China is getting more expensive: in 2008-12, growth in earnings outpaced that of productivity in four out of five years. These trends mean that cost competitiveness alone will not be enough to maintain the country’s global manufacturing predominance.
Rising wages in China is one of the key global economic trends for 2015, but the extent to which its competitiveness is being harmed and how this varies between different manufacturing locations is still opaque. The EIU has developed robust estimates of labour compensation per hour for China as a whole and also in each of its 31 provinces, forecast out to 2020, in a new report entitled Still making it: an analysis of manufacturing labour costs in China. "We anticipate that manufacturing labour costs in China will continue to increase steeply on an annual basis, albeit at a more moderate rate than in recent years."
At the national level, The EIU expects annual earnings growth of 12% on average in 2013-20. China is likely to remain price-competitive in manufacturing labour costs for a number of years to come, despite this high rate of growth, because productivity will continue to improve at a faster pace than in many other big emerging markets.
A key question for businesses will be whether the strong increase in manufacturing labour earnings in China will be met with comparable gains in labour productivity. The EIU’s data suggests that the relationship between earnings and productivity growth has become less favourable in recent years.
Nonetheless, manufacturing labour costs in China are still forecast to be lower than those in many competitor nations in 2013-2020. Earnings per hour in China are expected to stand at just 35.2%, 55.2% and 75% of those in Brazil, Mexico and Turkey respectively by 2019. China only loses significant ground in labour cost terms against relative manufacturing novices, including India, Indonesia and Vietnam. Manufacturing labour costs are already higher in China than in these countries. This disparity will widen further in the coming years, as wage growth in these countries is kept down by strong expansion in labour supply.
In 2019, manufacturing labour costs per hour in China will be 177% of those in Vietnam and 218% of those in India, up from 147% and 138% respectively in 2012. The EIU says that whether these countries can take advantage of this cost advantage will depend on their ability to develop effective supply chain infrastructure.
Within China, there will be new manufacturing hotspots. Internal disparities within China in manufacturing labour costs are narrowing, but still offer opportunities for firms looking to diversify capacity to cheaper locations. Factory workers in Anhui and Henan will see smaller increases in their earnings growth in 2013-2020, as they have a larger pool of rural labour on which to draw, and more workers opt to work near their hometowns, keeping the labour supply steady. That will be attractive for labour-intensive manufacturers.
Earnings growth in commodity-driven economies, such as Inner Mongolia and Hebei, will also slow as their economies adjust to weaker domestic demand. Provinces such as Jiangxi, Henan and Shandong stand out as attractive destinations for manufacturing, given their relatively low labour costs, large labour pools and developed infrastructure.
The EIU’s Tom Rafferty, China economist, says, “Real manufacturing productivity growth has been on a slowing trend since 2007, while expansion in real manufacturing earnings has remained elevated. In 2008-12, growth in earnings outpaced expansion in productivity in four out of five years. This suggests that China needs to transition more rapidly up the value chain. Price competitiveness alone will not be enough to maintain the country’s global manufacturing predominance; it will also need to demonstrate greater aptitude in innovation.
“While there has been strong focus on China's service sector, property market, economic re-balance and internet finance, it is time to revisit the core competitiveness that China offers," says Qian Liu, deputy director, China Forecasting Services at The EIU.
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