Game changer China

The Asian giant is trying to mark a different economic footprint, one that has many Western retailers knitting their brows. In the five-year plan for 2011-15, the Chinese government seeks to raise wages by about 13 percent every year. Besides the suggested raise in wages by the government, a decreasing labour supply, thanks to Chinas one-child policy, has also put upward pressure on domestic wages. Small business owners are concerned that rising wages at a time when demand from Western countries is quite subdued may lead to some unwanted closures. An economist at the UBS-a US-based banking and financial services group-found that Chinas share of imports into the US and EU had begun to decline in the first half of 2011. For Bangladesh and Vietnam, on the other hand, increase in exports to the US was prominent for the same period, indicating a partial substitution for China as the Wests manufacturing hub. However, Chinas lions share in manufacturing is not likely to be much affected. First, Western countries can move their manufacturing to more inland cities of China where labour costs are still relatively cheaper. However, higher transport costs along busy Chinese highways and roads will run the risk of beating the purpose of cheaper manufacturing in the first place. Secondly, yet the productivity of Chinese workers is supposed to be much better than that of workers in other countries, resulting in a greater percentage of goods manufactured in China meeting multinationals standards more than that made in other countries. Thirdly, which country can possibly match the scale in terms of manufacturing logistics of the great giant that China is? Consequently, distribution of manufacturing to other countries may not be as cost-effective for Western retailers looking for alternates to China for a manufacturing haven. And more importantly, by acting as somewhat a benchmark for wage rates and prices, it is quite likely that labour in other developing countries will be cognisant of the changes taking place in China, and, ultimately, the wage differential between Chinese workers and those of other countries such as Bangladesh or Vietnam will shrink. Besides these factors which may put China at some ease in the face of rising labour costs, Chinas next economic game plan highlights how the country is gearing itself to evolve its economic footprint. From being a primarily export-driven nation, the country is striving to put domestic consumption and services in the top gear. With wages of Chinese workers rising, it appears likely that domestic consumption will be kicked up to a considerable extent, helping the government achieve its economic goals for 2011-15. But, it also means China will be experiencing a surge in inflation in the days to come. And given its importance as a trading nation established above, it also means the country will be exporting a chunk of this inflation abroad as well. So, not only Western retailers, but also Western authorities have a reason to fret about the changing scenario in China. The only respite is that once the country starts focusing on domestic consumption, it offers a mammoth market for Westerners to sell their goods. But, is it time also for the West to revisit and reduce its consumption.