Thursday, October 20, 2011


In my opinion, China’s success of the past three decades is mostly attributable to the exploitation of Chinese workers. That’s right, the world’s largest communist country has been exploiting its workers! There are an estimated 120 million migrant workers in China. These are not people from other countries. They were all born in China, mostly in rural villages. Yet, they are restricted from living and working freely in their own country.

Many of them have no siblings because their parents were limited by the one-child population control policy instituted during 1978. When they were teenagers, they swarmed out of the impoverished rural areas to the urban centers on the east coast of China, finding jobs in the booming export manufacturing industries.

These migrant workers provided the cheap (exploited) labor that transformed China into the world’s top manufacturer and exporter. Their pay was low, and they received few, if any benefits. They were second-class citizens subjected to the household registration system known as the “hukou,” which defines where people are officially registered to live and whether they are considered urban or rural residents. The distinction is crucial, because rural migrant workers who move to cities to work in factories and on construction sites are not eligible for many social benefits, including education for their children.

Many migrant workers are now young adults, who are very unhappy about their status and their standard of living. They are starting to demand better treatment. The government responded at the beginning of the year by raising the minimum wages by 15%-20%, and by promising that the next Five Year Plan will focus on improving the lives of Chinese workers. The resulting jump in labor costs has been exacerbated by a shortage of young exploitable new entrants into the labor force as a result of the one-child policy.

Higher nominal wages and rising labor costs have pushed the CPI up by 6.1% y/y through September, led by a 13.4% increase in food prices and a 12.3% increase in fuel prices. Anecdotal evidence suggests that inflation may actually be higher than shown by the official data. That explains why monetary and credit authorities have been tapping on the brakes since early last year. M2 (in yuan) rose 13.1% y/y through September, the slowest since May 2001. Bank loans are up 14.3%, the slowest since November 2008.

Small firms are getting squeezed by rising labor costs and much tougher credit conditions. They are being forced out of business. The authorities are scrambling to provide credit to them, fearing that rising unemployment along with erosion in the purchasing power of recently raised wages will exacerbate social unrest. No wonder that the Chinese stock market is down 15.7% ytd, among the worst performing in the world.

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