China’s workers agitate for their rights

In China recently, workers at a Honda Motor factory did something that is illegal in the communist country. They went on strike.

More interestingly, they won. Honda management at the plant in southern Guangdong province agreed to pay higher wages to settle the June dispute.

The strike was not a unique event in China. Every month there are reports of strikes in China at foreign-owned and local-owned businesses, although no official statistics on industrial disputes are released. Bloomberg reports that suppliers to Japanese automakers including Honda, Toyota Motor and Nissan Motor have suffered at least 10 strikes in China from May to early August.1

This labour unrest in a country where no independent unions are allowed has causes and consequences that, mostly, are part of any country’s successful progression from a developing to a developed economy. Now that China is the world’s No. 2 economy, the largest exporter and the biggest hoarder of foreign exchanges some of the consequences have wide implications.

The causes of the unrest are varied. One main cause is that many Chinese factories are literally sweatshops in that conditions are poor and shifts are long. Many Chinese workers live in dormitories on site where they work. This means that companies control many aspects of their lives, even down to forbidding dating among staff. The drab life for many Chinese workers was highlighted by some suicides at two sites in southern China owned by Foxconn Technology, a Taiwan-based electronics firm that employs 800,000 people in China to make everything from Apple iPhones to Sony PlayStations.

 Another reason for the industrial strife is that China’s workers have failed to share adequately in their country’s success. While in nominal terms workers are better off, the share of personal income in China’s GDP has fallen to 40% now from 53% in 1999, according to economists at Beijing-based investment bank China International Capital, as quoted by the China Daily.2 That compares with 57% in the US and 51% in Japan.

A third reason for the industrial disputes is that the high demand for labour has emboldened younger Chinese workers to seek better pay and conditions before they will accept a job. Companies in Guangdong province are now cutting working days, offering subsidised meals and air-conditioned comfort in factories to attract, and then keep, younger Chinese.3

Part of the high demand for labour is obviously China’s economic success– 10.3% GDP growth p.a. on average since 1992.4 But another aspect is demographic. China’s strict family-planning policies – typical limiting couples to one child – are aging China’s population fast. The supply of workers aged 16 to 24 has peaked in percentage terms and is forecast to drop by one-third in the next 12 years.

Lastly, young adults in China are better educated, hold higher hopes and are, perhaps, more spoilt than earlier generations (being only children). They are, therefore, more assertive than their parents were when China embarked on its economic modernisation from 1978.

The agitators are having some success in their quest for a more-rewarding work life, though some of the gains in pay reflect the end of a wages pause announced when the global financial crisis intensified in 2008.

The Hong Kong Trade Development Council estimates that wages in Guangdong have jumped close to 20% in the past six months, including a 19.8% rise in the minimum wage for full-time employees.5 The government-owned China Daily newspaper reports that nine provinces and cities raised their minimum wage from early July by as “much as a third”.6 Morgan Stanley in June forecast that labour costs in China will double to about 30% of GDP in the next decade from 15% now.

Consequences

One result of the industrial unrest is that the Guangdong Provincial People’s Congress is considering making strikes legal. The proposed law would allow strikes if negotiations have been attempted and no violence is used. The law could be passed in other provinces, as China’s government wants to control industrial unrest.

Another consequence of the unrest is that the resulting higher labour costs may erode China’s competitiveness. The Economist quotes studies that found that, after 9% p.a. growth in wages from 2002 to 2006, Chinese workers are now as costly as those from Thailand and the Philippines.7

Some foreign-based factory owners are concerned enough about labour costs to turn to technology. Bloomberg reports that Foxconn, Nissan Motor’s Chinese venture and VTech are investing in automated assembly plants in Guangdong for this reason. That said, wages in China are low by world standards – 81 US cents an hour according to one of the studies reported in The Economist – and productivity improvements justify wage gains so there won’t be a massive shift to automation or to other countries anytime soon.

At a macro level, the economic consequences of a more powerful labour force could help Chinese authorities achieve one of their key economic aims. This goal is to make consumer demand a bigger driver of China’s economy, and thus lower the importance of exports in driving growth. At present, consumer spending in China is estimated to be between one-third and one-half of GDP compared with about 70% in the US and Australia.

China’s reliance on exports, coupled with its low-yuan policy, is creating tensions with trading partners, especially the US. The dependence on exports leaves it vulnerable to the state of the world economy, as was shown by how the global financial crisis rocked China, which was only stabilised by a massive stimulus package.

China’s exports success (along with Germany’s) could, in fact, be hobbling the US and other developed economies. The country cannot record endless trade surpluses, such as in July when the surplus came in at an 18-month high of US$28.7 billion, and expect the economies of its trading partners to flourish when domestic demand in these countries in so fragile.

Happy workers would make China a better play to live. So China’s striking workers could be doing the capitalist and communist sides of the world a favour as they illegally push for higher wages and better conditions.

Average wage in China since 2000 (in yuan)

China_wages_-_Sept_2010

DataStream

1 Bloomberg News. “China Workers May Get Legal Sanction to Strike in Guangdong Law.” 4 August 2010
2 China Daily. “China provinces to raise minimum wages.” 1 July 2010. http://www.chinadaily.com.cn/bizchina/2010-07/01/content_10046549.htm
3 New York Times. China factors now compete to woo labourers.” 12 July 2010
4 IMF. World Economic Outlook, April 2010. imf.org
5 Hong Kong Trade and Development Council. http://www.hktdc.com/info/mi/a/fs/en/1X06SCU6/2/Feature-Stories/China-Minimum-Wages-Increased-In-Zhejiang-Fujian-Guangdong-And-Shanghai.htm#
6 China Daily. “China provinces to raise minimum wages.” 1 July 2010. http://www.hktdc.com/info/mi/a/fs/en/1X06SCU6/2/Feature-Stories/China-Minimum-Wages-Increased-In-Zhejiang-Fujian-Guangdong-And-Shanghai.htm#
7 The Economist. Wages inflation from a study by Erin Lett, formerly of the US Bureau of Labour Statistics and Judith Banister of the Conference Board. Comparison with other countries from a study by Dennis Tao Yang of the Chinese University of Hong Kong, Vivian Chen of the Conference Board and Ryan Monarch of the University of Michigan. “Briefing China’s labour market. The next China.” 31 July 2010

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