Honda's Wage Offer `Tip of Iceberg' as China Factories Grow

China’s manufacturing job growth accelerated to the fastest pace in at least five years in the past three months, signaling more employers may be forced to follow Honda Motor Co. in offering higher wages.

The Federation of Logistics and Purchasing said yesterday in Beijing its average factory employment index for the past three months reached 52.7 even as its measure for manufacturing growth slid. The release came a day after Tokyo-based Honda offered a 24 percent pay increase to workers at a factory in the aftermath of a strike that shut down its Chinese production.

Faster job growth and higher wages will help Premier Wen Jiabao’s government rebalance the world’s third-largest economy away from export dependence. The shift may also stoke inflation, making it more important that officials contain prices in part by ending China’s currency peg to the dollar, said Peng Wensheng, head of China research at Barclays Capital.

“Honda’s just the tip of the iceberg, and it reflects the urgency of adjusting China’s growth model,” said Huang Yiping, an economics professor at Peking University and a former Citigroup Inc. chief Asia economist. “After three decades of rapid growth partly driven by cheap labor, China must adjust” to higher wages, he said.

Manufacturing Peak

Earnings are poised to rise even amid signs that the acceleration of growth in China’s industries may have peaked, economists said. Yesterday’s report showed the country’s manufacturing purchasing manager index dropped more than forecast, to 53.9 in May from 55.7 in April; readings higher than 50 indicate expansion.

The decline contributed to a sell-off in stocks that saw the MSCI Asia Pacific Index snap a four-day winning streak. It retreated again today by 0.6 percent as of 10 a.m. in Tokyo.

China’s regional officials are contributing to wage gains. After halting minimum wage increases last year amid the global recession, seven Chinese provinces raised their levels in the first quarter, according to the Labor Ministry. Companies from Dell Inc. to Hon Hai Group have also increased pay in their Chinese businesses this year.

Foxconn Technology Group, also known as Hon Hai Group, the assembler of Apple Inc.’s iPhones, said today it will raise workers’ salaries by at least 30 percent in China. At least 10 people have died this year at its manufacturing complex in Shenzhen and police are treating the deaths as suicides.

Honda Strike

Honda, Japan’s second-largest carmaker, said it plans to resume full operations today at its parts plant where workers went on strike. The company hasn’t decided when to reopen its four car-assembly plants in the country, said Akemi Ando, a Honda spokeswoman.

“The Honda strikes could lead to an increase in these types of incidents,” Auret van Heerden, president and chief executive officer of the Washington-based labor-monitoring group Fair Labor Association, said by phone yesterday. “This sort of labor action generally has a copycat nature.”

About a quarter of workers in nine Chinese provinces surveyed by the central bank said they expected at least a 10 percent pay increase this year, the state-run Xinhua news agency reported in March.

Tao Dong, a Hong Kong-based economist at Credit Suisse Group AG, said “I expect double digit wage growth a year for the migrant workers over the next few years.” China has about 145 million migrant workers across the nation, about 11 percent of the total population, according to government data.

‘End of an Era’

“The events have dramatized the beginning of the end of an era of China as world factory,” Tao said.

Faster wage increases and yuan appreciation should both be in policy makers’ toolkit to help reallocate resources away from exports toward domestic demand, said Peng at Barclays, who is based in Hong Kong. “Wage increases may push up domestic inflation so letting the yuan strengthen at the same time may help cool inflation.”

China’s consumer prices rose 2.8 percent in April from a year before, approaching the 3 percent target that the government has set for this year’s average.

Any change in the yuan’s 6.83 peg to the dollar, kept since July 2008 to aid exporters, may hurt manufacturers with thin profit margins, such as Zhejiang Mingfeng Car Accessories Co., an exporter of car covers and seats cushions whose margin last year stood as low as 2.5 percent.

‘Great Distress’

“Pressure on wages has been greater this year especially as we expanded our business after the New Year holiday,” said Bai Ming, deputy general manager of Zhejiang Mingfeng, adding that his company has raised wages by almost 20 percent. “Even a 3 percent yuan revaluation may cause great distress for our business,” he said.

China’s trade balance has already shrunk with foreign demand gains outstripped by domestic spending. The country’s gross domestic product climbed 11.9 percent in the first quarter from a year before, the most in almost three years.

China faces a “pressing” task in the “post-crisis era” to adjust its growth model and move away from growth reliance on investment and exports, which may be restrained by a slow world recovery, Vice Premier Li Keqiang wrote in the Chinese Communist Party magazine published yesterday.

--Li Yanping, Stanley James, Henry Sanderson, Jay Wang. Editors: Chris Anstey, James Tyson

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

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