturers operating in the Pearl River Delta (PRD); Taiwan companies operating outside of Shanghai; and companies operating in Chongqing, in south western China. Our main findings are as follows:
? Wages are up 9-15% this year –a significant rise, but below the 20-30% rates sometimes reported.
? Despite broader worries about inflation, minimum wages are being raised nationwide this year, and the central government wants this to continue.
? Overall wages are not going up because of higher minimum wages, though the lowest-paid workers are certainly affected by these hikes. Most firms pay above the minimum and find that labour demand/supply dynamics are the main factor driving wages up.
? Formal wage negotiations are still uncommon, despite the beginning of legal efforts to implement them in the PRD. Some firms expect them, though.
? Wage pressures in the PRD and among Taiwanese firms near Shanghai appear to be a little higher than in 2010. Wage pressures in inland areas are lower than on the coast.
? Firms are responding by investing in capital equipment to replace workers.
? Many more firms are considering moving inland than leaving China.
? The majority of firms say that believe per-worker output is rising faster than wages, signalling that productivity growth is still just about able to absorb higher wages (and, conversely, that higher wages reflect higher productivity – which means this is ‘wage growth’, not ‘wage inflation’).
? That said, wage growth means different things for different firms; labourintensive clothing producers, for example, are hit much harder than more capitalintensive firms.
? Most firms expect the Chinese yuan (CNY) to appreciate 0-5% against the US dollar (USD) this year.
Hong Kong-owned enterprises in the PRD
Wages up 13% this year, after an 11% rise in 2010
In the month after Chinese New Year, we surveyed 58 Hong Kong companies that have manufacturing operations in the PRD region. Of these, 39 (67%) said their hourly wages have already risen this year, by an average of 13% and a median of 15%; increases ranged from 5% to 20%. Of the remaining 19 companies, 15 plan to raise wages this year, by a mean average of 10%.
Wage pressure in the PRD seems to have increased in the past year. 38 of the survey respondents said they had raised hourly wages during the equivalent period in 2010 (after the Chinese New Year holiday), by an average of 11% and a median of 10% – smaller increases than the ones reported this year. Another 15 hiked wages later in 2010, by an average of 14% and a median of 15%.












Dongguan, a manufacturing powerhouse situated between Shenzhen and Guangzhou, reported the biggest wage increases – 16% on average, versus 8.5% last year. 12 of the 22 Dongguan respondents saw wages rise by 15% or more around Chinese New Year 2011.
Impact of the minimum wage
Our respondents pay higher wages than the local minimum wage. They pay monthly salaries of around CNY 1,800-2,000 (USD 270-300), versus the newly revised minimum wages of CNY 1,320 (in Shenzhen, to be implemented on 1 April), CNY 1,300 (in Guangzhou) and CNY 1,100 (in Dongguan, Foshan, Zhuhai and Zhongshan). We show some of the adjustments in Chart 2. While our clients are not directly affected by the minimum wage hikes, they expect to have to deal with spillover effects, as Chart 3 shows. Of the 58 respondents, 44 (76%) saw at least some impact from higher minimum wages. The pressure will continue: the 12th Five Year Plan targets a 13% increase in minimum wages every year.
The coming (sometime soon) of collective bargaining
The Guangdong authorities are pioneering new labour rules. A formal collective bargaining mechanism between employers and employees is in the making. At present, the draft rules are still in the consultation stage. We have outlined the main points in Table 1. The first draft triggered quite a few complaints from Hong Kong manufacturers concerned about workers’ ability to demand higher wages and access corporate information.
The majority of respondents (74%) said they had not negotiated wages in the past six months and did not think they would have to do so this year (Chart 4). Nine respondents had done so, however. Another six said they would likely have to negotiate wages later this year.
Responses to labour shortages
Firms in the PRD also appear to be finding it harder to find workers. 26 respondents (45%) said finding workers was more difficult this year than last, and 25 said it was as difficult. That said, only 18 (31%) thought labour shortages were“serious” or “very serious”. Most (30) described the current situation as ‘normal’.
How are companies responding to labour shortages? The majority answered “investing in more capital equipment”















(34 respondents), and 17 chose “moving capacity inland”. Only four picked “moving capacity out of China”. Other responses included reorganising the factory to increase productivity; moving up the value chain via design, R&D, etc.; and improving living conditions for workers.
Moving a factory is a costly operation. Lost proximity to suppliers and customers, and increased transport costs, are serious issues. The Guangdong provincial government is trying to help to move factories to cheaper areas within the province. It has set up a CNY 2.5bn industrial relocation incentive fund to help inland localities set up industrial parks and subsidise some of the relocation costs.
Wages are going up – but for the majority of firms, perworker output is rising more quickly (Chart 7). This is especially true for those operating at or close to full capacity (Chart 8). Such things are hard to measure, but this is evidence that productivity improvements are still absorbing most, if not all, of the increased wage costs. For this reason, factory gate prices for most output should not be rising as a result of wages.
Taiwan companies in mainland China
We also visited nine Taiwan enterprises with production in Shanghai and Suzhou in the last month. All nine reported wage rises this year, averaging 15%. As Chart 9 shows, this would have happened even without any change in the local minimum wage. All of the companies surveyed believe that average wages in the Shanghai/Suzhou area could double over the next three to five years.
Five respondents indicated that it is less difficult to find workers this year than it was last year (the rest thought it was as difficult). Those paying above-average wages reported a higher retention rate (Chart 10). Three manufacturers of sports apparel said that the average wage for a skilled worker can be as high as CNY 2,700-3,000 (USD 410-455) per month, which they deemed was CNY 400-500 higher than what local producers in the area are paying.
All nine manufacturers reported that per-worker output had risen “a little bit” more than wages, again a positive signal for productivity growth. But they also reported that they will be looking to pass costs onto buyers, which is much easier to do now than in 2008-09. All said they were experiencing increased raw-material costs (Chart 11).
The responses were again varied, but investment in capital equipment was the dominant reaction to labour shortages.












Three labour-intensive textile manufacturers reported that around 80% of their production processes currently require manual work, and that this could be reduced somewhat, but not below 70%. All but one reported that they are diversifying their production bases, mostly within China, but also to South East Asian countries such as Vietnam and Cambodia (Chart 12). More interestingly, the bicycle maker we interviewed, which mostly exports to the US and Europe, is considering moving some high-end production back to Taiwan. Taiwan’s decent supply chain and skilled labour pool is attracting the company back; this process will be accelerated if the Taiwanese government is able to offer the right tax incentives.
Companies in Chongqing
There is less upward wage pressure in Chongqing, which we believe is pretty representative of inland China. We spoke to a broad range of 20 companies in Chongqing in February. Only 36% had raised wages this year, by an average of 9%. Another 12 confirmed that they had plans to raise wages sometime this year, by an average of 9%.
Chongqing is also raising its monthly minimum wage from CNY 680 to CNY 870 in the highest-wage districts – a 28% increase. Of the 18 companies that responded to the question about the minimum wage, 14 said it had had no impact on their original wage plans. Three said it had some impact, and one considered the impact “huge”.
Only two of the 18 firms that replied said they had engaged in wage negotiations with their employees in the past six months. One group of employees asked for a 5-10% rise, the other 10-20%. Another five respondents said they see some probability of having to negotiate wages this year.
The labour shortage is also less severe in Chongqing than in other regions. Roughly equal numbers of respondents chose each answer to our question about how difficult it was to find workers this year (Chart 14). The majority (54%) considered the current labour situation to be ‘normal’, while none considered it ‘very serious’. And as Chart 15 shows, nearly all (90%) said per-worker output growth has outpaced wage growth, implying higher labour productivity.
Of the 13 companies that shared their plans on how to tackle labour shortages, seven opted for ‘investing more in capital equipment’ and three chose ‘moving capacity inland’. Only one intended to leave China. Other solutions included increasing productivity and retraining workers.






Final thoughts
Wages are up 9-15% this year. This is a significant increase, especially for labour intensive firms, but it is below the 20-30% rates sometimes reported. It is also more or less in line with GDP growth – and so backs up our thinking that this is the new normal for China – wage growth in line with overall GDP growth. We do not think there is anything worrying about this. If China is to become a consumer-driven economy, people need to be paid more – as far as we can tell corporate profits are still growing healthily.
Wages are not going up because of minimum wage hikes. Rather, this trend, we believe, is being driven by demand-supply forces. This is partly structural, as the end of the so-called demographic dividend hits. And it is partly cyclical- the economy is growing strongly right now, and is probably creating many more jobs than the government thinks.
Wage pressures in mainland China and among Taiwan firms near Shanghai appear to be a little higher than in 2010. Wage pressures in the inland are less than on the coast – and no surprise there, as migrant workers are much happier to work nearer home. Firms are mostly responding by investing in capital equipment to replace workers. Many more firms are considering moving inland than leaving China – which means that China remains an attractive location for most, despite higher wage costs.
So far, formal wage negotiations between workers and management are not common, despite the beginning of legal efforts to implement them in the PRD. Workers do need more protection from abuses by irresponsible bosses, and there is clearly a need to enforce health and safety regulations. However, we do understand those who believe the initial PRD rules went too far. Clearly, the role of unions in China is evolving – while more active, even independent, unions are clearly needed to protect workers, it is difficult to see the Party allowing them too much autonomy.
The majority of firms believe per worker output is rising faster than wages, signalling productivity growth is still just about able to absorb higher wages (and conversely that higher wages reflect higher productivity – which means this is “wage growth”, not “wage inflation”). This suggests in turn that the prices of stuff being exported out of China may rise in price, but not primarily because of rising China costs.
(Author: Economists, Standard Chartered China)