Wage pressures hit Chinese city

The evidence is anecdotal but it dovetails with other signs that price pressures are mounting in China, whose low-cost goods have helped to hold down inflation worldwide and so lend support to a long boom in bonds and equities.

Henry Fan, a small businessman in the capital, has taken the overnight train to Anhui to try to recruit young women from one of China’s poorest provinces to follow a well-worn path working as maids, nannies and housekeepers for well-heeled Beijingers.

Paying a call on the local government in its plush new buildings on the edge of Hefei, Fan hears from Wang Libo, a director of the local branch of the All China Women’s Federation, how Greater Hefei itself is short of 30,000 maids.

Women can earn 800-900 yuan (US$105-US$120) a month in Beijing, compared with 500-600 in Hefei, Anhui’s capital. But, with strong demand for local strawberries and flowers powering earnings in the countryside, Wang says many girls prefer to stay on the farm.

Rural incomes nationwide were up 15 percent in the first quarter from a year earlier; in Anhui, where two out of three people live outside the urban areas, they rose almost 20 percent.

Indeed, Wang’s office last year had few takers when it offered 200 yuan to local women if they would sign on to train as migrant workers.

“I’m quite surprised to find out there’s a shortage,” Fan said. “It’s unbelievable.”

Downtown, at the Hefei Employment Service Centre, the story is the same. An official says she’d be happy to help — the center would take a juicy commission — but tells Fan that fewer and fewer people are willing to leave for big cities like Beijing and Shanghai because there are plenty of jobs at home.

China has achieved double-digit growth with low inflation by combining modern technology, introduced by foreign investors, and an apparently inexhaustible pool of cheap labor. The resulting leaps in productivity have stayed ahead of double-digit wage increases in the all-important manufacturing sector.

The unknowable is how fast the labor part of the magic formula is changing. Export prices from Hong Kong, a proxy for non-existent mainland China data, have already been rising by 2 percent a year since 2004, according to Jonathan Anderson at UBS.

Prices are not rising faster because even in labor-intensive industries wages account for a small part of production costs.

According to an example given by German chemical firm BASF, labor accounts for only US$1.30, or 8.5 percent, of the US$15.30 it costs a Chinese factory to produce a pair of leather work boots that retail in the United States for US$49.99.

The question is whether productivity gains will slow, pushing up unit labor costs with implications for global inflation, as manufacturers dredge the bottom of the workforce barrel.

Recent research by the Chinese Academy of Social Sciences put the surplus of rural laborers under the age of 40 at 52 million, well below common estimates of 100-150 million.

By 2009, labor could be in short supply even in the interior of the country, heralding wage rises across the board, according to the research, which was reported by the Beijing Times.

In Hefei, wages are still modest.

A local electronics company was advertising at the center this week for two drivers, offering 800-1,000 yuan a month.

A machinery company was willing to pay 1,400 yuan for an experienced grinder and 1,700 for a drill operator — meals, accommodation and social insurance included.

Outside on the pavement, a young woman and her husband were looking for a sales assistant to work in their CD and DVD shop from 8 a.m. to 8 p.m. for 1,000 yuan a month.

They used to get away with paying 600-700 yuan a month. “It’s much higher than before because we’re short of hands,” she said.

Generalizing about a country of 1.3 billion people based on a glimpse of one provincial capital of 2.24 million is treacherous.

But Hefei, 950 km (600 miles) south of Beijing, is in some respects typical of China’s ambitious second-tier cities — not least in successfully concealing its charms.

New roads and apartment blocks attest to the vigor of fixed-asset investment. Wal-Mart is preparing to open a store, joining French rival Carrefour, as Western retailers push ever inland from their coastal beachheads.

Unilever moved its main Chinese manufacturing operations to Hefei in 2003, trading lower labor costs for longer transport times. Foreign direct investment (FDI) in Anhui rose 60 percent in 2005 and then more than doubled in 2006 to US$1.4 billion.

Officials are planning a big expansion of Anhui’s road and rail links to lure even more FDI, while Hefei itself is budgeting for annual GDP growth of 15.5 to 18 percent from 2006 to 2010.

Can such breakneck growth be sustained without igniting inflation or running into resource and environmental constraints?

The scope for catch-up is immense. Anhui’s GDP per head was just 10,044 yuan (US$1,312) last year compared with the national average of 15,930. New downtown apartments sell for about 3,000 yuan a square meter, about a seventh of the price in Beijing.

Paul Cavey, China economist for Macquarie Securities, said the overriding impression he got during a recent visit to Anhui was that growth is valued at all costs; officials would continue to provide whatever incentives are needed to attract investment despite Beijing’s strictures, he wrote in a report.

“The infrastructure-related opening up of inland areas like Anhui will put a ceiling on cost increases and so help preserve China’s competitiveness,” Cavey concluded.

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