The economic imperative for change in the factory of the world

03 October 2011
The Chinese government plans to double the country's minimum wage over the next five years. This plan is partially designed to make Chinese workers happy so that they won't go on strike every day. Unfortunately, the plan has not proved effective because many factories refuse to abide by the minimum wages standards set by the local government, and seek to maintain their cost advantage by forcing employees to work long hours for low pay.
Take the case of the Youmei Underwear Company in Hainan which saw more than 1,000 employees go out on strike last month. This was the third time in the past five years that workers at the plant, owned by German lingerie giant Triumph International, had gone on strike.  Each time the workers voiced the same basic demand; to earn no less than the local minimum wage. Workers told China Daily on 8 September that they could still only earn 700 yuan per month, far less than the local minimum wage of 830 yuan.
Apart from the issue of how the local labour bureau in Haikou failed to spot a factory with more than 1,000 employees paying less than the minimum wage for years on end, a more pressing question is whether or not this factory could stay profitable if it did abide by the local minimum wage standard.
China, the factory to the world, has long been known for its cheap labour advantage. But, according to Feng Wang, Director of the Brookings-Tsinghua Centre for Public Policy, at this year's World Economic Forum, the abundant supply of labour is no longer so abundant. The once oversupplied labour market is turning into a seller's market, where workers are gaining more confidence as they get more bargaining power.
That brings a real headwind to Chinese factories, many of which rely solely on cheap labour to snatch up orders from overseas customers. Now, amid rising inflation and yuan appreciation, Chinese manufacturers are having a really difficult time in dealing with both their workers and clients.
According to some experts, at this critical moment when the world's production base is beginning to shift away from China in search for even cheaper labour resources, Chinese factories cannot cope by themselves anymore. It is time, they say, for the Chinese government to save local manufacturers from either going bankrupt or facing endless rounds of strikes.
China's staggering 30.9 percent year-on-year tax revenue increase in the first eight months this year has again stirred worries about whether such a tax burden will discourage business development in China. Jia Kang, director at the Beijing-based Research Institute for Fiscal Science, believes it is time to implement structural tax cuts for small enterprises and foster
business innovation.
That said, rising labour costs in China today could push factories to reform and be a powerful catalyst for the country's industrial upgrading; as was the case in Japan in the 1960s. “The success of China's first economic reform over the past three decades was based on cheap and abundant labour resources and that probably cannot be sustained in the long run,” Gu Shengzu, deputy chairman of China National Democratic Construction Association, told Shanghai Securities News. “Rising labour cost will eventually drive China to transform its economic development model.”
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