China's New Chapter
Hill Gets Steeper For China’s Manufacturing Economy

Manufacturing wages are rising in China, but that’s not necessarily good news. CNBC explains:

As China’s economy expanded at breakneck speed, so has pay for employees. But the wage increase has translated to higher costs for companies with assembly lines in China. Some firms are now taking their business elsewhere, which also means China could start losing jobs to other developing countries like Sri Lanka, where hourly factory wages are $0.50.

Apparel manufacturing has been hit “extremely hard,” said Ben Cavender, a principal at Shanghai-based China Market Research. “The result has been that factory owners have gone on a massive investment spree outside of China.”

Companies are also investing in robots in efforts to automate as much as possible to offset labor costs, according to Jefferies analysts Sean Darby and Kenneth Chan. China’s industrial robotics market became the world’s largest in 2013, and is continuing to grow.

Outsourcing devastated the American middle class while creating a Chinese middle class. Now, the same forces are challenging China’s economic stability with the added pressure posed by more advanced automation.

It is becoming increasingly urgent for China to rebalance from a manufacturing economy to a consumer economy, and CNBC’s report shows that there’s a limited window in which this transition can be completed. Robotics and outsourcing will eventually force Chinese heavy industry firms to lay off employees no matter how much of a subsidy the government provides—right now, Beijing is bankrolling many big factories which wouldn’t survive on the open market. Higher wages in China increase demand in the short term, and so they may paper over some of the systemic challenges the country faces. But if hiring people in China to do factory work becomes more expensive than alternatives, then there won’t be any jobs paying any wages whatsoever.

Meanwhile, as the developed world has seen, factory workers don’t easily transition to new jobs in the service economy. Even with aggressive retraining programs, people often struggle to find work in a new industry. Chinese society has shown extraordinary flexibility as it has lifted much of a mostly-rural, agrarian population into an urban-dwelling industrial middle class. But even that development did not occur without dramatic consequences — social trust is very low in China, for example. Another massive transition coming before the last one is even completed (millions of Chinese still live in small poor villages) will disrupt communities and threaten political order. And that’s assuming there are new, better-paying jobs to replace the old ones and that the population is willing to retool for a new economy. If China sees the same kinds of challenges the West has in its struggle to replace factory work, the whole interconnected world will be in for a very rough period.

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