Offshoring hits China as rising wages push factory jobs overseas

China is losing its “workshop of the world” tag as salaries soar, forcing blue-collar manufacturing jobs away towards frontier nations across Southeast Asia.

The minimum average monthly Chinese wage jumped 15% in 2011 to around $200 in Shanghai and Beijing, according to the National Bureau of Statistics. In some eastern and southern coastal cities like Shenzhen, that figure is closer to $210, after rising more than 20% last year. China wants to double the wages of a billion workers over the next five years.

At the heart of this protracted period of offshoring – which economists and mainland investors say has only just begun – lies the challenge mandarins face as they seek to restructure China’s economy.

Intent on promoting domestic consumption, Beijing has implicitly encouraged wage competition between provinces.

This strategic shift toward an internally driven economy is causing pain among the corporates that fuelled China’s recent and rapid rise. “It’s becoming increasingly hard for Chinese companies to find competent and affordable labourers,” said Calvin Xu, a partner at pan-Asian buyout firm Olympus Capital, and a former sustainable business expert at the International Finance Corporation.

This problem is exacerbated by an increasing unwillingness among Chinese workers to work long hours for little pay. Managers are being forced to raise wages to levels more typical of a developed country.

“Many of the people who were willing to work for a few bucks [a day] aren’t willing to do so any more,” said Xu. “Slowly but surely, this is having a huge impact on the cost of China-produced goods, meaning that [Chinese companies] are trying to push on higher costs to consumers.”

Wage price inflation is also causing corporations, from multinationals to small business owners, to rethink their China strategy.

Many companies making basic manufacturing goods – among them, shoes, plastic toys, textiles, and basic electronic equipment – are opting to downscale their China presence, or circumvent the country entirely.

“Labour-intense jobs aren’t automatically going to China any more, and that will help drive jobs growth in low-income countries,” said Liu Li-Gang, chief Greater China economist at ANZ Bank in Hong Kong.

“The move away from China will benefit Southeast Asian countries like Vietnam, Cambodia, Laos, and particularly Myanmar.”

Others, including Xu, believe rising wages in China will also encourage higher-value skilled manufacturing jobs to return to troubled, job-hungry parts of Europe and North America – a trend known as reshoring. Xu said wage price inflation would be “very hard to control in the short run”.

China’s government recognises the problem but appears determined to suffer pain in the short-term, so long as it shifts the wider economy onto a more sustainable, consumption-led footing.

In March 2012, foreign direct investment (FDI) into China dropped for the fifth straight month, shrinking 6.1% year-on-year. Ministry of commerce spokeswoman Shen Danyang said that “rising labour costs [were] making China less attractive for foreign investors”.

By comparison, outbound FDI from China surged 94.5% the same month to a record high of $16.55 billion. With high and rising salaries, and dwindling reserves of willing blue-collar workers, many believe the offshoring of Chinese jobs has already begun.