By Hong Liang (China Daily)
Updated: 2007-08-21 07:16

China's monthly inflation rate shot to over 5 percent in July, causing much concern about toughening government action to combat further price rises.

Other than the rising prices of foodstuff, the higher-than-expected July inflation rate was attributed to the increased costs of a wide range of services, showing that free market forces were at work.

For that reason, some economists have reasoned that the latest available inflation data was a reflection of overdue market reaction to the significant increase in the average wage of the many millions of migrant workers in the past three years.

As such, there is no compelling reason for the government to take drastic action because the driving force behind this demand-pull inflation does not seem to derive from a bubble economy showing signs of unsustainable growth. But rather, it is the side effects of a long-term economic trend as the nation embarks on a new phase of development.

Migrant workers' wages, which had lagged way behind economic growth in the past few decades, are now just beginning to catch up. The wage rise is widely expected to gather momentum in coming years as more and more migrant workers are moving to the high-value-added services sector, which is growing at a much faster rate, especially in major cities, than the manufacturing sector.

Official statistics show that in the eight years to 2002, the average cash wage for migrant workers employed in the low-end manufacturing sector rose at an average rate of about 3 percent to 4 percent a year from about 450 yuan ($60) a month to 659 yuan. By 2004, the average wage went up to over 780 yuan a month and has been rising at an estimated 12 percent to 15 percent a year since.

More important, perhaps, is that a growing proportion of migrant workers have moved up to the higher income bracket. Latest available data shows that the proportion of migrant workers earning more than 800 yuan a month had exceeded 50 percent by 2005, compared to 37 percent in 2004 and 28 percent in 2003.

The price/wage cycle seems even more apparent in the rural districts. Rural incomes on average have increased in tandem with the aggregate 30 percent increase in farm produce over the past four years. Higher produce prices are expected to continue to push up rural incomes, which, in turn, will fuel further price increases.

The increase in rural incomes is having a direct impact on migrant workers' wages because employers must pay more to attract laborers from the rural districts to work in the cities.

It seems reasonable to assume that the rising cost of migrant workers, who have contributed so much to the nation's economic miracle, is an integral part of a long-term structural change, driven by the rapid development of the services sector. To be sure, the manufacturing industry will remain for a long time the main engine for economic growth. But economic prosperity, filtering down to the wider segments of the society, is creating a strong demand for better and more services. Such a demand, which draws its strength from rapid economic growth, will add to the momentum of structural change.

The impact of this change is yet to be fully understood. But as Jonathan Anderson, economist at UBS Securities, said of rising migrant workers' wages: "The future bodes a better livelihood for China's rural migrant labor, and this trend plays a key role in our findings on inflation, industrial strategy and macroeconomic rebalancing and growth."

E-mail: jamesleung@chinadaily.com.cn

(China Daily 08/21/2007 page10)