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China's labor unrest and the world economy

Labor unrest in China has reached the headlines of the Western media. The suicides at Foxconn and the strike at Honda have led to significant percentage wage increases that have been widely publicized. This will eventually increase somewhat disposable income and consumer spending in the country, encouraging a shift to production for the domestic market rather than for export. With the expected appreciation of the yuan during the course of this year, the wage hikes will inevitably make China’s exports more expensive for consumers in the developed countries, where they will consequently contribute to an increase in inflation.

As the Financial Times noted earlier this year, wage increases have been on the agenda since the middle of last year, when shifts in the labor market led to manpower shortages in the export-intensive coastal regions of the country. Those shortages resulted from China’s fiscal stimulus, which led to investment in infrastructure in regions from where the migrants come, and where they would otherwise have stayed and found employment in new stimulus-created jobs. Guangdong, for example, raised the minimum wage by one-fifth three months ago, and other provinces followed suit. The movement in favor of larger salaries was coincidentally been accompanied by a strong decline in the country’s equity markets.

As Andy Xie notes in Caixin Online, the Chinese workers who have been lately in the headlines are a new generation, a second generation that has fewer ties to the countryside than its predecessor generation that worked for three decades at low wages. The new, younger generation, which is also more highly educated, has higher expectations, making for a greater capacity to express despair (as in the Foxconn suicides) and also anger (as in the Honda strike).

So it is no surprise that the leadership’s so far measured response to the labor unrest manifests its principal concern with managing the country’s own economic transition from export-led growth to a model that gives the domestic market greater weight in tandem with the development of a more substantial middle class able to sustain such production.

Add to that demographic basis, all the macroeconomic problems: with bank lending, inflation and the real estate bubble; and top it off with demographic fact that many more peasants are legally tied to land in the countryside (irrespective of violations of the law in practice) under an administrative rural registration system inherited from the truly Communist era that Khrushchev had abolished in the Soviet Union 42 years ago.

All that also means, coincidentally, that, when push comes to shove, the Chinese leadership is less concerned with assisting the rest of the world in managing the global financial crisis than it is with insuring domestic tranquility and stability. That should hardly come as a surprise, but it would be easy to forget if one limited one’s reality to the appearance of things as represented in certain Western (semi)popular financial and economic publications.

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URL:  http://www.robertcutler.org/blog/2010/06/chinas_labor_unrest_and_the_wo.html
First published as "China's exports surge for now," Asia Times Online, 10 June 2010.

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