China's Low Costs are on the Rise

by alexda - Date: 2008-07-30 - Word Count: 643 Share This!

HONG KONG - We've come to know "the China Price" as the mark of the cheapest goods in the world, dreaded by competing manufacturers, irresistible to buyers.

Well, Asia Foundation vice president Allen Choate follows this topic and has some news:

"I think the China Price is gone," he said over a dim sum lunch Saturday.

Costs are rising among manufacturers all across the Pearl River Delta, which spreads like a fan north, east and west of Hong Kong. Raw materials and energy prices are up. Taxes are up, thanks to a Chinese government decision to take away preferences for exporters.

The minimum wage rose by a third on July 1. Enforcement of anti-pollution rules is starting to bite.

For the hundreds of thousands of apparel, footwear and consumer electronics buyers who have loved the Pearl River Delta, the bloom is off the romance. For many years, this region brought lower prices to American stores. Now it's bringing inflation.

Myron "Mike" Ullman, chairman of both J.C. Penney Co. and the National Retail Federation, saw this firsthand on a recent swing through Asia.

EUGENE HOSHIKO/The Associated Press
A worker arranges new bicycles at the Shanghai Forever Bicycle factory. Manufacturers spreading up the Yangtze River from Shanghai are facing rising costs as well as a labor shortage.

Mr. Ullman expects Penney can hold the line on price hikes, but other retailers won't be so lucky.

"What's been good news for a long time now is going to be realistic news," he said.

"Costs are going up. We think apparel at the cost level, not retail, in the first half of '09 will go up 8 percent for the industry."

Inflation hawk and Dallas Federal Reserve Bank President Richard W. Fisher says retailers are telling him that Chinese goods are rising in price from 5 to 10 percent.

"Our labor unions were cowed by the fact that cheap stuff at very, very low prices was coming out of China. But their wage rates are increasing at a very, very fast rate," Mr. Fisher said.

It's not just the Pearl River Delta. Manufacturers spreading up the Yangtze River from Shanghai are also facing rising costs.

"There's a labor shortage in the Yangtze River basin," Mr. Fisher said. "That's an arresting statement."

Coming on the heels of higher prices for food and energy, price hikes from China are bad news for American consumers. But this is also a shift in the global economy.

China's rapid economic growth was built on a seemingly endless supply of inexpensive workers. More than 75,000 Hong Kong manufacturers built factories in the Delta to take advantage of cheap labor and land. Tens of millions of migrant workers - often single women - have poured into the Pearl River Delta over the last 30 years looking for factory jobs.

One result was "the worst excesses of capitalism" in a communist country, said Geoffrey Grothall, editor of the Hong Kong-based China Labour Bulletin. Sweatshops. Child labor. Employers who confiscated wages for decrepit dormitory housing or skipped town without paying employees anything. Pollution and unsafe working conditions.

After several years of this, workers stopped putting up with these conditions. The flood of migrant workers slowed. Employee turnover in many factories rose to 75 percent a year. Many shops were hit with wildcat strikes, and labor rights campaigners publicized the worst excesses through the Chinese media and international consumer awareness campaigns.

These have always been factories operating on thin margins, however, and the rising value of the Chinese currency (up 18 percent against the dollar) has had a major impact on exports.

The Chinese government is now pushing employers toward collective bargaining with their workers. The new minimum wage is 1,000 yuan a month, or about $130. Chinese smog and water pollution are an international embarrassment that's beginning to get some attention.

"They're trying to move up the value chain" to more advanced manufacturing and services, Mr. Choate said. Meanwhile, some of the shoe and apparel makers are leaving for cheaper places such as Vietnam.

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