Global Tax Insights
Is the Chinese Economy Slowing Down?February 11, 2014
What that the economic climate in China means for manufactures in the U.S.
Written in conjunction with KLR China Affiliate Dezan Shira & Associates.
First hand insight from Guangdong Province
For the past three decades, Guangdong has served as one of the driving forces behind China’s manufacturing sector. As a result of their economic success, Shenzhen a city in Guangdong located across the border from Hong Kong, is now home to the highest paid minimum wage workers in China at nearly $300 U.S dollars a month.
Due to the rising cost of doing business in this popular region, many multinational companies involved in traditional manufacturing are choosing to move their facilities and operations further inland. Moving inland allows the companies to be closer to the larger population of less expensive workers. This transition, which many Americans have heard in the news, is really more of re-location of strategy by the Chinese rather than an actual downturn in their economy. In fact, the growth in many second and third tier cities in inland Chinese provinces is above 13%.
To better illustrate what the climate is like in China, let’s compare the situation in Guangdong to that of the pre-global economic crisis in Detroit, Michigan. Detroit was once the hub of auto manufacturing in the U.S. and as this labor force grew, they created trade unions and eventually became some of the highest paid manufacturing workers in the country. The auto manufacturers could not afford to pay the increased labor and manufacturing costs associated with this and many companies were forced to move their manufacturing facilities to Mexico or overseas to Asia. Much of the same is happening in China, however, while some companies choose to move to cheaper locations in Southeast Asia, many are choosing to stay within China.
This transition to more rural inland areas is not viewed as a negative and is actually encouraged as the central government focuses on improving infrastructure in western and inland China. The movement allows companies to be closer to the source of China’s large population of migrant workers (workforce originates from the poorer, more rural inland provinces to work in the more prosperous, coastal provinces such as Guangdong). Although this shift may be portrayed differently by the media, jobs are now moving closer to their migrant workers’ home base, allowing them to save on commuting costs, travel time and spend more time with their families. This transition also helps to improve the economic development and infrastructure of inland China and results in less burden on transportation systems and public services such as hospitals and schools in coastal cities to serve migrant workers and their families. This shift is creating more opportunities for inland cities to participate in the coming economic growth in China while allowing more prosperous coastal cities to consolidate their growth and enter into developed markets.
An interesting take on this shift can be found here
At the same time, Chinese companies are also dealing with higher minimum wage by sending low end manufacturing that was once done in Guangdong province to Southeast Asian countries such as Vietnam. This allows the Chinese to outsource its own manufacturing projects and re-sell them back to the U.S. for reasonable costs just as many U.S. companies have outsourced to China.
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