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China Now Has Third Highest Labor Costs in Emerging Asia

February 2012 | Servcorp

An average worker in China costs more than the average worker in any other emerging Asian economy, save Malaysia and Thailand, when considered in terms of combined salary and welfare payments, China Briefing has found.

Conducting a review of minimum labor costs, determined by the legal minimum amount stipulated in 15 different countries, and added together with the pertinent mandatory welfare payments due, it is apparent that since the introduction of the revised labor law in 2008, China's workers are now amongst some of the best paid in Asia.

The survey, conducted in-house, took samples of minimum wage levels from each of China's provinces and 40 cities, and based its figures on the mean average. China's minimum wage varies both on a provincial and an urban basis. This was then compared with similar data from other Asian countries. The results look like this:

However, it is expected that China's next five year plan will see mechanisms put in place to double the country's minimum wage by 2015. That will raise the Chinese figure to $3,000 plus welfare of 50 percent, assuming the latter payments remain the same. This provides a total minimum salary overhead of $4,500. In reality, most salaries will be far higher. That will make China's average labor cost second only to Malaysia and significantly more expensive than any other Asian country.

This represents mixed fortunes for foreign investors in China. It signals that an exodus of export driven manufacturing may occur, principally to competing, lower-cost Asian nations for China's residual export driven manufacturing.

According to figures released by China customs, the country's export manufacturing trade reached US$1.58 trillion in 2010. It is to be expected that a significant percentage of this will relocate elsewhere purely to maintain economic viability for export manufacturers. While that is a huge amount China stands to lose, if it can genuinely develop a sustainable domestic consumer market, then the impact of losing this amount may be lessened by the impact of a greater collection of domestic taxes, both in VAT and profits taxes. However, that is a balancing act the government needs to get right if they are not to be left with a huge fiscal income gap.

The good news is that such salary increases should manifest themselves into a massive rise in Chinese consumerism as significant wealth and disposable income is created. This follows on from plans revealed last year by several large scale manufacturers such as Bayer and Adidas, both of whom signaled their intentions to increase sales in China's domestic markets by establishing additional manufacturing units in several inland cities. Growth for them, it appears, would be coming from new wealth being created inland and elsewhere within China's own emerging markets.

The scale of movement of the China demographics as concerns its working population is undervalued. Businesses involved in China must now start to take these figures into consideration for their businesses, or face either losing a burgeoning domestic market, or failing to adapt to lower pricing from competitors who have relocated elsewhere in Asia. Low prices for cheap commodities such as computers, toys, and other mass produced items will remain the driver for markets in the United States and European Union, meaning export driven manufacturers must begin to look at emerging Asia to ascertain which country is suitable for housing facilities for such demand.

Dezan Shira & Associates is a specialized foreign direct investment practice, providing business and legal advisory, tax, accounting, payroll and due diligence service to multinationals investing in the emerging markets of Asia. Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 170 business advisory and tax professionals. For information or advice on establishing business operations in China, please contact Dezan Shira & Associates at info@dezshira.com or visit www.dezshira.com.