China's rising labor cost aids US jobs

China Daily, October 10, 2011

A woman works at a production line in a clothing factory in Anhui Province. [CFP]

Fast-rising labor costs in China's competitive manufacturing regions are expected to keep more US investment at home and create up to 3.2 million new jobs there by 2020, according to a report from the Boston Consulting Group.

However, foreign direct investment from the US might not shrink in the coming years, said a partner of the consulting company on Sunday.

"US manufacturers are expected to continually inject as much money as in previous years into China's manufacturing sector. Their investments might shift to supply products for Chinese domestic consumption instead of exports," David Lee, a partner in Shanghai, said.

Mainly because of China's rising wages, which are growing about 20 percent annually, the country's cost advantage for many products was predicted to decline by a range of 10 to 15 percent.

As a result, the world's second-largest economy might no longer be the default low-cost manufacturing location for the US in the long term, said the report.

Lu Zhongyuan, deputy head of the Development Research Center of the State Council, said last week at a news conference that the rising cost of labor was one of the main factors that was likely to lead to a slowing economy in the five-year period starting 2016, with a possible average expansion rate of less than 8 percent.

"However, the country's economic fundamentals are still very strong because of the booming domestic consumption market, which can eliminate worries about a hard landing," said Lu, who forecast that GDP growth was likely to exceed 9 percent this year, compared with 10.4 percent in 2010.

China's export-led and labor-intensive companies might be the first to face problems because of changing economic conditions, said Yuan Gangming, a researcher at the Center for China in the World Economy at Tsinghua University in Beijing.

The Boston Consulting report said that 15 percent of US imports from China could be reshored, meaning the products would instead be produced and sold in the US.

"The trade surplus with the US could possibly narrow, which might increase the pressure on manufacturing sector growth," said Yuan. "But it will help to accelerate the adjustment of the industrial structure and remove the overwhelming dependence on low-cost manufacturing."

US President Barack Obama last week accused China of "gaming" the trading system to its advantage and to the disadvantage of other countries by manipulating the yuan.

The US Senate is scheduled to vote on Tuesday on a currency bill that could lead to levies on Chinese goods.

Obama's comment might have been motivated by the weak labor market and economic situation in the US, and it looked like an excuse for the US to adopt trade protectionist measures, Chinese experts said.

"It will not help the US resolve domestic issues such as the trade deficit and high unemployment. In fact, China's advantages in competitive manufacturing regions are gradually weakening," said Yuan.

The Boston Consulting report "might reduce the pressure for a stronger yuan from the Obama administration", Yuan added.