US embassy cable - 06HONGKONG1415

NYT CHINA LABOR ARTICLE -- UBS ANALYST CLARIFIES VIEWS, WAS NOT ACTUALLY INTERVIEWED

Identifier: 06HONGKONG1415
Wikileaks: View 06HONGKONG1415 at Wikileaks.org
Origin: Consulate Hong Kong
Created: 2006-04-04 10:02:00
Classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY
Tags: ELAB ECON HK CH
Redacted: This cable was not redacted by Wikileaks.
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PP RUEHCN
DE RUEHHK #1415/01 0941002
ZNR UUUUU ZZH
P 041002Z APR 06
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 5925
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 04 HONG KONG 001415 
 
SIPDIS 
 
STATE FOR EAP/CM AND EB 
TREASURY FOR DAS DLOEVINGER AND OASIA GKOPEKE 
STATE PASS USTR 
USDOC FOR 4420 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ELAB, ECON, HK, CH 
SUBJECT: NYT CHINA LABOR ARTICLE -- UBS ANALYST CLARIFIES 
VIEWS, WAS NOT ACTUALLY INTERVIEWED 
 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S. GOVERNMENT 
CHANNELS.  NOT FOR INTERNET PUBLICATION. 
 
INTRODUCTION/SUMMARY 
-------------------- 
 
1. (SBU) UBS Managing Director Jonathan Anderson was not 
interviewed by the New York Times (NYT) despite being quoted 
in an April 3 article that has sparked widespread discussion 
about whether or not there is a labor shortage in China.  He 
speculated that the NYT quoted one of his electronically 
published research notes.  Anderson clarified for us his 
views on the labor question, asserting that there is no 
shortage.  Instead, he explained, there has been a change in 
labor market conditions that leaves many laborers unwilling 
to relocate as migrants for jobs in certain geographical 
areas.  END INTRODUCTION/SUMMARY 
 
NO INTERVIEW 
------------ 
 
2. (SBU) UBS Managing Director Jonathan Anderson told us 
today that he was not interviewed by the New York Times 
(NYT) for the April 3rd article, appended to this message, 
that quoted him with regard to a purported labor shortage in 
China.  Further, he only partially agrees with the article's 
thesis that there is a labor shortage in China created by 
demands for higher wages, a better economic situation for 
agricultural workers, demographic trends related to the one- 
child policy, and a decision by many young people to go to 
college "to avoid the factory floor." 
 
3. (SBU) Anderson, who was unaware even of the article's 
existence, said the NYT receives his research and speculated 
that the quotation was taken from one of his papers but 
perhaps out of context.  The article has been the topic of 
discussion and debate among several of our contacts here in 
Hong Kong and, as this message was drafted, was the most 
emailed item on the NYT web site. 
 
4. (SBU)  Anderson clarified his views on the availability 
of labor in China, making the following points: 
 
o There is no "labor shortage" per se but instead a change 
in the willingness of labor to make itself available at 
prevailing wage rates in certain geographical areas, most 
notably the Pearl River Delta (PRD). 
 
o Many potential laborers are unwilling to work as migrants. 
Manufacturers want to hire young women aged 18 to 28 for 
light manufacturing and young men for construction.  Of the 
150 million or so people who fit this demographic, perhaps 
90-110 million are already employed and have migrated to 
take their jobs.  The remainder in general face 
circumstances that prevent them from moving (e.g., family 
obligations).  Consequently, the cost of migrant labor is 
being bid up, i.e., "the rural influx story is ending, it 
has hit the wall."  Meanwhile, workers over 30 have either 
already exhausted themselves as migrants, have taken on 
family obligations, or have sufficient savings from previous 
work that leave them unwilling to move far away to seek 
factory jobs. 
 
o The market for unskilled manufacturing labor is not one 
where those who hire and those who work can easily find each 
other or where laborers can compare their salary options. 
More typically, a given manufacturer relies on 
subcontractors to provide labor.  The subcontractor very 
often hires repeatedly a group of people from a village or 
concentrated area.  Such arrangements do not create a 
"market clearing environment," where the raising of wages 
automatically draws new workers.  Consequently, if the lot 
of rural residents is improving or if there are suddenly 
employment options near a given area, the willingness of 
workers from that area to migrate may suddenly diminish and 
a moderate change in prevailing wage rates would not 
compensate for their new unwillingness to migrate.  This can 
then give rise to blocks of jobs in the PRD going unfilled, 
at least temporarily, creating the optic of a shortage. 
 
o Rising wage rates are visible in a trend analysis of the 
transshipment of consumer goods through Hong Kong.  Prices 
 
HONG KONG 00001415  002 OF 004 
 
 
are rising 3-4 percent per year, whereas a few years ago 
they were falling. 
 
5. (SBU) Comment: Anderson had not read the NYT article when 
he made his comments.  We do not feel his clarifications 
strongly contradict what the NYT said.  However, Anderson 
appeared taken aback at being associated with the expression 
"labor shortage," which he insisted he has only written in 
research papers using quotations around the expression.  To 
this end, we note a comment he wrote two years ago: "Let's 
not get carried away.  What's really occurring in China is 
not a 'labor shortage,' or anything remotely close to it. 
Instead, it's the end of a very unique set of labor market 
circumstances and the beginning of... economics as usual." 
 
6. (SBU) Anderson said he might prepare a new research note 
on the labor situation in light of the NYT article.  We will 
forward this to EAP/CM if/when received. 
 
7. (U) Article from the April 3, 2006, New York Times 
 
Labor Shortage in China May Lead to Trade Shift 
By DAVID BARBOZA 
SHENZHEN, China - Persistent labor shortages at hundreds of 
Chinese factories have led experts to conclude that the 
economy is undergoing a profound change that will ripple 
through the global market for manufactured goods. 
The shortage of workers is pushing up wages and swelling the 
ranks of the country's middle class, and it could make 
Chinese-made products less of a bargain worldwide. 
International manufacturers are already talking about moving 
factories to lower-cost countries like Vietnam. 
At the Well Brain factory here in one of China's special 
economic zones, the changes are clear. Over the last year, 
Well Brain, a midsize producer of small electric appliances 
like hair rollers, coffee makers and hot plates, has raised 
salaries, improved benefits and even dispatched a team of 
recruiters to find workers in the countryside. 
That kind of behavior was unheard of as recently as three 
years ago, when millions of young people were still flooding 
into booming Shenzhen searching for any type of work. 
A few years ago, "people would just show up at the door," 
said Liang Jian, the human resources manager at Well Brain. 
"Now we put up an ad looking for five people, and maybe one 
person shows up." 
For all the complaints of factory owners, though, the 
situation has a silver lining for the members of the world's 
largest labor force. Economists say the shortages are 
spurring companies to improve labor conditions and to more 
aggressively recruit workers with incentives and benefits. 
The changes also suggest that China may already be moving up 
the economic ladder, as workers see opportunities beyond 
simply being unskilled assemblers of the world's goods. 
Rising wages may also prompt Chinese consumers to start 
buying more products from other countries, helping to 
balance the nation's huge trade surpluses. 
"The next great story in China is how they are going to move 
out of the lower-end stuff: the toys, textiles and sporting 
goods equipment," said Jonathan Anderson, an economist at 
UBS in Hong Kong. "They're going to do different things." 
When sporadic labor shortages first appeared in late 2004, 
government leaders dismissed them as short-lived anomalies. 
But they now say the problem is likely to be a more 
persistent one. Experts say the shortages are arising 
primarily because China's economy is sizzling hot, tax cuts 
have helped keep people working on farms, and factories are 
continuing to expand even as the number of young Chinese 
starts to level off. 
Prosperity is also moving inland, and workers who might 
earlier have migrated elsewhere are staying closer to home. 
Though estimates are hard to come by, data from officials 
suggest that major export industries are looking for at 
least one million additional workers, and the real number 
could be much higher. 
"We're seeing an end to the golden period of extremely low- 
cost labor in China," said Hong Liang, a Goldman Sachs 
economist who has studied labor costs here. "There are 
plenty of workers, but the supply of uneducated workers is 
shrinking." 
Because of these shortages, wage levels throughout China's 
manufacturing ranks are rising, threatening at some point to 
weaken China's competitiveness on world markets. 
Li & Fung, one of the world's biggest trading companies, 
 
HONG KONG 00001415  003 OF 004 
 
 
said recently that labor shortages and rising manufacturing 
costs in China were already forcing it to step up its 
diversification efforts and look for supplies from factories 
in other parts of Asia. 
"I look at China a lot differently than I did three years 
ago," said Bruce Rockowitz, president of Li & Fung in Hong 
Kong, citing the rising costs of doing business in China. 
"China is no longer the lowest-cost producer. There's an 
evolution going on. People are now going to Vietnam, and 
India and Bangladesh." 
The higher wages come at a time when costs are already 
rising sharply across the country for energy and land. On 
top of a strengthening Chinese currency, this is likely to 
mean that the cost of consumer goods shipped to the United 
States and Europe will rise. 
To be sure, China is not about to lose its title as factory 
floor of the world. And some analysts dispute the 
significance of the shortages. 
"Reports of a shortage of unskilled and semi-skilled factory 
workers are overblown," said Andy Rothman, an analyst at 
CLSA, an investment bank. "Companies are, however, having 
trouble finding experienced people to fill midlevel and 
senior management jobs." 
The lack of workers is most acute in two of the country's 
most powerful export regions: the Pearl River Delta, which 
feeds into Hong Kong, and the Yangtze River Delta, which 
funnels into the country's financial capital, Shanghai. 
Wages are rising significantly in both areas. 
According to government figures, minimum wages - which 
averaged $58 to $74 a month (not including benefits) in 2004 
- have climbed about 25 percent over the past three years in 
big cities like Shenzhen, Beijing and Shanghai, mostly by 
government mandate. 
Wages at larger factories operated on behalf of 
multinationals - which are typically $100 to $200 a month - 
are also on the rise. 
Here in Shenzhen, one of the first cities to benefit from 
the country's economic reforms, factory operators say 
finding low-wage workers is harder than ever. At the Nantou 
Labor Market, where hordes of people used to come to find 
jobs, there are now mostly lonely employment agents. 
"The people coming here are fewer and fewer," said a woman 
named Miss Li, who works at the Xingda Employment Agency. 
"All the labor agencies face the same problem. A lot of 
young people are now going to the Yangtze River area, where 
there are higher salaries." 
In Guangdong Province late last year, the government said 
factories were short more than 500,000 workers; and in 
Fujian Province, there was a shortage of 300,000. 
Even north of Shenzhen, Zhejiang Province, known for its 
brash entrepreneurs, is short about 200,000 to 300,000 
workers this year, government officials say. The Wahaha 
Group, a Chinese beverage maker based in the city of 
Hangzhou, is one of the region's rising corporate stars. But 
one of the company's 500-worker factories is short by 50. 
"It seems to become more and more serious year by year," 
said Sun Youguo, the company's human resources manager. 
"Because of the shortage we're paying more attention to 
migrant workers. We're now building a dormitory to house 
couples." 
Government policy is playing a role in creating the coastal 
labor shortages. Trying to close the yawning income gap 
between the urban rich and the rural poor in China, the 
national government last year eliminated the agricultural 
tax, and it also stepped up efforts to develop local 
economies in poor, inland and western provinces, which have 
mostly been left behind. 
Now, even remote areas are starting to develop - sprouting 
malls, housing projects, restaurants and infrastructure 
projects. These are creating jobs in the middle of the 
country and offering alternatives to many young workers who 
once were forced to travel thousands of miles for jobs on 
the coast. 
According to Goldman Sachs and other experts, the beginnings 
of a demographic shift have already been reducing the number 
of young people between the ages of 15 and 24, who make up 
much of the migrant labor work force. Similarly, the number 
of women between the ages of 18 and 35 began falling this 
year, according to census data. 
The women are critical because China's factories like to 
hire many women from the countryside, who have been willing 
to migrate for three-to-five-year stints to earn money as 
factory workers before returning home with bundles of cash 
 
HONG KONG 00001415  004 OF 004 
 
 
and fresh hopes of finding a marriage partner. 
China's one-child policy is also aggravating the shortages. 
With the first generation of young people born under the one- 
child policy now emerging from postsecondary education, many 
of them see varied opportunities not available to an earlier 
generation. 
"When the economic reform started, migrant workers were very 
hard-working, and usually stayed for a long time at factory 
jobs, but the new generation has changed," said Chen 
Guanghan, a professor at Zhongshan University in Hong Kong. 
"They are reluctant to take factory jobs that are harsh and 
pay very little." 
Many are going to college to avoid the factory floor. Last 
year, Chinese colleges and universities enrolled over 14 
million students, up from about 4.3 million in 1999. 
Workers are sharing more information about factory 
conditions among friends and learning to bargain and leap 
from job to job. They are also increasingly ambitious. 
"There's still a lot of cheap labor, but Chinese workers are 
getting skilled very quickly," said Ms. Hong at Goldman 
Sachs. "They are moving up the value chain faster than 
people expected." 
Economists may continue to debate the severity of the 
shortages, but there is little doubt that the waves of 
migrants who once crowded into the booming coastal provinces 
are diminishing. 
As a result, manufacturers are already starting to look for 
other places to produce goods. 
"Many companies are already moving to Wuhan, Chongqing and 
Hunan," Ms. Hong said, ticking off the names of inland 
Chinese cities. "But Vietnam and Bangladesh are also 
benefiting. We're bullish on Vietnam." 
CUNNINGHAM 

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