On the World's Factory Floor:How China's workers are changing China and the global economy

standardchartered

Special Report: On the World's Factory Floor | 14 January 2008

Content
Part I. On the Shanghai building site (pp.3-5)
We start our story on the Shanghai building site. There have been significant wage increases among
unskilled construction workers since 2005. Most of the men we met wanted to return to the countryside -
partly for cultural reasons, and partly because urban social services were closed to them. Land at home
drew them back. Most of their wages are saved for housing and marriage back home.
Part II. Counting the working masses (pp.6-9)
Official figures over-state how urban present-day China is. But they also under-estimate what proportion of
the labour force is working in the factories, as opposed to the fields. In 2005, we believe, China's
urbanisation rate was nearer 37% than the official 43%, though it will have risen a bit since then. We also
count an urban workforce of 330mn, 60mn above the official estimate.
estimate.
Part III. Inflated pay packets (pp. 10-14)
Official wage data counts only relatively well-paid state-sector workers. It misses two thirds of all urban
workers. As a result official numbers exaggerate both the level and growth of urban wages. We estimate
the average urban wage at some CNY 1,250 (USD 160) in 2006, 30% less than the official level. And it is
rising at around 8% y/y, not 15-19% y/y.
Part IV. Ignore the hype: China is still cheap (pp.15-19)
Wages in China are still low. According to our numbers, they are still only about 3% of the US wage and
25% of Mexico's. Other costs, including welfare contributions and corporate tax, will push up costs over the
next few years. However, there are still vast regional disparities in wage rates across China. These are
created by different minimum wage environments, as well as different social insurance regimes. Firms
sensitive to labour costs are 'wage-shopping' and 'tax-shopping' across the country. As a result, most firms
relocating out of the coast are moving inland, rather than offshore.
Part V. A smaller slice of a bigger GDP pie (pp.20-23)
Wage earners' share of the overall income pie is probably falling, although it is probably not in free-fall. As
a result, the share of income going to capital is increasing. This trend has its roots in the growth model -
cheap capital, a lack of labour protection, the bias to heavy industry etc. However, at the same time, there
is some positive news too - real wages are finally rising, and labour force growth seems to have
accelerated over the past few years. It is clear, though, that the growth model still needs fundamental
reform.
Part VI. Is anybody out there? (pp.24-32)
Labour supply growth has slowed while labour demand has accelerated over 2005-06. As a result, wage
pressures have appeared. China's "surplus" labour is disappearing, with major implications for the growth
model. However, the Lewis Turning Point is still likely more than a decade away. This is because more
young workers are arriving in the market, some 5 mn more a year to 2015, and many are wanting to stay
longer in the cities. Moreover, rural income policies have also contributed to urban wage growth - and these
will eventually fade.
Part VII. A New Socialist Town Policy (pp.33-38)
Over 2010-20 China would be well served by a New Socialist Town Policy, one that promotes intelligent
migration into the cities, boosts the urban workforce and makes migration more permanent. Social supports
in the countryside are required, especially pensions, but not grain production-linked subsidies. Access to
urban services - education and healthcare, as well as residency - needs to be opened up to outsiders.