Chinese manufacturers are starting down the road to increasing wages. Workers cannot be consumers if wages are so low as to not allow purchases. Increasing wages are the trigger to the Chinese wage- price spiral:

Henry Ford Raising Wage May Give China Tip on Worker Prosperity  

By Bloomberg News

Jan. 19 (Bloomberg) — “Little” Xie says he wants to own one of the autos he helps build at Ford Motor Co.’s assembly plant in the Yangtze River city of Chongqing. With his mortgage payment taking about 60 percent of his 2,000 yuan monthly pay, that won’t happen soon.

“It isn’t even worth talking about company incentives to help buy a car, since I can’t afford one in the first place,” said Xie, 28, a six-year Ford employee, as he approached the factory gates for his night shift. Xie, whose nickname comes from his youthful age, asked that his full name not be used.

Higher wages for people like Xie would help resolve
China’s biggest economic challenge: shifting away from growth fueled by exports and investment and moving toward an economy driven more by domestic consumers. China’s communist leaders might learn a lesson about how to create a more prosperous working class from American industrialist Henry Ford. 

The founder of the auto manufacturer that bears his name generated headlines around the world in January 1914 by doubling the average autoworker’s pay to $5 a day. The move made Ford’s Model T more affordable, created a more stable workforce and helped stoke the growth of the U.S. middle class, according to Bob Kreipke, the historian for the Dearborn, Michigan-based company.

“This allowed people to increase their buying power and, at the same time, they produced a better product,” Kreipke said.

Low wages in the world’s third-largest economy are slowing the rise of a consumer culture that Premier Wen Jiabao and President Hu Jintao have said China needs to maintain expansion at the 8 percent a year that will generate jobs for its 1.3 billion people. The current growth pattern is “unsustainable,” Wen said Dec. 27

As a rule of thumb, the announced rate of GDP growth in any county is more of a measure of its rate of inflation. GDP measured activity, not returns:  as consumption – wherever it takes place using the goods and services of a particular country – is just that. It does not provide any long- term return. The return suggested by GDP is the measure of money/debt creation by the transactions taking place to enable consumption, instead. The Chinese rate of inflation is probably close to the 8% posted as GDP and is much higher in asset classes such as real estate and equities that are positioned to capture credit and created funds.

Increasing wages is a component of wage- price inflation. Prices rise out of reach of enough purchasers to require corresponding increasing wages so that businesses have enough customers to show a profit. The spiral succeeds because businesses are closer to the sources of funding than are workers. Funding sources in China would be bank lending and local ‘baksheesh’ payments from government agencies to favored businesses.

Businesses enjoy higher price returns in the interval before wage increases ‘catch up’. As wages increase – and consumer lending and turned out savings flood the marketplace, prices increase further. As wage earners and others with funds attempt to gain or maintain price parity with their depreciating funds, they initiate purchase more rapidly, attempting to capture value before the spiral tightens and reduces their holdings’ purchasing power. As buyers increase the velocity of purchases, this increase in transactions acts as a feedback mechanism which tightens the spiral further all by itself.

The suggestion that Chinese businesses are starting to raise wages indicates the inflation spiral out of control and feeding on itself. At some point, the savers’ funds – which is the fuel that accelerates any inflation – are committed to purchases or lost to rising prices. The ‘use or lose’ dilemma motivates buyers. Since China has a high savings rate, there is a lot of savings to turn out into the market when savers are faced with the choice to use or lose.