The Central Economic Work Conference closed in Beijing on Wednesday with headlines proclaiming that the 'ten-year prudent' monetary policy will be replaced by the 'tight one' in 2008. The current 'prudent' policy itself replaced the 'proactive' policy in 2005. Amid familiar fears of 'overheating,' China's economy has been running at 11.5% year-on-year growth in the first nine months of 2007, and the annual consumer price index was estimated to stand at about 4.5%, overrunning the warning threshold by more than 1%. The conference identified five major problems in the national economy, starting with 'overheating' and inflation concerns, to a weak agricultural sector and difficulties with energy conservation and emission reduction, and ending with welfare issues.

So with the economy frequently showing signs of overheating, how long can China's phenomenal growth rates continue? Moreover, while low labour costs have undoubtedly been China's trump card in capturing world markets, how long can this advantage persist with labour costs likewise creeping upwards?

One study (see reference 1 below) conducted this year examining the impact of market access and internal migration on average provincial manufacturing wages in 29 Chinese provinces between 1997 and 2004 found that provincial wages increased by about 15% per year (or 130% over the 7 year period), corresponding to 'common shocks possibly like total factor productivity growth and national rise in prices.' Internal migration, the study found, has slowed down wage growth by only 2% per year.

The question is really how China can keep increasing the competitiveness of its products and maintain its export growth, and factors such as low wages, a favourable exchange rate and the flow of foreign direct investment have all played their part in fuelling China's growth. Yet according to a study (2) assessing the causes for China's competitiveness, China's pool of cheap and increasingly mobile labour means competitiveness based on low wages will persist for 'quite some time,'  and Chinese producers are becoming much more proficient in enforcing world requirements for quality and product design, partly facilitated by the inflow of foreign direct investment and entrepreneurship. In effect, the study suggested, with China's enormous rural population and increasing number of 'floating' urban workers, 'it will be many years before the supply of low-cost unskilled labour runs out.'   

(1) De Sousa, J; Poncet, S, How are wages set in Beijing?, CEPII, No. 2007 - 13.   

(2) Adams, FG; Gangnes, B; Shachmurove, Y; Why is China so competitive? Measuring and Explaining China's Competitiveness, 2006.