June 1, 2010ChinaeconomicsEconomyForeign AffairsgeoeconomicsJapan

Honda discord

It’s an inflection point

This is an archived blog post from The Acorn.

In hindsight, the labour strike at Honda’s auto parts manufacturing plants in Guangzhou and Wuhan is likely to prove a turning point in China’s economic history. It is remarkable because it is the first time that the Communist Party of China has permitted an action of this nature in a very long time.

The strike itself was triggered by workers demanding more pay and benefits. Such demands are hardly unusual, even in China. There are mechanisms—with Chinese characteristics—that deal with this, and the relatively stable labour relations are touted as part of the China advantage for foreign investors. The strike implies that these mechanisms failed. In their failure lies the reason why this is a turning point.

In the current geoeconomic context—with the United States keeping pressure on China to revalue the renminbi—Beijing can no longer use the cheap currency as a source of its export competitiveness. If it can’t keep the renminbi undervalued the other option it could use to stay competitive is to not allow wages to rise. That’s an uphill task, because there is an upward pressure on wages as labour productivity increases and skilled labour tends to be in short supply. Attempts to restrain wages, therefore, will is likely to cause resentment and dissatisfaction.

The Communist Party of China, of course, would not want to be the target of this resentment—not least because it is supposedly a communist party. It might well decide to release the pressure by taking the usual route—stoking nationalism’ and channeling outrage towards foreigners.

This creates a new vector: while earlier China only cared about attracting FDI, it will now have to manage the backlash as well. If these two vectors do not balance, we will see hitherto unknown political resultants.

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