November 10, 2011 at 05:00 AM EST
Rising Wages in China Good for Glocals, But Few Jobs Coming Back
Although some economists have predicted that steeply rising wages in China would bring some jobs back to the United States, the biggest winners will be the large multinational companies operating in China. Last week the Guangdong province, where many of China's factories are concentrated, announced a 20% increase to the minimum wage. Combined with two earlier hikes in April and July, the total increase over the past 10 months is a startling 42%. And with an eye toward booting domestic consumption, the government plans to keep the raises coming - on average 20% a year through 2015. That extra money will get spent with domestic Chinese businesses as well as U.S. corporations with a strong presence in China - such as McDonald's Corp. (NYSE: MCD ) - but is dramatically raising costs for Chinese manufacturers. Between the wage increases and slumping global demand, the Federation of Hong Kong Industries warned on Tuesday that as many as one-third of Hong Kong's 50,000 factories could downsize or close by the end of the year. As China's competitive advantage in wages erodes, some analysts have predicted a wave of jobs returning to the United States from China. A recent study by the Boston Consulting Group (BCG) forecast a return of 2 million to 3 million jobs by 2020. But Money Morning Chief Investment Strategist Keith Fitz-Gerald doubts any repatriation of jobs will be quite so massive. "Wishful Thinking' "That's wishful thinking on the part of Westerners," said Fitz-Gerald, who operates The New China Trader service for the Money Map Press, who noted that "labor rates are still very, very low" in China. Although Fitz-Gerald said a few "industries with little value-added" could see the return of some jobs to the United States as a result of China's rising wages, other factors will restrain a mass migration of jobs across the Pacific. Despite reports of major labor shortages in the eastern coastal parts of China, Fitz-Gerald said there remains "vast undeveloped low-wage areas ripe for industrial expansion" in the western provinces of China. "They have a 50-year initiative called the "Go-West' program that is designed to push labor from the eastern regions to the western ones," Fitz-Gerald said. "If the jobs are pushed west, there will be no great exodus of jobs from China." The majority of jobs that do leave China, he said, will probably go to areas with even cheaper labor, such as Indonesia, Thailand, Vietnam and Mexico. "That should make U.S. manufacturers very nervous," Fitz-Gerald said of Chinese jobs moving to Mexico. "The Chinese would be building stuff on our back doorstep." With a factory just across the U.S. border, a Chinese manufacturer would save a lot of time and money on shipping. "They could become even more competitive than they are now," Fitz-Gerald said.
Although some economists have predicted that steeply rising wages in China would bring some jobs back to the United States, the biggest winners will be the large multinational companies operating in China.

Last week the Guangdong province, where many of China's factories are concentrated, announced a 20% increase to the minimum wage. Combined with two earlier hikes in April and July, the total increase over the past 10 months is a startling 42%.

And with an eye toward booting domestic consumption, the government plans to keep the raises coming - on average 20% a year through 2015.

That extra money will get spent with domestic Chinese businesses as well as U.S. corporations with a strong presence in China - such as McDonald's Corp. (NYSE: MCD) - but is dramatically raising costs for Chinese manufacturers.

Between the wage increases and slumping global demand, the Federation of Hong Kong Industries warned on Tuesday that as many as one-third of Hong Kong's 50,000 factories could downsize or close by the end of the year.

As China's competitive advantage in wages erodes, some analysts have predicted a wave of jobs returning to the United States from China. A recent study by the Boston Consulting Group (BCG) forecast a return of 2 million to 3 million jobs by 2020.

But Money Morning Chief Investment Strategist Keith Fitz-Gerald doubts any repatriation of jobs will be quite so massive.

"Wishful Thinking' "That's wishful thinking on the part of Westerners," said Fitz-Gerald, who operates The New China Trader service for the Money Map Press, who noted that "labor rates are still very, very low" in China.

Although Fitz-Gerald said a few "industries with little value-added" could see the return of some jobs to the United States as a result of China's rising wages, other factors will restrain a mass migration of jobs across the Pacific.

Despite reports of major labor shortages in the eastern coastal parts of China, Fitz-Gerald said there remains "vast undeveloped low-wage areas ripe for industrial expansion" in the western provinces of China.

"They have a 50-year initiative called the "Go-West' program that is designed to push labor from the eastern regions to the western ones," Fitz-Gerald said. "If the jobs are pushed west, there will be no great exodus of jobs from China."

The majority of jobs that do leave China, he said, will probably go to areas with even cheaper labor, such as Indonesia, Thailand, Vietnam and Mexico.

"That should make U.S. manufacturers very nervous," Fitz-Gerald said of Chinese jobs moving to Mexico. "The Chinese would be building stuff on our back doorstep."

With a factory just across the U.S. border, a Chinese manufacturer would save a lot of time and money on shipping.

"They could become even more competitive than they are now," Fitz-Gerald said.

And while some jobs have left China for lower-wage countries in Asia and elsewhere, many Chinese manufacturers have found that other conditions in those areas, such as poor transportation infrastructure and a reluctance to manage workers of different cultures, negate the wage advantage.

Not only that, but the Chinese government also has made a major long-term effort to reduce its economy's reliance on exports in favor of more domestic consumption, which makes moving factories overseas less practical, as it increases shipping costs.

Glocal Growth With few jobs likely to come back to America, the U.S. companies with the most to gain from rising wages in China are the multinationals, or "glocals" - firms with both a local and global presence.

U.S. companies that have focused on China will end up with a fair portion of those rising Chinese wages, much of which will translate to disposable income.

"The best thing to do is invest in large global companies for which China is a major part of their growth strategy," Fitz-Gerald said, pointing out that domestic consumption now accounts for 40% of the Chinese economy - up from 20% just 20 years ago.

Additionally, China's taste for luxury items - it is the world's second-largest consumer of luxury goods - means more profits ahead for companies like Coach Inc. (NYSE: COH), Christian Dior SAF (PINK: CHDRF) and Burberry Group PLC (PINK: BURBY).

Fitz-Gerald said two "classic examples" of such companies are McDonald's and ABB Ltd. (NYSE ADR: ABB). He also suggested investors look at Chinese companies selectively, particularly big Chinese oil companies such as CNOOC Limited (NYSE ADR: CNOOC) and PetroChina Company Limited (NYSE ADR: PTR).

For those who prefer the less-risky approach of an exchange-traded fund, there's Claymore/Alpha Shares China Small Cap ETF (NYSE: HAO) and the Global X China Consumer ETF(NYSE: CHIQ), both of which concentrate on consumer-focused firms.

Fitz-Gerald also likes a mutual fund, the Morgan Stanley China A Shares Fund (MUTF: CAF).

"I particularly like CAF because small business ventures in China have the most to gain and most of those companies are traded only in China A shares," said Fitz-Gerald. "And CAF is the only fund that gives U.S. investors "direct access' to the A-shares."

For in-depth analysis of the Chinese markets, try Keith Fitz-Gerald's The New China Trader service. For more information, click here.

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