Doubling in China's Manufacturing Wages Won't Deter Investment, Xie Says

A doubling of China’s manufacturing wages over the next five years won’t deter foreign investment because Asian rivals such as India and Indonesia lack comparable infrastructure, former Morgan Stanley economist Andy Xie said.

Labor strikes and worker suicides have forced companies ranging from Foxconn Technology Group to Honda Motor Co. to raise salaries in the world’s third-biggest economy. Demands for higher wages are fast becoming an issue in China and companies need to get used to it, said Jun Ma, an economist at Deutsche Bank AG.

“China’s workers are getting a break for the first time,” Xie, who is now an independent economist, said in a Bloomberg Television interview in Hong Kong. The economy remains in a “sweet spot” and the country will continue to be the most popular hub for foreign manufacturers because of its superior infrastructure, he said.

Spending on roads, bridges and railways was a key part of China’s $586 billion economic stimulus, announced in November 2008. China will spend 700 billion yuan ($103 billion) building highspeed railroads across the nation this year, the official Xinhua News Agency reported this month, citing He Huawu, chief engineer of the Ministry of Railways.

Taiwan companies will consider moving factories to India, Indonesia and Vietnam in the next three to five years as costs in China rise, the Economic Daily News reported this week, citing Arthur Chiao, chairman at Taiwan Electrical and Electronic Manufacturers’ Association.

Foxconn, Honda

Foxconn said this week it will double salaries for its lowest-paid employees after a spate of worker suicides. The increase prompted analysts at brokerages such as Macquarie Group Ltd. and Daiwa Securities Group Inc. to cut investment ratings on Taipei-based Hon Hai Precision Industry Co., the flagship of the group.

Honda, Japan’s second-biggest automaker, suffered its second strike in China in less than a month as workers at a plant partly owned by affiliate Yutaka Giken Co. walked out demanding higher pay, forcing the parts maker to close the factory.

The Shanghai Composite fell 0.8 percent to 2,562.58 today.

“One probably shouldn’t overreact to the wage increases,” said Christina Chung, senior portfolio manager at RCM, which oversees $146 billion in assets worldwide. “The adjustments to labor costs are a ‘catch up’ because wages were frozen during the global financial crisis.”

Domestic Consumption

Boosting salaries will help Premier Wen Jiabao’s government increase domestic consumption and move the economy away from a reliance on exports for growth.

“The wage increases will increase the spending power of the Chinese and boost tourism,” said Chen Minhua, chief executive officer of China Yida Holdings Co., a media and entertainment company.

The yuan’s peg to the dollar has helped exporters rebound from last year’s contraction in global trade while spurring criticism abroad that China is giving its companies an unfair subsidy.

The nation’s overseas shipments jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years, indicating that Europe’s sovereign-debt crisis has yet to pose a restraint on the world’s fastest-growing major economy.

Rapid wage gains will push up inflation and the government may need to cool the economy by increasing borrowing costs, said Xie, who correctly predicted in April 2007 that China’s equities would tumble.

Xie said last month that inflation may accelerate to 10 percent and that China needs a property crash for stocks to return to a bull market because that would jolt investors into switching money to equities.

Property Market

The nation’s property market is still in a “bubble,” Xie said today, after a report showed housing prices rising last month at the second-fastest pace on record.

The 12.4 percent gain in property prices compared with a record 12.8 percent increase in April from a year earlier, the National Bureau of Statistics said in a statement today on its website. The value of sales slid 25 percent.

China’s housing prices have been rising even after the government intensified a crackdown on speculation to limit the risk of asset bubbles and keep housing affordable.

--Allen Wan and Chua Kong Ho in Shanghai, Rishaad Salamat in Hong Kong. Editors: Richard Frost, Linus Chua

To contact Bloomberg News staff for this story: Allen Wan at +86-21-6104-7041 or awan3@bloomberg.net

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