NYT CHINA LABOR ARTICLE -- UBS ANALYST CLARIFIES

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SUBJECT: NYT CHINA LABOR ARTICLE -- UBS ANALYST CLARIFIES
VIEWS, WAS NOT ACTUALLY INTERVIEWED


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INTRODUCTION/SUMMARY
--------------


1. (SBU) UBS Managing Director Jonathan Anderson was not
interviewed by the New York Times (NYT) despite being quoted
in an April 3 article that has sparked widespread discussion
about whether or not there is a labor shortage in China. He
speculated that the NYT quoted one of his electronically
published research notes. Anderson clarified for us his
views on the labor question, asserting that there is no
shortage. Instead, he explained, there has been a change in
labor market conditions that leaves many laborers unwilling
to relocate as migrants for jobs in certain geographical
areas. END INTRODUCTION/SUMMARY

NO INTERVIEW
--------------


2. (SBU) UBS Managing Director Jonathan Anderson told us
today that he was not interviewed by the New York Times
(NYT) for the April 3rd article, appended to this message,
that quoted him with regard to a purported labor shortage in
China. Further, he only partially agrees with the article's
thesis that there is a labor shortage in China created by
demands for higher wages, a better economic situation for
agricultural workers, demographic trends related to the one-
child policy, and a decision by many young people to go to
college "to avoid the factory floor."


3. (SBU) Anderson, who was unaware even of the article's
existence, said the NYT receives his research and speculated
that the quotation was taken from one of his papers but
perhaps out of context. The article has been the topic of
discussion and debate among several of our contacts here in
Hong Kong and, as this message was drafted, was the most
emailed item on the NYT web site.


4. (SBU) Anderson clarified his views on the availability
of labor in China, making the following points:

o There is no "labor shortage" per se but instead a change
in the willingness of labor to make itself available at
prevailing wage rates in certain geographical areas, most
notably the Pearl River Delta (PRD).

o Many potential laborers are unwilling to work as migrants.
Manufacturers want to hire young women aged 18 to 28 for
light manufacturing and young men for construction. Of the
150 million or so people who fit this demographic, perhaps
90-110 million are already employed and have migrated to
take their jobs. The remainder in general face
circumstances that prevent them from moving (e.g., family
obligations). Consequently, the cost of migrant labor is
being bid up, i.e., "the rural influx story is ending, it
has hit the wall." Meanwhile, workers over 30 have either
already exhausted themselves as migrants, have taken on
family obligations, or have sufficient savings from previous
work that leave them unwilling to move far away to seek
factory jobs.

o The market for unskilled manufacturing labor is not one
where those who hire and those who work can easily find each
other or where laborers can compare their salary options.
More typically, a given manufacturer relies on
subcontractors to provide labor. The subcontractor very
often hires repeatedly a group of people from a village or
concentrated area. Such arrangements do not create a
"market clearing environment," where the raising of wages
automatically draws new workers. Consequently, if the lot
of rural residents is improving or if there are suddenly
employment options near a given area, the willingness of
workers from that area to migrate may suddenly diminish and
a moderate change in prevailing wage rates would not
compensate for their new unwillingness to migrate. This can
then give rise to blocks of jobs in the PRD going unfilled,
at least temporarily, creating the optic of a shortage.

o Rising wage rates are visible in a trend analysis of the
transshipment of consumer goods through Hong Kong. Prices

HONG KONG 00001415 002 OF 004


are rising 3-4 percent per year, whereas a few years ago
they were falling.


5. (SBU) Comment: Anderson had not read the NYT article when
he made his comments. We do not feel his clarifications
strongly contradict what the NYT said. However, Anderson
appeared taken aback at being associated with the expression
"labor shortage," which he insisted he has only written in
research papers using quotations around the expression. To
this end, we note a comment he wrote two years ago: "Let's
not get carried away. What's really occurring in China is
not a 'labor shortage,' or anything remotely close to it.
Instead, it's the end of a very unique set of labor market
circumstances and the beginning of... economics as usual."


6. (SBU) Anderson said he might prepare a new research note
on the labor situation in light of the NYT article. We will
forward this to EAP/CM if/when received.


7. (U) Article from the April 3, 2006, New York Times

Labor Shortage in China May Lead to Trade Shift
By DAVID BARBOZA
SHENZHEN, China - Persistent labor shortages at hundreds of
Chinese factories have led experts to conclude that the
economy is undergoing a profound change that will ripple
through the global market for manufactured goods.
The shortage of workers is pushing up wages and swelling the
ranks of the country's middle class, and it could make
Chinese-made products less of a bargain worldwide.
International manufacturers are already talking about moving
factories to lower-cost countries like Vietnam.
At the Well Brain factory here in one of China's special
economic zones, the changes are clear. Over the last year,
Well Brain, a midsize producer of small electric appliances
like hair rollers, coffee makers and hot plates, has raised
salaries, improved benefits and even dispatched a team of
recruiters to find workers in the countryside.
That kind of behavior was unheard of as recently as three
years ago, when millions of young people were still flooding
into booming Shenzhen searching for any type of work.
A few years ago, "people would just show up at the door,"
said Liang Jian, the human resources manager at Well Brain.
"Now we put up an ad looking for five people, and maybe one
person shows up."
For all the complaints of factory owners, though, the
situation has a silver lining for the members of the world's
largest labor force. Economists say the shortages are
spurring companies to improve labor conditions and to more
aggressively recruit workers with incentives and benefits.
The changes also suggest that China may already be moving up
the economic ladder, as workers see opportunities beyond
simply being unskilled assemblers of the world's goods.
Rising wages may also prompt Chinese consumers to start
buying more products from other countries, helping to
balance the nation's huge trade surpluses.
"The next great story in China is how they are going to move
out of the lower-end stuff: the toys, textiles and sporting
goods equipment," said Jonathan Anderson, an economist at
UBS in Hong Kong. "They're going to do different things."
When sporadic labor shortages first appeared in late 2004,
government leaders dismissed them as short-lived anomalies.
But they now say the problem is likely to be a more
persistent one. Experts say the shortages are arising
primarily because China's economy is sizzling hot, tax cuts
have helped keep people working on farms, and factories are
continuing to expand even as the number of young Chinese
starts to level off.
Prosperity is also moving inland, and workers who might
earlier have migrated elsewhere are staying closer to home.
Though estimates are hard to come by, data from officials
suggest that major export industries are looking for at
least one million additional workers, and the real number
could be much higher.
"We're seeing an end to the golden period of extremely low-
cost labor in China," said Hong Liang, a Goldman Sachs
economist who has studied labor costs here. "There are
plenty of workers, but the supply of uneducated workers is
shrinking."
Because of these shortages, wage levels throughout China's
manufacturing ranks are rising, threatening at some point to
weaken China's competitiveness on world markets.
Li & Fung, one of the world's biggest trading companies,

HONG KONG 00001415 003 OF 004


said recently that labor shortages and rising manufacturing
costs in China were already forcing it to step up its
diversification efforts and look for supplies from factories
in other parts of Asia.
"I look at China a lot differently than I did three years
ago," said Bruce Rockowitz, president of Li & Fung in Hong
Kong, citing the rising costs of doing business in China.
"China is no longer the lowest-cost producer. There's an
evolution going on. People are now going to Vietnam, and
India and Bangladesh."
The higher wages come at a time when costs are already
rising sharply across the country for energy and land. On
top of a strengthening Chinese currency, this is likely to
mean that the cost of consumer goods shipped to the United
States and Europe will rise.
To be sure, China is not about to lose its title as factory
floor of the world. And some analysts dispute the
significance of the shortages.
"Reports of a shortage of unskilled and semi-skilled factory
workers are overblown," said Andy Rothman, an analyst at
CLSA, an investment bank. "Companies are, however, having
trouble finding experienced people to fill midlevel and
senior management jobs."
The lack of workers is most acute in two of the country's
most powerful export regions: the Pearl River Delta, which
feeds into Hong Kong, and the Yangtze River Delta, which
funnels into the country's financial capital, Shanghai.
Wages are rising significantly in both areas.
According to government figures, minimum wages - which
averaged $58 to $74 a month (not including benefits) in 2004
- have climbed about 25 percent over the past three years in
big cities like Shenzhen, Beijing and Shanghai, mostly by
government mandate.
Wages at larger factories operated on behalf of
multinationals - which are typically $100 to $200 a month -
are also on the rise.
Here in Shenzhen, one of the first cities to benefit from
the country's economic reforms, factory operators say
finding low-wage workers is harder than ever. At the Nantou
Labor Market, where hordes of people used to come to find
jobs, there are now mostly lonely employment agents.
"The people coming here are fewer and fewer," said a woman
named Miss Li, who works at the Xingda Employment Agency.
"All the labor agencies face the same problem. A lot of
young people are now going to the Yangtze River area, where
there are higher salaries."
In Guangdong Province late last year, the government said
factories were short more than 500,000 workers; and in
Fujian Province, there was a shortage of 300,000.
Even north of Shenzhen, Zhejiang Province, known for its
brash entrepreneurs, is short about 200,000 to 300,000
workers this year, government officials say. The Wahaha
Group, a Chinese beverage maker based in the city of
Hangzhou, is one of the region's rising corporate stars. But
one of the company's 500-worker factories is short by 50.
"It seems to become more and more serious year by year,"
said Sun Youguo, the company's human resources manager.
"Because of the shortage we're paying more attention to
migrant workers. We're now building a dormitory to house
couples."
Government policy is playing a role in creating the coastal
labor shortages. Trying to close the yawning income gap
between the urban rich and the rural poor in China, the
national government last year eliminated the agricultural
tax, and it also stepped up efforts to develop local
economies in poor, inland and western provinces, which have
mostly been left behind.
Now, even remote areas are starting to develop - sprouting
malls, housing projects, restaurants and infrastructure
projects. These are creating jobs in the middle of the
country and offering alternatives to many young workers who
once were forced to travel thousands of miles for jobs on
the coast.
According to Goldman Sachs and other experts, the beginnings
of a demographic shift have already been reducing the number
of young people between the ages of 15 and 24, who make up
much of the migrant labor work force. Similarly, the number
of women between the ages of 18 and 35 began falling this
year, according to census data.
The women are critical because China's factories like to
hire many women from the countryside, who have been willing
to migrate for three-to-five-year stints to earn money as
factory workers before returning home with bundles of cash

HONG KONG 00001415 004 OF 004


and fresh hopes of finding a marriage partner.
China's one-child policy is also aggravating the shortages.
With the first generation of young people born under the one-
child policy now emerging from postsecondary education, many
of them see varied opportunities not available to an earlier
generation.
"When the economic reform started, migrant workers were very
hard-working, and usually stayed for a long time at factory
jobs, but the new generation has changed," said Chen
Guanghan, a professor at Zhongshan University in Hong Kong.
"They are reluctant to take factory jobs that are harsh and
pay very little."
Many are going to college to avoid the factory floor. Last
year, Chinese colleges and universities enrolled over 14
million students, up from about 4.3 million in 1999.
Workers are sharing more information about factory
conditions among friends and learning to bargain and leap
from job to job. They are also increasingly ambitious.
"There's still a lot of cheap labor, but Chinese workers are
getting skilled very quickly," said Ms. Hong at Goldman
Sachs. "They are moving up the value chain faster than
people expected."
Economists may continue to debate the severity of the
shortages, but there is little doubt that the waves of
migrants who once crowded into the booming coastal provinces
are diminishing.
As a result, manufacturers are already starting to look for
other places to produce goods.
"Many companies are already moving to Wuhan, Chongqing and
Hunan," Ms. Hong said, ticking off the names of inland
Chinese cities. "But Vietnam and Bangladesh are also
benefiting. We're bullish on Vietnam."
CUNNINGHAM