Chart of the Week: Chinese Wages

Labor unrest is rising in various forms in China, with industrial workers using their power of numbers to try to secure higher wages and better working conditions. The protests have been peaceful for the most part, though some have involved clashes with police.

The workers are having some success – examples include tech company Foxconn, which recently gave employees a 60 percent raise, and car maker Honda, which boosted pay by 20 percent.

Labor costs are, of course, one of the key inputs in the cost of production, so economically it stands to reason that significantly higher wages may result in significantly higher prices for finished products. In the U.S., for example, labor can account for up to 70 percent of a company’s overall cost structure.

But this week’s chart from Goldman Sachs shows that labor costs in China and neighboring Taiwan comprise a relatively low percentage of operating costs – typically less than 15 percent, and in some cases much less than that, with telecom in Taiwan being a notable exception at more than 20 percent.

Higher wages and an appreciating yuan together stand to create a double benefit for Chinese workers in terms of purchasing power. This is consistent with Beijing’s focus on promoting domestic consumption.

Some coastal Chinese companies may opt to relocate their production inland, where wages are lower, and some may be able to pass along at least some of the costs to their customers. It’s also possible that China’s tight labor market could loosen next year because the 2008 stimulus is scheduled to end. A rise in unemployment could put a damper on wage hikes and take some momentum away from labor activism.

None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 3-31-10.

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About Frank Holmes 282 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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