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Chinese farmers will decide yuan's future

According to the government statistics, the October CPI number of 4.4 per cent which prompted the Chinese stock market selloff was composed almost entirely of dearer food.

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An army marches on its stomach and the same is true of a country like China, where the price of pork is a measure of national happiness. Unfortunately, for the politicians in Beijing, food prices are on the rise again. Stubbornly high Chinese inflation figures spooked the markets this week as investors put their bets on a Chinese monetary tightening with all that follows: dearer money and slower Chinese growth.

The mandarins can be expected to engage in their usual micro-management of the economy with price controls, just as they squashed a frenzied bout of real estate speculation earlier this year with curbs on mortgages for second and third home purchases. But Chinese inflation looks stubborn and the interesting question is what effect it may have on the competitiveness of the world's biggest workshop.

Some analysts are beginning to question whether whether China's export-led expansion can continue. At Lombard Street Research in London, Diana Choyleva reckons that the Chinese economic resurgence was made possible by the good fortune of buoyant overseas demand. With low or negative growth in consuming nations, China's potential growth rate could halve, she reckons, to 5 per cent. Such a rate would feel supersonic in Europe or North America but it's not enough to maintain high levels of job creation in China, essential for political peace.

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China needs to switch its orientation towards internal consumption but the usual tools used by Beijing of encouraging lending only seem to create asset bubbles - house price inflation, gold purchases and bingeing on the stock market. Wage inflation continues at gangbuster rates of 10 per cent, but curiously it doesn't really figure in Chinese consumer price inflation. According to the government statistics, the October CPI number of 4.4 per cent which prompted the Chinese stock market selloff was composed almost entirely of dearer food.

But there is much micro-evidence from employers that wages are thundering ahead. It even makes headlines when a big firm such as Foxconn, the Dell and Apple contract manufacturer, is forced to double wages after a spate of worker suicides. Productivity is improving in Chinese factories, helping businesses to keep factory gate prices under control, but for how long? The answer, I reckon, may be found down on the farm.

Where does the army of cheap Chinese workers come from? They come from rural towns and villages in the underdeveloped western provinces of China where young people face a stark choice: Stick-at-home poverty or a frightening migration to the east, where there awaits a job on an assembly line and a bed in a dormitory. But upward wage pressure is increasing from nascent labour unions and government policy - in a bid to rebalance the economy towards domestic consumption, Beijing wants to increase the wage portion of GDP. In response, 30 out of 31 provinces have raised minimum wage levels this year, some by as much as 20 per cent.

If the satanic mills carry on paying more to suck workers off the farm, rural labour costs will begin to rise and the cost of food will be carried upwards with it. Small wonder that the Chinese are paying more for their dinner and sooner rather than later the inflation in wages will begin to erode export competitiveness.

This poses a big challenge to the party bosses in Beijing. Do they allow market forces to push up the value of the yuan, enhancing the value of a Chinese wage packet and boosting domestic demand or do they keep it low in a desperate effort to chase sickly export markets. So far, this argument about the Chinese currency has been confined to diplomatic bickering but it could soon be about the worker's rice bowl.

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