China Takes Aim At Foot

By: kekepana.com

There is great concern in business communities, and evident surprise, that China’s labor and input costs are rising, thus making the country less attractive for low-end manufacturing. Why any one should be surprised is a mystery, since China is following a relatively normal path for economic development. The United States once made cheap stuff for Europe. Later on, Japan made cheap stuff for the U.S. market. The trade then moved on to Taiwan, Hong Kong, South Korea and Singapore. China was next up. But things keep moving as countries climb the development ladder. Those whose livelihoods depend on not having change will be disappointed, and apparently surprised, but production of cheap stuff is now moving beyond China.

Rising costs in
China's factories

That is not to say that Beijing should accelerate the offshore movement of its low-price industries, but they seem to be doing so. Despite much lamentation and some efforts to keep costs down, Beijing has found it socially and politically necessary to raise wages and improve conditions for its poorest workers. This is a good and necessary part of the country’s development process, and will boost domestic consumption, a necessary element for future development.

But now China has decided to artificially increase costs for expatriates living and working in China. Many of these expats are needed to produce quality goods for export, whether in design, management or inspection of such goods. But the South China Morning Post reports that, effective July 1, expatriate employees in China will have to pay up to 22% of their earnings to China’s social security fund, causing a massive rise on the cost of doing business in China. This applies to all foreign employees who work in China for more than six months. As usual in China, details still are not available less than a month before the new policy begins, but it appears that expats from Germany and South Korea are exempt because their governments have negotiated bilateral social insurance agreements with China.

The newspaper estimates that there are 800,000 expatriates working in China, 200,000 of them from Hong Kong. They quoted a Hong Kong engineer about to be posted to Nanjing, but who is rethinking his new job:

“I’m not happy to see a significant portion taken out of my pocket after already contributing to Hong Kong’s retirement pension. It’s unlikely that I will work on the mainland permanently. I don’t know when and how much I am getting back in return after all of the money is taken out. I’d seriously look into staying in Hong Kong if I have to bear the extra social security burden myself.”

In most cases, the added tax burden will be passed on to the employee’s company who will see expat staffing costs skyrocket in China.

I met recently with a client who makes products both in its own plant in Hawaii and with contract manufacturing in China. The company doesn’t keep its own expats in China, but is finding costs for its products rising anyway. They told me they are actively looking into moving their previously low-cost Chinese production to Indonesia. That’s how development works.