By Jason Simpkins
China's economy made massive strides in 2007, averaging a quarterly expansion of 11.5%. Critics alleged that stellar growth figures were the product of cheap labor and a severely undervalued currency, which drove a torrent of exports out of the country.
But new labor laws and the accelerating value of the yuan could make for a different set of circumstances in 2008.
Willy Lin, managing director of Milo's Knitwear (International) Group, told the Financial Times that the new labor law, put into effect Tuesday, could increase costs by as much as 8% in 2008. In collusion with a higher minimum wage, increased social security payments and outside factors such as the appreciation of the yuan, Lin thinks the price paid by Chinese employers could be much greater.
"We estimate that, added together, labor costs [in mainland China] will be close to 40% higher for this year," he said.
Provisions made by the labor law greatly expand the rights of workers and strengthen their bargaining power. A loophole that had allowed companies to layoff employees hired on temporary or fixed-term basis without compensation has been closed.
Workers employed by a company for 10 years are now entitled to one month's severance pay for every year worked. And employers are required to consult an "employee representative congress" with regard to changes in hours, benefits and compensation.
Over the past several years, a combination of cheap labor and low operating costs have helped make China the world's manufacturing floor, as well as a global warehouse for bargain-basement goods. The controversial value of China's main currency, the yuan, has also helped to drive China's trade surplus to a record high of $238 billion.
Both the United States and European Union believe the yuan is severely undervalued, giving Chinese exporters a distinct advantage. Pleas to the government in Beijing to let its currency appreciate have fallen on deaf ears. But while the yuan has moved little against the euro, a rapidly declining dollar is beginning to emerge as a serious threat to Chinese exports.
In fact, the yuan hit a new high against the U.S. dollar yesterday (Wednesday) breaking the 7.30 mark to reach a central parity rate of 7.2996 yuan to one dollar. The yuan is up 50 basis points from Friday, the last trading day of 2007. It gained 6.9% on the dollar for the whole year and is up 12% since July 2005, when the yuan was first revalued.
The U.S. Commerce Department said the U.S. trade deficit with China jumped 9.1% to $25.9 billion in October, a record for a single month. In mid-December, the U.S. trade imbalance with China reached an annual rate of $256 billion, already ahead of last year's record high of $233 billion.
U.S. Treasury Secretary Henry Paulson, who has repeatedly lobbied for an appreciation in the yuan's value, has also acknowledged that "the pace of appreciation has increased over the past year."
However, he quickly added that the Chinese currency isn't appreciating fast enough, but that reason alone is not responsible for the massive trade disparity with China. Anyone who thinks the trade imbalance can be significantly affected simply by a rise in the yuan's value has been "misinformed," Paulson has said.
In his closing statement at a recent round of economic dialogue, Paulson said that China's trade surplus has been "created by the fact that our nation is growing and not saving and that China has an economy that is built around exports, investing heavily in export industries and has relatively low levels of domestic consumption and very high saving rates."
The U.S. trade deficit with China isn't going anywhere any time soon. But if the yuan continues to appreciate, and government reforms shrink operating margins for Chinese exporters, some significant signs of progress could emerge.
News and Related Links:
- Financial Times:
Chinese labour law set to boost costs