A China puzzle

This is my latest comment from Fund Strategy.

The spectre of labour unrest and rising wages in China has brought to the fore many prejudices. Perhaps it is the sight of workers in a nominally Communist country going on strike and even committing suicide. For whatever reason the discussion is confused.

The question of rising wages has split Chinese and western commentators. Many Chinese pundits worry that higher wages will squeeze profit margins. In contrast, many westerners welcome them.

Although the Chinese concern is more straightforward, that does not necessarily make it true. There is no simple connection between wages and profits. Both can increase if productivity – output per worker – is rising.

The new-found western concern for Chinese workers’ wages is more perverse – especially coming at a time when western governments are pursuing austerity at home. Westerners are not supporting higher Chinese wages for altruistic reasons but because they hope to benefit from a rebalancing of the world economy. They want China to bolster domestic consumption so it exports less and imports more.

More bizarre still is the argument that demographic factors are pushing up wages. The reasoning is that China’s one-child policy means labour shortages are emerging among younger workers. Given that China has a population of 1.3 billion it is hard to imagine labour shortages – particularly when 57% of the population remains rural.

Probably strangest of all is the obsession among western pundits about a spate of suicides at Foxconn. The deaths at the Taiwanese-owned technology company have probably caught the western imagination partly because it produces iconic gadgets such as the iPhone. They are also, in a cliché of the times, seen as proving the high price of cheap goods.

But a closer look shows that the suicide rate is lower than would be expected given the huge number of Foxconn workers, judging by the national average.

No doubt Foxconn imposes a harsh regime, but it is certainly a better place to work than a rural farm. Western greens have a remarkable capacity to romanticise the rural and condemn anything that represents modernity.