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China: Unrest threatens to spoil the Party

Unrest in China | China: Unrest threatens to spoil the Party Anthony Harrington

There is an inevitable trajectory that any successful developing economy has to traverse. How adroitly it does so determines, ultimately, whether  the notion of success continues to apply or not. No country can set out its stall to be the beneficiary of wage arbitrage moves indefinitely. The vast base of the population who provide the labour pool for this low wage game have to see their expectations of rising living standards being met over time, or in short order, the lid blows off the pot. So transitioning from an “emerging” country to a “developed” country means building a broad middle class of consumers.

The Chinese understand this dynamic as well or better than anyone. Down through the ages the most usual cause for dynastic change in China has been widespread popular unrest caused by the ruling elite losing “the Mandate of Heaven”. This last loosely translates as having the right to hold office on the basis of being a competent shepherd of the people. Lose touch with the sheep or oppress them overmuch and ultimately they hang you from whatever’s handy, as several Chinese emperors found to their cost.

How does this unrest begin to manifest itself in this day and age? Well, striking workers are one obvious signal. There are plenty of signs that at least a portion of China’s vast army of workers have had enough of being wage slaves on salaries that put plasma TVs, washing machines and dishwashers either forever out of reach, or only partially reachable through Herculean levels of labour.  

In the most recent spate of “labour difficulties”, a combination of strikes and suicides forced Foxconn, the world’s largest contracts manufacturer, which runs large factory towns manufacturing electronic goods for companies based in Hong Kong and Taiwan, to rethink both levels of pay and the way it relates to its workers. The company initially instituted a pay rise of 30% then increased that by a further performance related pay rise of 66%. Strikes at Honda factories forced the car manufacturer to implement 24% pay increases. That rate of increase would fritter away the wage arbitrage differential in relatively short order.

As the Financial Times noted recently, we are probably seeing the beginning of the end of the era of ultra cheap labour in Chinaas they head towards "developed" country status. That  said, there is still a long way for Chinese workers to go before they even start to sniff pay parity with European or US workers. Currently Mexicans earn about three times the salary of their Chinese counterparts, while Brazilians earn four times as much.

Meanwhile, in the outlying suburbs and regions bordering smaller towns, collusion between local authorities, which own vast tracts of land and local banks and developers seeking to build “big ticket” luxury homes, is seeing numbers of poor farmers evicted to make way for speculative home building. The resulting buildings lie empty (vacancy rates for new builds run as high as 60% in some areas) and their prices put them way out of reach of those who have just been evicted. The numbers of those involved may not be large enough yet to constitute any kind of serious social unrest, but it is a clear instance of waste and mismanagement on a grandiose scale.

The more immediate threat from this property scam, of course, comes from the huge and growing mountain of non performing loans that China’s smaller banks are piling up, and from the real estate bubble that is now threatening to implode, with unpredictable consequences.

A large part of the cure, as the Chinese Government knows very well, lies in improving the living standards of the vast majority at the base of the pyramid. Achieving this would simultaneously defuse unrest and lay the foundations for a major increase in spending by Chinese consumers. However, quite apart from the enormous challenges involved in pushing through reforms that would create more affluence at the base of the pyramid, there is the non trivial problem of how you turn people from savers to spenders.

A horrendous century has taught the Chinese people to be frugal and to set aside whatever surplus they can for the hard times that they “know” in their bones, lie just round the corner. Switching the mind set of consumers from “save” to “spend” is a tough act for any government, but a necessary one in order to reach ‘developed’ country status. Whether the Chinese government can pull it off remains to be seen.

Further reading on unrest in China and asset bubbles

Tags: asset price bubbles , banking , China , demographics , real estate
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