2010-06-30 10:18

Wang Tao, head of China Economic Research, UBS Securities

Labor disputes and wage increases in southern China have recently hit the headlines. These have triggered concerns about widespread labor disputes and a profit margin squeeze in China's export sector, as well as a big jump in inflation or even a wage-inflation spiral.

The latest wage concerns follow reports of labor shortages in the Pearl River Delta earlier this year. Linking these together, many believe they are reflections of a shift in China's demographics - fewer young people are entering the labor force - and that is the end of China's cheap labor and associated growth story.

In my view, these concerns are over exaggerated because people, for one thing, are mixing a cyclical upswing in labor demand with structural demographic changes, and they are not putting the latest wage increase within the context of past wage increases and the growth of productivity and the overall economy. They are also overlooking the positive aspects of gradual wage increases.

With regard to China, growth is certainly decelerating while inflation has not yet peaked. However, we believe that the recent increased wage pressures mostly reflect cyclical demand-supply factors in the labor market, as well as rising living costs. In the short term, profit margins will be squeezed, but inflationary pressure will be limited. I do not think China is entering a wage-inflation spiral.

Moreover, gradual wage increases will help China move to a more consumption-based economic growth model.

In the medium term, however, demographic changes and shrinking surplus labor are expected to be an important factor pushing up relative labor costs and inflation.