Sure enough, the prime minister went on to say: “We will steadily increase the minimum wage of workers, basic pensions of enterprise retirees, and subsistence allowances for both urban and rural residents.” This approach is meant not only to put more money in pocketbooks and thus encourage consumption, but also to help bridge the rich-and-poor divide and ensure social stability.

 

But the rise in minimum wages will, of course, add to the cost of doing business. MNCs and other enterprises in China are already getting hit. On January 1 this year, the Beijing city government increased the statutory monthly wage in the capital to RMB1,160 (US$176), up 21% from RMB960, which was mandated only in June last year and represented a 20% rise.

 

All the country’s provinces and municipalities have announced plans to raise their minimum wage in 2011. Xu Xianping, who is deputy director of the National Development and Reform Commission, reports that five regional governments have promised to raise income growth above GDP growth while 19 others plan to raise wages at the same pace during the 12^th Five-Year Plan (2011-2015).

 

It’s all unsettling news to the legions of global companies that use China as production base. Rising minimum wages will surely raise their labour costs. “We’re going to see continued increases in wages for privately owned companies . . . at around 17% annual growth in the next three years,” says Jonathan Wright, Senior Executive at Accenture, the global management consultant.

 

This, even as wages in Vietnam, India, Indonesia and Asia’s other low-cost countries (LCCs) remain stagnant or rise more slowly. According to Accenture, the Chinese average hourly rate in U.S. dollar terms is now far higher than in other LCCs (see chart). The projected increases in the minimum wage this year, coupled with the strength of the renminbi against the greenback, are expected to bring the average hourly wage in China past the US$2.50 level – more than twice wages in Vietnam, whose currency has just been devalued against the U.S. dollar.

 

But Wright argues that MNCs in China don’t have to pull up stakes and go to Vietnam and other LCCs instead, although they can consider a ‘China-plus’ strategy in which some production can be done in another country.

 

“These increases can be managed,” he says, pointing to the findings of Wage Increases in China: Should Multinationals Rethink their Manufacturing and Sourcing Strategies?, a new Accenture study that analysed wage trends in three industries – apparel (footwear), heavy equipment, and high technology (personal computers) – and plotted how future salary increases will affect profit margins.