China's Wages Are Rising - And That's A Great Thing, Says Matthews Asia

Tom Burroughes

7 March 2013

China’s wage growth is a positive development and no reason for alarm that the Asian giant might lose its competitive edge, while concerns about supposed over-investment and slowing growth are exaggerated, Matthews Asia, the US-headquartered fund management house, says.

Average urban salaries in China rose 12 percent in the first nine months of 2012 from a year earlier without adjusting for inflation, slowing from 14.4 per cent for all of 2011 and 13.3 per cent in 2010 (source: Bloomberg). For Asia as a whole, wages have risen notably since 2000. For example, on an index where the year 2000 carries a figure of 100, Asia now ranks at 194, compared with an overall world index of 122.7. Among developed economies, the figure is 105 (source: Matthews Asia.)

For over a decade after China embraced aspects of capitalism, it has been assumed that its low-wage, export-focused traits were key to success and that wage growth might now be seen as some kind of problem, but that is not the case, Robert Horrocks, chief investment officer at Matthews Asia, told journalists in a briefing.

“China used to have a low-wage model that was called the `Great Leap Forward’,” Horrocks said, referring to state-imposed industrialisation and other measures enacted under Chairman Mao that involved huge dislocations and loss of life.

“The conventional wisdom is of dirty factories producing cheap, low-margin products for the US and Europe. Quantitatively though, that was never an important part of the Asian economy as a whole,” he said.

With rising real wages, enabled by significant increases in productivity, China and other Asian consumers, especially women in a growing middle class, will help these economies broaden out into services, he said.

In China, the country has recorded productivity, on annualised terms, of 9.0 per cent from 2000 to 2010, ahead of India, at 7.4 per cent, then Vietnam, at 7.1 per cent; Mongolia at 6.2 per cent, and Singapore, at 5.5 per cent (source: Matthews Asia). At the other extreme, Japan has a figure of just 0.8 per cent, with the US at 1.5 per cent and Taiwan at 3.7 per cent. (To an extent, some of these figures can be explained from countries starting from different points of economic development.)

Over-investment?

Late last year, economists at the International Monetary Fund argued that there is an “over-investment” issue in China. Some commentators have raised concerns about “ghost factories” and empty apartment blocks. Investment, the IMF report said, is close to half of China’s gross domestic product.

Horrocks, however, said data on “optimal” and actual levels of investment between 1980 and 2010 did not suggest a significant gap and cause for alarm.

“I think the evidence for over-investment in China is quite weak…there was no evidence of such over-investment before the global financial crisis ,” he said. Another factor to consider, in judging if the Chinese government has pushed unwarranted investment, is to note that now, about 30 per cent of Chinese businesses are state owned, compared with 70 per cent in the late 1970s, he said.

Horrocks predicts, that with a loosening of controls of the Chinese yuan, or renminbi, there will be continued development and liberalisation of the country’s capital markets, such as through a build-out of its corporate bond market, for example. “International trading in renminbi is growing exponentially,” he said.

Some recent Chinese data has suggested a slower pace of growth, which has weighed on market sentiment. Asked about this, Horrocks said: “There is no doubt that China is slowing down…it used to be growing at rates of over 10 per cent a year and it is now more like seven to eight per cent. China is trying to slow itself down and monetary policy has been relatively hawkish and they are trying to control property prices."

Matthews Asia, which is headquartered in San Francisco, specialises in Asia funds and currently has total assets under management of $22.1 billion, with $3.1 billion run in single-country strategies.