Low-end processing companies will likely be the first to deflect investments away from China in light of very thin margins. This is usually a major concern facing investors because they fear other countries will take FDI permanently away from China. We, however, believe the trend merely shows that these low-value added production lines require an even lower cost structure to survive. It does not point to an across-the-board hollowing out of the manufacturing sector.
Moreover, unlike other Asian countries, China is vast in terms of its geographical size. Companies have the option to relocate to inland China to benefit from the relatively lower labor costs there. This should make foreign-invested enterprises think twice before pulling out of the country. In 2008, there was a 42% difference in minimum wages between the highest paid city, Shanghai, and lower paid provinces like Anhui (Chart 6). Relocation inland is likely to rise significantly when inland transportation accessibility is improved following the completion of the high speed rail by 2012.
Click on charts to enlarge, courtesy of DBS Vickers.
Relocating some production to Vietnam and India? Or high speed train will save the China inland?