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Sun 20 Jun 2010 04:00 AM

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Time to pay

The moment that corporate executives from New York to Tokyo have dreaded has arrived: Chinese workers are demanding a raise.

Time to pay

The moment that corporate executives from New York to Tokyo have dreaded has arrived: Chinese workers are demanding a raise.

It was great for company balance sheets while it lasted. Hundreds of millions were willing to toil for a dollar or two a day. The arrangement pumped up profits and made many a senior vice president look like a genius. Well, those days are over and the global economy won’t be the same.

Just ask Honda Motor Co, the subject of a recent walkout that shut down all of its production in China. The carmaker had to offer workers a 24 percent pay raise to get things back online. Consider this the vanguard of a Chinese we-won’t-work-for-peanuts movement and another reason to fret about inflation.

Higher wages won’t just become the norm because workers feel exploited. China will have no choice but to advocate big increases in compensation to keep the peace among its 1.3 billion people. Labour unrest is bubbling up as rarely before.

Events in Shenzhen leave few doubts about it. There, the suicides of at least ten employees at Foxconn Technology Group so far this year are captivating the nation. It’s the world’s largest contract electronics manufacturer with clients from Apple Inc to Hewlett-Packard Co. And like many others, the Taipei-based company is getting rich from cheap mainland labour.

Foxconn last week boosted pay by 30 percent to 1,200 yuan ($175) a month. Before you conclude they are rolling in dough, consider this: At this point, it would take one newly cashed-up Foxconn worker 2.8 million years to amass the $5.9bn that Forbes magazine estimates Foxconn chairman Terry Gou is worth. Recently, Foxconn said it will raise monthly pay to 2,000 yuan, effective October 1.

The suicides have exposed the human costs of China’s 11.9 percent growth and opened the plight of the average factory worker to outside scrutiny as rarely before. Workers have a long, long way to go to benefit more fully from China’s boom.

Signs they are growing impatient show that China is entering a messy stage of development. For years, foreign companies raced to the mainland because lax regulations let them pollute in ways they couldn’t at home.

China is now home to a critical mass of the world’s most polluted cities and rivers, and the government is demanding greater accountability. While it’s the right thing to do for China, foreign executives can’t be happy about the fastest-growth major economy going green.

The wage issue will be even more difficult. Chinese workers demanding higher wages, as they should, must have the folks at Wal-Mart Stores Inc quaking in their boots. It’s hard to exaggerate the effect a big increase in Chinese pay would have on international profit margins and on inflation.

China’s balancing act is daunting. On the one hand, the government must acquiesce to labour tensions. Rising prosperity is the tool China uses to keep people from heading to Tiananmen Square with protest banners. But it’s getting harder to hide the news that millions of Chinese are underpaid by world standards.

On the other hand, skyrocketing wages would kill China’s all-important export industry. Yes, China wants to move its economy away from exports toward increased consumption. Big increases in household income would accelerate things. Yet the phenomenon probably concerns officials in Beijing, especially if it unfolds too quickly. That could cost China growth, as factories relocate to Indonesia, Vietnam and Central Asia.

Expect, at the very least, for all this to make China even more reluctant to let the yuan strengthen. A bubble in wages is the last thing Chinese policy makers want. It was certainly inevitable at some point, and pay increases will be the norm in the years ahead. As these unpredictable tensions flare, the government will be even more reluctant to undermine trade competiveness.

Greece’s debt crisis spooked officials enough. Now, both international and domestic trends are giving China reasons for pause. This higher-wage dynamic is quite ill-timed for China.

This is also a dicey topic for companies. Apple, Dell Inc, and Hewlett-Packard have all announced intentions to look into Foxconn’s working conditions. Workers’ rights or iPads? My money is on Silicon Valley increasing its public relations efforts and sticking to business as usual.

This is a “Nike moment” for manufacturers. During the 1990s, Oregon-based Nike Inc faced a global outcry over conditions at its shoe factories in Asia. Executives today will want to handle this issue better to avoid similar damage to their companies’ image.

Few risks unnerve Communist Party bigwigs like social instability, a phenomenon that isn’t always easily understood.

A spate of recent deadly attacks on schoolchildren is a case in point. Press reports suggest the attacks are related to grievances with local governments. It’s clear China has more than its fair share of social problems.

The wage genie is edging out of the bottle at this very moment. Putting it back in won’t be possible as China’s workers demand a bigger piece of the nation’s prosperity pie.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

Hussain 9 years ago

Seriously this why the worlds economy is in shambles... Greedy men getting rich by leeching off the poor, its the same everywhere. And what do the rich do with that money? Nothing good, I feel so sorry for those foxxconn suiciders... Jsut go on Ebay.... a single foxconn board fetches 90-230 USD OEM and 60-180 HP OEM replacemnt parts I will never buy a foxconn Product as long as i live. that includes the iphone.