As earnings and mandated social insurance payments increase, urban China becomes less competitive in the global context and even in the domestic Chinese context. Shanghai, for example, is beginning to become too expensive for many manufacturing concerns: “The massive influx of investment and rapidly improving standard of living has driven up labor costs in Shanghai, almost high enough to price Shanghai out of the market.”164 Many businesses are now locating elsewhere. “Companies moving from Shanghai to neighboring Anhui Province report that they can cut costs by 50%. Few multinationals can resist those kinds of savings.”165 Cities throughout China are much more expensive for manufacturing than even their nearby suburbs: “Henry Tan, chief executive of Luen Thai, Hong Kong’s largest garment business with 20,000 employees, says he can save a third in power costs and half in wage bills just by relocating a factory half an hour’s drive from Guangzhou, the capital of Guangdong.”166 Indeed, many manufacturing companies are now choosing to move their production operations from developed countries or from China to other developing countries with lower labor costs. For instance, India, Pakistan, and Vietnam are becoming competitive as textile and apparel producing and exporting countries because the cost of textile production is generally lower there than in China.167 Of course, China remains highly competitive globally because of its relatively low labor costs and many other favorable factors, but rising labor compensation in China has begun to erode the country’s manufacturing price advantage.
Some businesses are moving from the city to the poorer inland province of Anhui.168 Cities throughout China are much more expensive for manufacturing than even their nearby suburbs. Factories can save a third in power costs and half in wage bills just by relocating a factory half an hour’s drive outside of Guangdong’s capital city of Guangzhou. 169
Additional sources of China’s competitiveness in manufacturing
The leading reason that China is so competitive in manufacturing for the international market as well as its own domestic market is the low cost of labor in China. But China has other competitive advantages over most other countries as well, among them the following:
China’s Domestic Market
Of the world’s total population, 21 percent live in China. They provide a far larger domestic market for manufactures than any other developing country today with the possible exception of India.170 Though China is still a lower middle income country, ordinary people buy some manufactured goods, providing a ready market for the least expensive manufactured products. More important, China has a growing middle class and a small luxury class, especially in cities. The numbers of such consumers are variously estimated as follows: