Why the corporate sector is desperate for the TPP [View all]

[Jesus Malverde]

It's not cheap to build things in China anymore.

China is showing rapid increases in wages and signs of resilience in hiring despite slowing growth, a reassuring sign for leaders seeking to put more money in the pockets of ordinary Chinese, but a trend that could prove difficult to sustain as countries nearby threaten to encroach on China's manufacturing dominance.

Chinese private-sector wages rose 14% in 2012, data showed Friday, good news overall for Beijing's push to make consumer spending a more important part of growth. But higher labor costs also hurt business profitability and export competitiveness—which could pose its own risks to the economic recovery.

Countries such as Bangladesh, Cambodia and Vietnam have all ramped up their garment sectors as global retailers look for alternatives to China.

Crystal Group, an apparel producer for Marks & Spencer, Abercrombie & Fitch, and Gap, says it has more than tripled its staff in Vietnam over the past three years, but made only small increases in its China workforce. "It's a simple matter of economics for us," says Andrew Lo, CEO of the Hong Kong-based company, as it becomes less cost-effective to make basic t-shirts and jeans in China

Rising manufacturing costs in China were one reason private-equity firm Grumman Hill Group LLC decided to put shoe maker Aerosoles up for sale this year, a person familiar with the matter said. The Edison, N.J.-based shoe company makes virtually all of its products in China, but wage inflation there is pressuring margins, this person said..

With that experience replicated across China's factories, industrial profits contracted for much of 2012. Export growth fell to 7.9% from 20.3% in 2011, as Chinese firms lost out to Vietnam and other low-cost competitors. That suggests China's leaders face a tough choice between keeping wages on a rising trend to boost household income, and controlling costs for the manufacturers that create many of the mainland's jobs.

"So far we haven't seen unemployment rates going up, with real estate, infrastructure, and services supporting strong job creation," said Haibin Zhu, China economist at J.P. Morgan. "But wage growth can't be sustained without profit growth. If the corporate sector remains weak, rapid wage growth will be difficult to sustain."

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