Labor dilemmas cloud China’s growth outlook

Rising wages putting brakes on investment

The global currency market saw daily transactions exceed $5 trillion in 2013, marking a new record. But the momentum didn't carry into 2014, as transactions taper off. Almost all of the major international financial markets have showed signs of slowing down. Is this because of a shortage of money in the market? No, there are still abundant flows of capital in major economies, and it's not that hard for corporations to raise money.

From a historical perspective, it's nearly impossible for multiple financial markets to start fluctuations at the same time. Even so, it would be temporary, often at the end of a global recession or during the period of rapid growth. Usually, the ups and downs of the gold market are separate from the currency market, but this time, it's different. Commodities such as crude oil and gold all move slightly.

The current global situation is associated with the general economic slowdown and low inflation. Therefore, it is unlikely the global economy will be out of the woods soon. Against the backdrop of sluggish growth, breaking the dilemma will be a challenge for China.

In fact, the root cause of the global economic slowdown stems from an ever more inert growth of the labor force, especially those sought-after professionals that can bring about innovation. In the modern economy, an innovative labor force is an important engine of economic growth. But it may also hurt the market. For example, it has largely inflated the cost of labor, which is detrimental for the development of real economies, particularly when it comes to infrastructure construction. Many countries have seen a falling rate of infrastructure investment over the past decade.

The economies in developed countries are usually well structured, which gives them an edge in innovative talent, as well as a full-fledged manufacturing industry. However, innovation has its own cycles. At present, an industry as innovative as IT is still out of horizons, which is one of the main reasons for the listless growth in Europe.

Thus, a weakening innovative labor force is closely linked to sluggish economic growth. Nowadays, most of the innovative achievements come from the US, simply because of its immigrant-friendly policies. In other developed economies such as Japan and Europe, strict immigration policies lock out many talented people from emerging markets. It is a problem a loose monetary policy cannot address.

In the context of economic globalization, the emerging market countries are the ones who took the baton to spur growth. But in recent years, they have been derailed from the rapid growth track.

Take China for example, wages have grown by more than 10 percent annually since 2008. Although China still has more growth potential than other developed countries, excessively fast short-term economic growth has become an obstacle in the long term.

Many people blame the decline in investment on strict monetary policies. In fact, high labor costs deserve more attention because they can make investment projects too costly to go through with.

In the first half of this year, infrastructure investment dropped 17 percent, falling well short of the average set over the past decade. China needs fresh momentum to boost growth, but it can hardly afford to lean away from infrastructure construction in the near future. To maintain a 7.5 percent growth rate, there definitely needs to be new investment, but where will the money and labor come from?

Joint action is required to reverse the dramatic fall in the investment rate. Monetary or fiscal policies can be easily adjusted, but it is impossible to artificially lower labor costs.

China's economy has entered what some have called a "new normal." But this doesn't mean slow growth is inevitable. Given the possibility of a salary increase for civil servants, labor costs in China will continue to grow. Therefore, reining in rising labor costs has become critical to making various policy choices.