Chinese Wage Growth Surging, But Hasn't Fueled Higher Prices

Scott Stoddard

Like many companies, Behlen Manufacturing went to China in search of cheap labor, expanding markets and big profits.

But four years after the Nebraska-based maker of structural steel products opened its Beijing factory, it's struggling with a labor shortage and soaring land prices amid China's economic boom.

Competition for managers, engineers and other highly skilled labor is especially intense and job-hopping for higher pay is rampant.

"Wages in China are definitely going up at a fast pace," said Behlen Chairman Tony Raimondo. "The movement of land value and wages has surprised many of us."

But despite fears that surging wages in China will force firms there to pass on higher costs -- and inflation -- to the rest of the world, that doesn't seem to be happening.

Huge productivity gains and intense competition due to overcapacity in industries ranging from textiles to metal stamping and plastics are helping to hold the line on prices.

"The offsetting factor is that labor productivity growth is fairly high in China," said Nicholas Lardy, an economist at the Institute for International Economics. "Higher wages have not spilled over to unit labor costs."

While Chinese productivity data are scarce, other evidence indicates that rising wages and other costs from the Middle Kingdom haven't hit Americans' wallets.

Prices of imports from China fell 1% in August vs. a year earlier, according to Labor Department data. They've been declining year-over-year since at least the end of 2004 -- and probably a lot longer.

"That's why you can go to Wal-Mart and buy a shirt that's cheaper than it was 20 years ago," said Siva Yam, president of the U.S.-China Chamber of Commerce.

Meanwhile, more companies are heading to the largely undeveloped hinterlands in the middle and western parts of the country to tap a huge surplus of cheap land and labor, Yam said.

"There are 150 million Chinese on the farm that have nothing to do," said Peter Morici, a University of Maryland business professor and a former chief economist for the U.S. International Trade Commission.

He says there is no threat of inflation from imported goods, barring a sharp increase in the value of China's currency.

U.S. manufacturers argue the yuan is undervalued by as much as 40% vs. the dollar, giving Chinese companies an unfair advantage.

Other economists say the yuan's undervaluation is much less.

China last year began letting its currency appreciate vs. the dollar, though at a near-glacial pace.

The yuan remains a political hot potato given America's huge trade gap with China. It hit a record $201 billion in 2005 and a new monthly peak of $22 billion in August.

Last month, Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., withdrew legislation that would have imposed a 27% tariff on Chinese-made goods unless Beijing loosened its control over the yuan.

Yet most companies will remain in China despite the threat of higher tariffs and rising costs due to the country's relative stability and huge investments in roads and other infrastructure, Yam said.

Raimondo says Behlen Manufacturing isn't going anywhere even though wages for engineers have doubled in the past three years to $1,000 a month. Wages for less skilled laborers have risen about half that rate.

Behlen can absorb those costs, he says, by adopting lean manufacturing techniques and using labor-saving devices such as automated welders and material handlers.

Raimondo added that Behlen is thinking about building a second Chinese factory in the next few years -- this time out in the west.

"China is going to be an incredible market for us for the next 20 years," he said.

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