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Monday, September 22, 2003

Wages and Deflation in China

In the mailbox, Stephen makes some comments on this . Some very interesting points, and he should know, since his job is researching this area.

Your 2 Sept 03 piece on China's 'reserve army' is interesting, but you may want to talk to factory owners in China before you start generalising about internal wage deflation. I take your points regarding xiagang, SOEs, etc, but minimum wages in China have shown pretty steady growth over the last decade (with Guangzhou - for instance - raising min wages five or so times in the last five years). Whether workers get paid those rates is another question, but given that we're now witnessing the migration south of garment factories (from Guangdong to Vietnam) might tell us something about Chinese wages. HK businessmen moving to Vietnam will tell you that high wages in China's south have had at least some influence on their decision to move, though of course there are many other reasons why someone shuts down a factory in Dongguan and moves to rural Vietnam. Shenzhen and other manufacturing centres in Guangdong have the highest minimum wages in the country (574 yuan per month for Shenzhen - off the top of my head...).

The interesting story, and one not often told, is about the competition between counties, townships and other administrative units over investment. Minimum wage competition is ongoing, with adjacent counties attempting to use lower wages to attract investment. People often quote stories about Malaysia losing contracts to China and so on, but wages competition is a much greater issue internally.

Second: everyone is talking about China sucking investment out of Southeast Asia, but far fewer are talking about China's outward FDI. It's growing rapidly and is making waves in Southeast Asia in particular. With large investments in Cambodia, Burma and Laos, the Chinese state is now in a position to influence ASEAN, much to the consternation of the Singaporeans and others. That China is probably (it's hard to know for sure) the largest investor in Cambodia is not widely understood, but the ramifications of this are pretty interesting.

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