Will China's Wage Increase Affect Wool Processing?

Labor costs are rising in China, with official figures showing minimum wages have grown by more than a fifth. The average minimum wage in most of the country rose by 21.7 percent at the end of September, the Ministry of Human Resources and Social Security said.

This comes despite a broader economic slowdown engineered by Beijing to bring down inflation. Rising costs may mean China will lose its edge as one of the world's cheapest manufacturing centers.

The figures cover 21 of China's 31 provinces and regions, the ministry said. The city of Shenzhen, next to Hong Kong, guarantees the highest minimum wage of 1320 yuan ($207) a month. Beijing offers the best hourly rate of 13 yuan ($2).

The rise in minimum wages is in line with China's efforts to boost spending power and domestic consumption. KPMG says that minimum wage levels in China are four times greater than other places in South and South East Asia.

However, it believes China can defend its position because of its productivity and infrastructure. China is still dominant in the production of goods such as consumer electronics and furniture.

China's low-cost manufacturing base has helped revive Australia's wool fortunes, but can it last? That's the question the wool trade and Australian Wool Innovation (AWI) is asking after two years of escalating wages in China.

AWI market analyst Paul Swan, Ph.D., believes there is already pressure for relocation of some of China's wool manufacturers. Pressure was building on wool processors in China as a result of rapid rises in manufacturing wages, which was partly a reflection of intense competition for access to the tight Chinese skilled-labor supply.

"This is an inevitable consequence of the rapid growth in affluence, from which we are all benefiting, but also the impact of a long-term policy to restrict birth rates," Swan said.

Swan highlighted the trend in a comparison of Chinese wage rates to those in India and Vietnam.

"The implications of these trends are profound for the Chinese industry, which in a real sense is the major hub of the global apparel wool processing industry," he said. "Substantial improvements in production efficiency, technical innovation and staff technical skill development by wool processors and garment manufacturers will be required to preserve price competitiveness.

"We should expect to see relocation of manufacturing capacity, especially knitting, from higher wage cost areas in eastern China to central and western regions and from China to lower wage cost countries, such as Vietnam. The fact that Vietnam has a free trade agreement with the United States and Bangladesh has an equivalent agreement with the European Union adds impetus to this potential cross-border capacity change."

China is the largest export market for U.S. wool.

Reprinted in part from BBCB and Weekly Times Now