China Still Lucrative for Businesses Despite the Rising Wage Rates
China’s wage has been increasing and is now higher than some of its peers. This means operating in China involves paying more in wages, which can cause the profit margin to narrow. An important question for businesses is if they can save by moving or planning future expansions in countries where wages are still below China. This article explores the implication of China’s rising wage rates for business organisations and forms a part of our upcoming briefing titled Facilitating Trade.
China’s wage exceeds its peers
The implications of China’s rising wages need to be analysed in a wider context to answer if this is becoming less advantageous for businesses in a more meaningful way. The four key parameters to help understand the benefits of China’s business environment include labour skills, productivity, infrastructure and future market potential.
Wage per Hour: 2011-2016
Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics
Improving labour skills
Chinese labour is becoming more sophisticated in terms of skills:
No. of Students in Science and Engineering, Manufacturing and Construction: 2011/2016 and Human Development Index: 2014
Source: Euromonitor International from Eurostat/OECD/UNESCO
Note: Human Development Index scores countries on a scale of 0-1 and countries scoring higher indicate a better state of development
- The number of graduates in Science and Engineering, Manufacturing and Construction was 26.7 times higher than its closest competitor, Indonesia, in the group of countries listed above. In Chinathe number of graduates in the technical fields have increased 18.0% between 2011 and 2016. Chinese labour is in fact involved in the manufacturing of more sophisticated technical products including advanced electronic gadgets and chips. The increasing wage reflects growing sophistication in skills acquired by Chinese labour and if a like-for-like comparison is made after taking into consideration the skills level, Chinese wages are still very competitive;
- The data for graduates in the technical fields are not available for India, but the country scores less than China in the Human Development Index, which is indicative of the quality of human capital in the country.
Strong growth in productivity
China is benefiting from improving productivity, which is expected to rise in the future. The rising wage in China can be compensated by improving productivity:
Period Growth in Labour Productivity: 2011-2016 and Proportion of R&D Expenditure: 2016
Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics, Unesco
- China recorded 40.4% period growth in productivity between 2011 and 2016, much higher than its closest peer including the Philippines with a growth rate of 24.7% during the corresponding period;
- China has the highest expenditure in R&D as a percentage of GDP in the listed group, which indicates that the country prioritises innovation over its peers. This can help China to make further strides in improving its productivity in the future;
- China is one of the largest buyers of robots, which can also be expected to contribute to its growing productivity.
More advanced infrastructure
China has a more advanced infrastructure than its peers:
Network Readiness Index, Global Competitiveness Index and Logistics Performance Index: 2016
Source: Euromonitor International from the World Bank and World Economic Forum
Note: Countries are scored on a given scale and the higher the score the better it is. The NRI scale ranges from 1-7, Global Competitive Index scale ranges from 1-7 and the Logistics Performance Index ranges from 1-5.
- China scored higher than its peers in the Global Competitiveness Index and Logistics Performance Index. The country is on par with Thailand when it comes to Network Readiness Index, but higher than the rest. China has good transport links and ports that can deal with large volumes of exports and imports.
Strong market potential
One of China’s key attractions is its large share of the global consumer market (including alcoholic drinks, apparel and footwear, beauty and personal care, consumer electronics, consumer appliances, home care and packaged food):
% Share of Global Consumer Market: 2020
Source Euromonitor Alcoholic Drinks, Apparel and Footwear, Beauty and Personal Care, Consumer Electronics, Consumer Appliances, Home Care and Packaged Food
- In 2020, China is projected to account for 18.4% if the global consumer market which only compares with regional markets including Western Europe and North America;
- Going forward, most of the consumer goods produced would be mostly for Chinese consumers, thus making it more strategic sense to retain manufacturing bases in the country.
The future of the Chinese labour market and wage rates
- The Chinese wage rate is expected to rise as the labour force acquires more sophisticated skills and the labour market reaches a near saturation point, but given that China accounts and will account for a significant part of the global consumer markets, investing in China has strong justifications despite the rising wage rates;
- China still has some underdeveloped parts, which are aiming to attract investment with tax breaks and where the wages are below main cities. With good transport links, investing in the inner parts of China is increasingly becoming more attractive;
- China would still account for 15.0% of the global population aged between 13 and 44 by 2030, much higher than its peers and developed countries. This combined with the country’s investment in robotics is expected to keep the wages under control;
% of Global Population Aged 13-44: 2030
Source: Euromonitor International from national statistics/UN
- India is a potential threat when it comes considering investment destinations given the large size of its young population and close proximity to the economically prospective Asian countries, but India has multiple challenges including governance, inequality and the relative quality of its human capital.