Will China Crush Chinese Unions?

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The China of Tiananmen Square has not entirely disappeared. The central government is still willing to assert control, often brutally. Last year, riots in the interior, based on a push by factory workers to get better pay, were put down violently by police. The actions were very public. China was sending a message.

There have been some signs recently that China’s blue-collar workforce is tired of being paid like factory workers in a Third World nations. Employees have closed three Honda (NYSE: HMC) plants and demanded raises of as much as 50%.  Workers at Foxconn, a supplier of parts to companies such as Apple (NASDAQ: AAP), have used the suicide rate in the company’s facilities to push for and get a doubling of their daily compensation.The People’s Republic has countenanced the union behavior for the last several months, but patience may be growing thin. China knows that its manufacturing labor costs are going up as workers press for better conditions. Higher labor costs mean that the demand for goods made on the mainland will likely fall. The mighty Chinese export engine will falter. And, China will face competition from nations including Vietnam and Mexico.

The Chinese government may well decide that it can control labor costs, if it is willing to control unions within its borders. The way the country handled unrest last year is telling. Police force was kept at a minimum briefly. Informants were used to identify the leaders of the strike movements. They apparently disappeared. or at least the drop in the riots would say so.

China is still well short of being an independent society, particularly when it comes to controlling its economic fate. It will use sophisticated tools including improved liquidity for its banks to stimulate the economy, but its internal police forces have not gone away. If China’s labor costs continue to rise, they may well be back in force.

Douglas A. McIntyre