China’s exports surged 48.5 per cent in May on the year before. It was the biggest rise in six years. It was only a couple of months ago that China posted a trade deficit, although that particular deficit had a feel of freakishness about it and was largely down to the surging price of oil. In the US, news of China’s apparently unstoppable export led revolution will lead to more calls for an appreciation of the yuan, as China gets the blame for everything that is wrong in America that can’t be put down to BP, Goldman Sachs or Toyota.

China’s economic march forward seems to stretch off into the distant future. It is tempting to see China as this unbeatable powerhouse that is growing at the expense of the rest of the world, and by forcing its workers to labour in horrendous conditions which in America would be deemed outrageous.

But it is not like that at all.

For one thing, the crisis in Europe is such that China’s most important export market may yet dry up.

The workers in these factories are not forced to work in them, but take jobs there to get away from the rural hell of their upbringing.

But one of the big problems in China is that while the economy expands, corporate profits growth is faster than the growth in wages. Corporate
China is sitting on its profits, which its banks lend out, fuelling China’s housing boom. Meanwhile, nearly a quarter of Chinese workers have not had a wage rise in around five years. (Press Association – Rising China wages may end cheap labour: experts.)

Imagine that, productivity per unit of labour is rising at an extraordinary pace, and yet wages for many are not moving. No wonder the economy behind the Great Wall is looking decidedly unbalanced. (According to the Chinese Academy of Social Sciences, the average Chinese will produce $4,000 worth of stuff by the end of next year, compared to just $3,500 odd at the end of 2009.)

What China really needs is higher wages for its labourers. This would lead to higher consumer demand, solving China’s imbalances and in turn leading to more purchases of goods and services from abroad.

And as global media focuses on suicides at the Foxconn factory, Chinese wages begin to rise. Wages at Foxconn have risen by 70 per cent in recent weeks. Workers at Honda’s factory in China have been on strike, but now they are back after being offered a 24 per cent wage rise. Merry Electronics, a Taiwanese owned handset component maker, has upped wages for its workers by 17 per cent.

Some fret this will lead to inflation. This is probably wrong. Inflation of asset prices and commodities is a much bigger risk, and in both cases this is a symptom of China’s imbalance. Of course, should the yuan rise, then foreign goods will become cheaper, workers will feel even better off because they are earning more and seeing cheaper foreign goods; and as a happy side effect, the inflation genie will be returned to its bottle.

It is a funny thing, which people often miss. Economic growth needs workers to be paid more. In times of innovation, or globalisation, there is this tendency for the fruits of growth to top up company coffers and bypass the workers. This in turn can lead to asset and commodity bubbles, and starve the economy of the aggregate demand it needs. Or alternatively we can see corporate savings sloshing around the banking system and promote consumer demand via debt. Um… isn’t that what happened in the West during the noughties?

And that brings us on to the great austerity era we are now entering.
See Gurus warn that inflation and fiscal hysteria could lead to depression

For more on China, the yuan versus dollar, and sino versus western culture see
The Great Bubble of China
China and the West: the lesson of history
Truth or myth, free trading yuan is answer to our ills
Will the emergence of China mean more unemployment in the West?
Why China’s real opportunity gets overlooked: the parallel with Japan
What went wrong with China and what went right?
China and the West – The difference is cultural
China in our hands and the currency row
China solves economic crisis, with cunning plan
China heading for recession, and the yuan myth
The great imponderable
China: the government is not omnipotent – it is impotent; and that’s where the West has got it wrong