Wed, Jul 07, 2010 - Page 8 News List

Dangers of speculation in China

By Wu Hui-lin 吳惠林

Now that the Economic Cooperation Framework Agreement (ECFA) between Taiwan and China has been signed, including the definitive “early harvest” list of goods and services on which tariffs will be cut or abolished, the so-called “post-ECFA era” is upon us.

Over the next few years there is likely to be a huge increase in business and trade across the Taiwan Strait, and Beijing and Taipei will exert more influence on one another than ever before. Regardless of whether you are for or against the ECFA, people living in Taiwan, and businesspeople in particular, will now need to keep a close watch on events in China, especially economic developments.

The first point to note is that big pay raises announced by Taiwanese electronics maker Foxconn for employees at its plants in China are likely to mark the start of substantial wage hikes for other workers across the country. This means that labor costs in China are almost certain to go up quickly. Labor supply shortages in coastal provinces, as well as changes to the legal environment in which businesses operate, such as China’s Labor Contract Law and other related legislation, can only add to the upward pressure on wages.

Second, a wave of strikes has broken out in foreign-owned factories in China, possibly instigated by the Chinese Communist Party. Now that the labor genie is out of the bottle, it will be impossible to put back. Having gained a taste for collective action and the concessions it can secure, workers are unlikely to want to give up their new found power and the communist government, for all its repressive policies, will not be able to hold back the tide.

Less overt action like go-slows are also effective ways for workers to hamper ­production and put pressure on employers. Chinese workers are becoming increasingly militant and that change in mindset is going to be an increasing headache for anyone doing business there.

Third, the appreciation of the Chinese yuan has become a hot topic once again following a recent announcement by the People’s Bank of China (PBC) that it intends to adopt a more flexible exchange rate policy. It is true that this measure was taken in part because of political pressures, including calls from the US Congress for sanctions and US Treasury Secretary Timothy Geithner’s criticism that a refusal to let the yuan appreciate was standing in the way of global economic and financial reform.

However, as the PBC made clear, allowing the yuan more flexibility would also help guide funds toward sectors driven by domestic demand, such as services, thereby reducing the Chinese economy’s reliance on exports. In view of this, Beijing’s policy of interfering less with the exchange rate is set to continue. That makes the question of whether the yuan will appreciate or depreciate over the long term an important consideration for those thinking of doing business in China.

Most foreign investors expect the yuan to continue climbing in value. Ma Jun (馬駿), Deutsche Bank’s chief economist for Greater China, predicts that it will appreciate by about 3 percent each year for the next three to five years. If so, that will have a negative impact on exporters.

The above three points all indicate that Chinese labor will no longer be cheap. Most affected will be exporters, as higher wages push up the cost of production and sales prices, making it tough to do business.

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