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World Bank: Wages Can Rise in China
From the World Bank Report


From the Wall Street Journal; June 19, 2010; By Aaron Back and Brian Spegele
Original Article  

Rail employees work on the second parallel line of the Lanzhou-Xinjiang railway, which traverses Gansu, Qinghai and Xinjiang with a full length of 1,776 kilometers. 		BEIJING—The World Bank said Friday the recent round of wage increases in China is unlikely to set off an inflationary spiral, as Chinese companies can absorb pay increases by raising productivity.

In its latest quarterly update on China, the World Bank also said Beijing should raise interest rates, which would be more effective than the administrative and regulatory approaches undertaken so far to rein in overinvestment and real-estate speculation.

The report also argued that a more-flexible yuan exchange rate would help make monetary policy more independent, which will be increasingly important as China's cyclical conditions diverge from those in the U.S.

Concerns are rising among investors that pressures to raise wages for Chinese workers could lead to broader inflation, or reduced profit margins for manufacturers accustomed to cheap labor.
Friday's World Bank report follows recent incidents of labor unrest at plants supplying Japan's Honda Motor Co. and a wave of employee suicides at Hon Hai Precision Industry Co., the world's largest contract manufacturer of electronics.

The Honda suppliers, Hon Hai, and other manufacturers have raised wages significantly, and many local governments have raised minimum-wage requirements.

"We don't think the developments we have seen over the past few months are heralding a new era in which we are going to see very high wage increases year after year," Louis Kuijs, senior economist at the World Bank in Beijing, told reporters Friday.

The report notes that total labor costs per unit of output have been flat in recent quarters. Wages are likely to rise, especially for low-income groups, but the flexibility of China's labor market and its track record in absorbing wage increases means "this is unlikely to set in motion an unwarranted wage-inflation spiral," the report says.

In the long term, analysts expect that an older, slower-growing work force will help shift China away from its role as the world's low-cost workshop and toward a more consumption-driven economy.

But Mr. Kuijs said China doesn't appear to have reached this point yet. "I would find it hard to believe China's surplus labor has already dried up."

Except for 2009, real wages for manufacturing workers have been rising by 5% to 10% every year since 2003, according to a recent note by Standard Chartered economists. Standard Chartered found that wage increases of about 8% to 12% were standard in the February-March period this year, when wage increases are typically reset to coincide with the Lunar New Year holiday.

Standard Chartered said recent labor disputes stand out not only due to their coverage by the media, but also because wages are being reset outside the normal Lunar New Year time frame.

The World Bank kept its forecast for China's gross domestic product growth this year unchanged at 9.5%, but lowered its estimate for next year's growth to 8.5% from 8.7% previously. It maintained its forecasts for China's consumer price index to rise 3.7% this year and 2.8% in 2011.

The strengthening labor market has contributed to growth in household consumption; that has fueled growth amid a slowdown in government-led investment as Beijing winds down its stimulus measures, the report said.

Tightening measures to cool the property sector since April will likely begin to affect booming real-estate investment later this year, the World Bank predicts. Still, it argues that low interest rates are the main cause of property price rises, and said a less accommodative monetary policy would be a better way to address the issue.

Measures so far taken by Beijing to contain credit growth and asset bubbles, including the restrictions on the property sector and quotas on total bank lending, "tend to create volatility and uncertainty on financial markets, are distortive, and sit oddly with efforts to make banks more commercially oriented," the report said.