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ASIA Rising wages are weighing on China’s ‘miracle’ economy

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The impact of Chinese inflation could prove to be bad news for consumers in Baltimore as well as Beijing

SINGAPORE The era of cheap Chinese exports could be drawing to a close, but that might not be all good news for American manufacturers.

Pigs, and pork, have been much on the minds of the Chinese lately. February saw the beginning of the year of the Golden Pig, a particularly auspicious event in the zodiac calendar that only comes around once every 60 years.

It was ironic, then, that just weeks into the new year a surge in pork prices began causing real discontent among Chinese consumers and a growing headache for the government. Pork, a staple food for most of the country's 1.3-billion population, is an important benchmark in China. Just as a sharp rise in beef or bread prices would hit the average U.S. consumer hard, the increase in pork prices—which rose almost 30 percent month-on-month in April—quickly sparked concern across China.

Analysts said that a rise in demand, and spreading incidents of disease, caused the price increases. But more important than the fluctuations in pork prices—which have since fallen—are the uncomfortable truths they are revealing about the Chinese economy.

Specifically, the price increases reawakened fears that Chinese inflation, long feared by economists but largely ignored in discussions of China's impact on global trade flows, might be here to stay. And that could be just as bad news for consumers in Baltimore as it is for those in Beijing.

A quick survey of recent events concerning China shows that it's been a tough few months for the world's fastest-growing major economy. U.S. consumers will be most familiar with the spate of safety scares emanating from China, including pet food, toothpaste and Thomas the Tank Engine toys. An even bigger story in China was a scandal about workers who had to be rescued from conditions of near slavery in brick kilns in rural areas. Some of the victims were teenagers who had been abducted from their families or lured with false promises of well-paid jobs, only to be abused by factory owners, many of whom operated with the tacit approval of local authorities.

Fundamentally, the problems that have hit the economy come down to prices. Chinese-made toys wouldn't be flooding the U.S. market if they weren't cheap, and workers wouldn't be exploited in Chinese factories if their owners weren't striving to keep prices as low as possible. But every episode like the brick kiln scandal strengthens the growing trend in China for workers to receive better benefits. And in line with China's longer-term progress towards becoming a developed country, this means costs are likely to rise.

Already, some employers in China are finding they have to pay even relatively unskilled workers far more than in the past. In the metals industry, magnesium producers said they can no longer rely on an endless supply of seasonal farm laborers to staff their facilities, as competition from other industries and the relentless urbanization in China forces them to raise wages. Some steelmakers also are having to pay higher salaries, although the market boom during the past few years has so far prevented that from being a major problem.

Overall, Chinese inflation is still relatively low at around 3 percent, although some analysts expect the rate to rise in the near future. These minimal inflationary pressures, combined with double-digit economic growth, have marked the Chinese economic "miracle" during the past five years, but no one expects the combination to last forever.

Taken at face value, this would seem to be good news for U.S. manufacturers. Assuming a decoupling of low inflation and high economic growth rates doesn't derail China's economy completely, a rise in Chinese prices would seem to indicate a growth in domestic purchasing power, which would bring the export-dependent economy closer to balance.

A rise in China's production costs also would go some way to stemming the surging exports of dirt-cheap toys, textiles and steel products that have hit the country's trade partners in recent years. If Chinese steelmakers do have to pay more for labor, electricity, raw materials and transport, then export prices might rise to a level at which companies in other countries can compete.

Such a scenario is more likely to have a long-term impact on the nature of the Chinese economy than any of the export tax changes announced by the government this year, or even calls for a revaluation of the yuan.

But there are huge risks to this process, too. Cheap labor costs in China mean the country has been exporting deflation—keeping global prices low—for several years. An end to that process could put severe upward pressure on consumer prices across the world, not just in China itself.

It would be wrong to imply that the health of Western markets is dependent on the abuse of workers in China's brick industry, or the unscrupulous factory owners who cut corners on safety in order to maximize profits. But the Chinese and U.S. economies are linked in more complex ways than some of the Beijing-bashing lobby in Washington like to admit. Those demanding an immediate end to cheap Chinese exports should be careful what they wish for.


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