Serious Chinese Wage Inflation Has Barely Even Begun

china factory

Chinese urbanization may be moving faster than expected, but the process of wage inflation for urban markets is only beginning, according to Societe Generale’s Glenn Maguire and Wei Yao.

Parsing through the data from the latest Chinese census (April 2011 release), Yao and Maguire find that urbanization is happening faster than expected, with 49.7% of all Chinese people now living in cities. Yao and Maguire argue that China is not yet at the key Lewisian Turning Point, where surplus labour from the countryside declines, and wages start to rise at a very rapid rate in cities. Wages are starting to rise, but this is only the beginning.

From Yao and Maguire:

According to a research published by the US Bureau of labour Statistics in 2009, Chinese manufacturing workers’ hourly wage was only USD0.81 in 2006 – 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of those in Europe. After five years of growth, inflation, and currency appreciation, we estimate that the wages of Chinese workers are still just around 5% of the levels in G3. If assuming an annual wage growth of 15% for another decade and total 20% appreciation of the yuan, China’s wage would be 25% of G3’s current levels. Indeed, it is still an ocean apart.

In order to urbanize their workforce to a level similar to Lewisian Turning Points in Korea and Japan, China may need another 30 years, according to Yao and Maguire. That means we’re only seeing the start of wage inflation in China, and the pass through effects on Western markets like the U.S. and Europe.

Don’t miss: Credit Suisse’s fabulous presentation on what China will look like in 2015 >


[credit provider=”Societe Generale”]