Is China becoming too Expensive?

The answer is not simple…but it can be answered.  We have to look at some foundational information first to understand the full picture….

China has seen a paradigm shift from a 14.8% GDP annual growth in 2007 (and plus 10% growth  annually for the previous 30 yrs)  to 7.6% GDP annualized growth based on 2012 second quarter numbers.  This is a 50% GDP drop in the last five years.  China’s GDP could be a lot higher based on all the infrastructural investment that is lined up…but it’s not happening.  This is all related to the cost of doing business in China…the expense.

China is and has been suffering for the last five years from massive shortage of labor.  Simple economics tells us that when supply is limited, then demand and prices go up.  Labor costs have risen more than 13% in just the last year.  Boston Consulting states that the real wages in China will exceed that of Mexico this year most likely.  Imagine if Mexico could get its act together and could start producing something else beside oil… they would have a terrific shipping, time and geographical advantage over China.  It also appears that the US TV manufacturers in Detroit will also continue to enjoy an increasing advantage along with other new factories in the US due to the current economic environment (for a host of reasons); however, is China really getting more expensive in real dollars is the question?  PMF Bancorp has had offices in China since 2004 providing factoring and finance to Chinese companies and their management has reported inflationary increases in the double digits for many business services as well as labor on a yearly basis.

I would argue that China is becoming more comparable in costs to many other developed countries, and therefore is getting more expensive in real terms.  Its impossible for a country with an increasing quality of life such as China to maintain low wages.  It is a benefit to the Chinese and to us in a way that China become gradually more expensive so each country can compete based on its true competitive advantage.

Therefore, imported products that are made in China have been and will continue to get more expensive naturally which has been the general economic prediction for a long time. This will mean our government’s vendetta to appreciate the Chinese currency will disappear, and our government will have to find another reason to point to our poor economic situation (could it be the management?!).   For now a stable China through higher wages is not a bad trade off for slightly higher prices at Walmart.  Happy shopping.