Rising wages reach a milestone

China has reached its Lewis Turning Point. This is a critical milestone for a developing economy, when urban factories, restaurants and other businesses have to start raising wages faster than the inflation rate to attract rural workers. Until that point, factory wages can remain flat and still attract farm workers living on subsistence incomes at home. It will take years for China to reach the end of the turning point, when urban and rural wages are equal. Until then, the increase in real wages for unskilled workers is here to stay.

We saw further evidence of this in our recent survey of manufacturing clients in the Pearl River Delta region, the industrial powerhouse in southern China bordering Hong Kong. The annual survey, conducted after the Lunar New Year holidays, showed that manufacturing wage growth across the region is likely to accelerate to an average 9.2 percent this year, from 7.6 percent last year.

Salary increases are outpacing consumer price inflation, which we estimate will accelerate to 4 percent this year, from 2.6 percent last year. This extends a long-running trend of rising real wages, and provides further confirmation that China has arrived at the Lewis Turning Point, named after Nobel prize-winning economist Arthur Lewis.