Labor rates are beginning to rise in China’s Pearl River Delta for the first time since the manufacturing boom began.

In relative terms, this may not look like much money. The going price for good factory workers in the industrialized region outside of Hong Kong is about $120 a month. But when you consider that a couple of years ago the price was about $80 a month, that’s a 50 percent increase.

There are several outcomes that will develop as this pricing escalates. First of all, various provinces within China will be fighting for new factories and jobs. Rural areas with access to big cities, such as Wuxi (pronounced Woo-Shi) already are underbidding more established areas such as the Pearl River Delta and Shanghai for jobs.

This scenario eventually will be repeated across China’s populace, which at last count numbered 1.3 billion people, providing there is no intervention by the central government. And as labor rates continue to rise throughout the general populace, it will give rise to a middle class and open up huge opportunities for sales of electronics components -- not to mention more political instability as the differences between rich and poor grow.

Second, as the price of labor continues to rise, so will the cost of exported goods. China’s primary attraction has been a combination of low-cost labor and significant tax breaks. Those tax breaks will continue to be weighted toward indigenous companies, but with so many joint ventures dotting the landscape it’s often hard to determine what’s indigenous and what isn’t.

Nevertheless, as costs of finished goods rise with the cost of labor, the price paid for those goods will continue to rise. In an industry that has been watching prices erode for the past four years, that’s not necessarily such a bad thing. But the exporting of higher prices also means that inflation will be exported with it, and that can be a very bad thing-particularly for things like trade deficits.

The high price of the Euro versus the U.S. dollar is putting a huge crimp on imports from Europe, not to mention tourism abroad. With the Chinese yuan still artificially low compared with the U.S. dollar, it could escalate international pressure to float the yuan. That, in turn, would increase inflation in countries that rely on inexpensive manufactured goods from China.

Which leads to the third outcome: Rising prices in China eventually will stir interest in manufacturing in other locations such as Eastern Europe. Factory costs are typically written off after three to five years, which means the same trend that started in Japan and shifted to Korea and then China could easily shift again somewhere else.

The great Chinese economic revolution is in full swing right now and will continue for the foreseeable future, but nothing lasts forever. Building an economic superpower is one thing, maintaining it is quite another.

By: DocMemory
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