Is China Becoming More Expensive?

Nicholas Borst (Federal Reserve Bank of San Francisco)



It’s a common argument these days that China is becoming too expensive and losing its competitive edge in trade. The press is full of anecdotes from foreign companies complaining that they are being priced out of China and are moving operations elsewhere.

Those that follow China know that these arguments are not new and are often exaggerated. The three data points below should cause you to be skeptical of claims that China is becoming less competitive.

1.  China’s Share of Global Trade is Still Growing

Chinese exports increased by 9.3% in 2011, a robust growth number and faster than the average growth rate of global trade.  In fact, over the past two years China’s trade grew twice as fast as the global average. The trend of China's trade growing faster has persisted for over a decade and looks like it will continue this year despite slower export growth. Specific industries in China may be facing declining competitiveness, but the overall trend is clear.

2.  Prices of Chinese Goods are not Dramatically Increasing

The U.S. Bureau of Labor Statistics issues a handy index that tracks the prices of Chinese goods coming into the US. Unlike some other sources, the BLS index adjusts for good quality, making it quite useful in tracking changes in import prices. As you can see below, prices for Chinese good have increased only by 5% over the last 7 years, despite a 30% appreciation of the currency. Moreover, during this same period import prices from other emerging markets such as Mexico have increased even faster. China's exports have not become significantly more expensive, especially compared to its competitors.

3.  Wage Growth has not Accelerated

The average wage in China grew 14% in nominal terms last year, which sounds like quite a bit. However, 14% is actually slower than the average wage growth rate of the past decade, 15%. Wages did jump 20% for private sector jobs in 2011, but from a much lower base than the average wage.

Without a change in the three metrics above, market share, product price, and labor costs, it seems unlikely that China’s trade competitiveness has declined dramatically.

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