China's Economic Cycle

Recent changes in Chinese labor laws have been mentioned all over the net lately. China Law Blog wrote an excellent piece on the details of the changes. Forbes wrote an article about the ramifications of those labor law changes yesterday in "Taiwan Fears Rising China Business Costs".

This is an interesting dilemma. China's economy is growing by leaps and bounds because of its abundance of inexpensive labor. However, as its economy grows, labor is becoming more expensive, forcing manufacturers who outsource to China to look elsewhere. Right now the "next China" is Vietnam, whose economy is the fastest growing in the world. In fact, Nike is currently relocating its production facilities there rapidly.

So what happens in China? Urban coastal areas are seeing the benefits of China's new openness with increasing wages and a corresponding standard of living. But wages remain relatively untouched in the inner, western provinces. This is exactly why China has introduced economic incentives for businesses to expand in these areas. However, the lack of adequate infrastructure has made the region too expensive for western manufacturers to build new manufacturing centers there. This dilemma only adds to the many pressures China currently faces, increasing risk for western investors.