CHINA: Thrifty Chinese resist enticements to spend

A woman in the city of Hefei in Anhui province shops for holiday items ahead of Sunday's Chinese New Year. The Chinese are traditionally more comfortable saving their money than spending it. (AFP / Getty Images / February 7, 2010)

An official push to promote consumerism as a way of reducing dependence on exports faces cultural hurdles.

By David Pierson and Barbara Demick

February 13, 2010

Reporting from Beijing

To re-balance their economies, Americans need to save more and the Chinese must loosen their wallets.

But judging from homemaker Wang Fang's grocery cart leading up to the biggest holiday of the year here it's going to take some doing to persuade consumers here to shop til they drop.

Her annual splurge, timed to Sunday's Chinese New Year festivities, included a sack of rice, a jug of cooking oil and a bag of beef jerky. Wang's lone personal indulgence: a $40 foot-washing basin she bought using a gift card from her husband's state-owned gas company.

"Chinese people like to buy practical gifts," said Wang, 49. "So it's mainly food and drinks. We're not going to buy junk that lasts one or two years."

Debt-strapped Americans would do well to mimic Wang's self-restraint. But in macroeconomic terms Chinese frugality is not a virtue. China's economy is overly dependent on foreigners to buy its low-cost exports, a weakness that was exposed during the recent global downturn. The government is now trying to encourage its own citizens to spend, with the goal of building reliable domestic demand for Chinese products.

"We must . . . transform the current development model that is excessively reliant on investment and exports," Li Keqiang, the vice premier widely expected to be the next prime minister, said last month at the World Economic Forum at Davos. "We will focus on boosting domestic demand."

It won't be easy.

China's rapid rise might be the envy of nations across the globe. Yet for all the talk of its economic miracle, Chinese consumers are taking home a shrinking share of the pie. In the 1990s, household income accounted for 72% of the country's gross domestic product. By 2007 it had fallen to 55%, according to a study on Chinese consumption by consulting firm McKinsey & Co.

That's because Beijing has geared China's economy toward production rather than consumption. It's a formula that has provided millions of workers with employment but no quick path to the middle class.

Driving the disparity, experts said, is China's decision to subsidize manufacturing and exports at almost any cost to keep its factories humming. The government has showered its manufacturers with low-interest loans, export subsidies and other incentives to give them an edge over foreign competitors. Beijing has also kept its currency, the yuan, artificially low so that its goods remain cheap abroad.

That has been a boon for Chinese factory owners and other well-connected elites. The nation boasted 42 billionaires on Forbes' most recent list of global tycoons.

But wages for most Chinese workers have grown slowly, while their tax burden has risen to help finance all those business subsidies. Meanwhile, a weak currency has fueled inflation and makes imports more expensive for consumers at home.

The McKinsey study said the average Chinese worker has to put in seven hours on the job to earn enough to purchase the same amount of goods or services that an American worker could buy with one hour's pay.

Yu Yaocai, a 28-year-old junior high school teacher in Beijing, said he set a $300 budget for the holidays, about $40 less than his monthly pay. He said he would put the expenses on his credit card but would pay it off promptly when the bill arrived.

"I only buy something when I need to buy something," Yu said.

To be sure, living standards are rising here. China surpassed the U.S. last year in auto sales, and it's the world's No. 1 cellphone market. Still, more than half of China's 1.3 billion people remain in the countryside, where per capita income in 2009 was $758. City dwellers averaged earnings of $2,773 last year, about 15 times less than what the typical American earned.

Persuading Chinese consumers to spend considerably more of their disposable income will require a massive cultural shift. The Chinese savings rate is more than five times higher than that of the U.S. That's largely because citizens here can't count on the government to supply them with adequate education, healthcare or retirement benefits.

Hu Yuping, a homemaker from a rural suburb outside Beijing, said she's trained her family to survive on about $1 a day. It's the only way they can afford her son's college tuition, which costs $1,000 a semester.

Her husband had to give up a job as a taxi driver because of diabetes. Their savings helped pay his medical bills. To make ends meet, he's taken handyman assignments in his village.

"We don't buy anything big," said Hu, whose deep crow's-feet and graying hair make her look far older than her 46 years. "The last time we did was five years ago when we bought a television."
The central government has launched plans to shore up healthcare and pension plans, but the efforts are still not enough, experts said.

Chinese people "still do not feel secure about their future," said Zhao Ping, an economist with the Ministry of Commerce, who researches consumer spending. "Social security is not well-developed. People in the rural areas have to save money for old age; children [providing for their parents in their old age is]the traditional way, but people can't rely on that because of the one-child policy. The government is trying to improve the social security system, healthcare and retirement programs in rural areas. Only when the system is established will people have the confidence to spend more."

A host of multinational firms, including Walmart, General Motors, Proctor & Gamble and Apple, are betting on it.

On a recent afternoon at one of the 156 so-called "hypermarkets" in China run by the French retailing chain Carrefour, hordes of shoppers elbowed their way through the aisles to stock up for the New Year's celebrations. Many said it was the most expensive occasion of year for them. Family meals had to be prepared and gifts had to be given to in-laws, colleagues and bosses.

The crowds weren't so thick in the electronics department, but traffic was jammed in the food aisles, where special red gift boxes of Peking duck, mixed nuts and rice wine were ready to be scooped-up by passersby.

"It's nutritious and the packaging is easy to hold," said He Liping, explaining why she bought her aunt a seasonally decorated box of organic eggs.

While thrift remains the watchword, some unapologetic consumers can be found in the upscale shopping districts that are springing up in the big cities.

Steven Chen, a 23-year-old musician, said his fashion icon was hip-hop star Kanye West. The Beijing native proudly described his ensemble while standing outside a designer T-shirt store: a Victorinox beanie, a Billionaire Boys Club jacket over a Uniqlo hoodie, Buffalo jeans and teal-colored Nike sneakers.

"If I have the money, I'll buy it," Chen said, describing his shopping addiction. "It's my own money so my parents can't complain. Though they keep telling me to save and buy a house."

Nicole Liu and Tommy Yang in the Times' Beijing bureau contributed to this report.

View Article in the LA Times

TIANJIN, CHINA: China Leading Global Race to Make Clean Energy

As China takes the lead on wind turbines, above, and solar panels, President Obama is calling for American industry to step up. Shiho Fukada for The New York Times

January 31, 2010

By KEITH BRADSHER

TIANJIN, China — China vaulted past competitors in Denmark, Germany, Spain and the United States last year to become the world’s largest maker of wind turbines, and is poised to expand even further this year.

China has also leapfrogged the West in the last two years to emerge as the world’s largest manufacturer of solar panels. And the country is pushing equally hard to build nuclear reactors and the most efficient types of coal power plants.

These efforts to dominate renewable energy technologies raise the prospect that the West may someday trade its dependence on oil from the Mideast for a reliance on solar panels, wind turbines and other gear manufactured in China.

“Most of the energy equipment will carry a brass plate, ‘Made in China,’ ” said K. K. Chan, the chief executive of Nature Elements Capital, a private equity fund in Beijing that focuses on renewable energy.

President Obama, in his State of the Union speech last week, sounded an alarm that the United States was falling behind other countries, especially China, on energy. “I do not accept a future where the jobs and industries of tomorrow take root beyond our borders — and I know you don’t either,” he told Congress.

The United States and other countries are offering incentives to develop their own renewable energy industries, and Mr. Obama called for redoubling American efforts. Yet many Western and Chinese executives expect China to prevail in the energy-technology race.

Multinational corporations are responding to the rapid growth of China’s market by building big, state-of-the-art factories in China. Vestas of Denmark has just erected the world’s biggest wind turbine manufacturing complex here in northeastern China, and transferred the technology to build the latest electronic controls and generators.

“You have to move fast with the market,” said Jens Tommerup, the president of Vestas China. “Nobody has ever seen such fast development in a wind market.”

Renewable energy industries here are adding jobs rapidly, reaching 1.12 million in 2008 and climbing by 100,000 a year, according to the government-backed Chinese Renewable Energy Industries Association.

Yet renewable energy may be doing more for China’s economy than for the environment. Total power generation in China is on track to pass the United States in 2012 — and most of the added capacity will still be from coal.

A worker inside a wind turbine at a factory in Tianjin, China.  Shiho Fukada for The New York Times

China intends for wind, solar and biomass energy to represent 8 percent of its electricity generation capacity by 2020. That compares with less than 4 percent now in China and the United States. Coal will still represent two-thirds of China’s capacity in 2020, and nuclear and hydropower most of the rest.

As China seeks to dominate energy-equipment exports, it has the advantage of being the world’s largest market for power equipment. The government spends heavily to upgrade the electricity grid, committing $45 billion in 2009 alone. State-owned banks provide generous financing.

China’s top leaders are intensely focused on energy policy: on Wednesday, the government announced the creation of a National Energy Commission composed of cabinet ministers as a “superministry” led by Prime Minister Wen Jiabao himself.

Regulators have set mandates for power generation companies to use more renewable energy. Generous subsidies for consumers to install their own solar panels or solar water heaters have produced flurries of activity on rooftops across China.

China’s biggest advantage may be its domestic demand for electricity, rising 15 percent a year. To meet demand in the coming decade, according to statistics from the International Energy Agency, China will need to add nearly nine times as much electricity generation capacity as the United States will.

So while Americans are used to thinking of themselves as having the world’s largest market in many industries, China’s market for power equipment dwarfs that of the United States, even though the American market is more mature. That means Chinese producers enjoy enormous efficiencies from large-scale production.

In the United States, power companies frequently face a choice between buying renewable energy equipment or continuing to operate fossil-fuel-fired power plants that have already been built and paid for. In China, power companies have to buy lots of new equipment anyway, and alternative energy, particularly wind and nuclear, is increasingly priced competitively.

Interest rates as low as 2 percent for bank loans — the result of a savings rate of 40 percent and a government policy of steering loans to renewable energy — have also made a big difference.

As in many other industries, China’s low labor costs are an advantage in energy. Although Chinese wages have risen sharply in the last five years, Vestas still pays assembly line workers here only $4,100 a year.

China’s commitment to renewable energy is expensive. Although costs are falling steeply through mass production, wind energy is still 20 to 40 percent more expensive than coal-fired power. Solar power is still at least twice as expensive as coal.

The Chinese government charges a renewable energy fee to all electricity users. The fee increases residential electricity bills by 0.25 percent to 0.4 percent. For industrial users of electricity, the fee doubled in November to roughly 0.8 percent of the electricity bill.

The fee revenue goes to companies that operate the electricity grid, to make up the cost difference between renewable energy and coal-fired power.

Renewable energy fees are not yet high enough to affect China’s competitiveness even in energy-intensive industries, said the chairman of a Chinese industrial company, who asked not to be identified because of the political sensitivity of electricity rates in China.

Grid operators are unhappy. They are reimbursed for the extra cost of buying renewable energy instead of coal-fired power, but not for the formidable cost of building power lines to wind turbines and other renewable energy producers, many of them in remote, windswept areas. Transmission losses are high for sending power over long distances to cities, and nearly a third of China’s wind turbines are not yet connected to the national grid.

Most of these turbines were built only in the last year, however, and grid construction has not caught up. Under legislation passed by the Chinese legislature on Dec. 26, a grid operator that does not connect a renewable energy operation to the grid must pay that operation twice the value of the electricity that cannot be distributed.

With prices tumbling, China’s wind and solar industries are increasingly looking to sell equipment abroad — and facing complaints by Western companies that they have unfair advantages. When a Chinese company reached a deal in November to supply turbines for a big wind farm in Texas, there were calls in Congress to halt federal spending on imported equipment.

“Every country, including the United States and in Europe, wants a low cost of renewable energy,” said Ma Lingjuan, deputy managing director of China’s renewable energy association. “Now China has reached that level, but it gets criticized by the rest of the world.”

View Article in The New York Times

JAPAN: On menu in Japan: Beef bowl with side of deflation

A beef bowl at Yoshinoya.   Ko Sasaki for The New York Times

January 30, 2010

By HIROKO TABUCHI

Beef Bowl Economics

TOKYO — The broiled meat is tender and the rice is silky-smooth. But as Japan’s economic recovery falters, beef bowls have come to symbolize one of its most pressing woes: deflation.

Japan’s big three beef bowl restaurant chains, the country’s answer to hamburger giants like McDonald’s, are in a price war. It is a sign, many people say, of the dire state of Japan’s economy that even dirt-cheap beef bowl restaurants must slash their already low prices to keep customers.

The battle has also come to epitomize a destructive pattern repeated across Japan’s economy. By cutting prices hastily and aggressively to attract consumers, critics say, restaurants decimate profits, squeeze workers’ pay and drive the weak out of business — a deflationary cycle that threatens the nation’s economy.

“These cutthroat price wars could usher in another recessionary hell,” the influential economist Noriko Hama wrote in a magazine article that has won much attention. “If we all got used to spending just 250 yen for every meal, then meals priced respectably will soon become too expensive,” she said. “When you buy something cheap, you lower the value of your own life.”

Deflation — defined as a decline in the prices of goods and services — is back in Japan as it struggles to shake off the effects of its worst recession since World War II.

While prices have fallen elsewhere during the global economic crisis, deflation has been the most persistent here: consumer prices among industrialized economies rose by a robust 1.3 percent in the year to November, but fell 1.9 percent in Japan.

In the decline, companies that undercut rivals too aggressively are being chastised as reckless at best, or as traitors undermining the country’s recovery at worst. Every markdown of beef bowl prices by the big three restaurants — Sukiya, Yoshinoya and Matsuya — has been promptly broadcast by the national news media here.

Japan has reason to be worried. Deflation hampered Japan from the mid-1990s, after the collapse of its bubble economy, to at least 2005. Households held back spending on big-ticket goods, knowing they would only get cheaper. Companies were unsure of how much to invest. At the time, the three beef bowl chains were in a similar price war.

Still, government officials back then emphasized the supposed benefits of deflation; falling prices were good for households, they said. Others said deflation would help restructure the economy by weeding out weak companies.

But the drawn-out deflationary cycle weighed heavily on Japan’s recovery. Apart from putting a damper on consumption and investment, asset deflation ravaged the country’s banks and shut out new businesses from credit.

Now that deflation is back, Japan is wary. Unemployment remains near record highs, and wages are falling. Mounting public debt is also a problem, causing Standard & Poor’s on Tuesday to cut its outlook for Japan’s sovereign rating for the first time since 2002. Japan must do more to lift its economy out of deflation and bolster long-term growth, S.& P. said.

Moreover, the population is shrinking, making demand inherently weak. Economists say Japan’s economy is saddled with a 35 trillion yen, or $388 billion, “demand gap,” or almost 7 percent of the country’s economic output.

“With supply continuing to exceed demand by a massive margin, deflationary expectations are proving very difficult to shake,” said Ryutaro Kono, an economist at BNP Paribas in Tokyo. “Households have been tightening their purse strings as the income outlook looks increasingly bleak, and we believe firms will continue to respond by lowering prices.”

Matsuya, the smallest of the three chains, set off the price war by cutting the price of its standard beef bowl to 320 yen, or $3.55, from 380 yen in early December. The market leader, Sukiya, followed suit that month, lowering its price to 280 yen, from 330 yen.

Matsuya is one of large beef bowl chains in Tokyo.  Ko Sasaki for The New York Times

This month, the No. 2 beef bowl chain, Yoshinoya, lowered the price of its beef bowl to 300 yen, from 380 yen, though it says the cut is temporary. A smaller chain, Nakau, has also lowered prices.

The restaurant chains insist they have not downsized their portions, and will make up for cheaper prices by raising efficiency.

“We don’t consider this a price cut. We’ve simply set a new price,” said Naoki Fujita at Zensho, which runs the Sukiya chain. “With incomes falling, we needed to figure out what would be a reasonable price,” he said. “We hope customers who came every week will now come twice a week.”

In a sense, the beef bowl has always been about low prices. Yoshinoya, the beef bowl pioneer with about 1,560 stores in Japan and overseas, helped bring beef to the Japanese working class with its first restaurant in the Nihonbashi district of Tokyo in 1899.

Though beef was a delicacy at the time, Eikichi Matsuda, the Yoshinoya founder, kept prices cheap by buying in bulk, and serving as many customers as possible from his tiny stall. Speed and efficiency reigned, with workers trained to start preparing a bowl even before a customer sat down.

Banners at Yoshinoya advertise an anniversary sale on beef bowls.  Ko Sasaki for The New York Times 

The same principles still apply at Yoshinoya. At a branch in central Tokyo, servers rarely take more than a minute to fill an order. The average customer spends just 7.5 minutes on a meal, and a small restaurant can serve more than 3,000 customers a day.

But forced to sell at ever-lower prices — and hurt by lower-priced competitors — making a profit has been increasingly difficult. The company suffered a 2.3 billion yen net loss in the nine months to November, and the next month, before Yoshinoya slashed prices, its sales slumped 22.2 percent. In contrast, sales at Sukiya, which serves up the cheapest beef bowl, surged 15.9 percent that month from the previous year.

Yoshinoya is not considering further price cuts. Squeezing out more savings is “like wringing a dry towel,” said a spokesman, Haruhiko Kizu.

Meanwhile, labor disputes at Sukiya show how falling prices and revenue can quickly hurt workers. A string of former workers have sued the chain over withholding overtime pay. Sukiya denies the accusations.

Other companies have been harshly criticized for slashing prices. Fast Retailing, the company behind the fast-growing Uniqlo brand, has garnered as much disapproval as awe for selling jeans as low as 990 yen. McDonald’s, on the other hand, has won kudos for resisting bargain basement prices by introducing a series of big “American-style” burgers for more than 400 yen, considered expensive in today’s Japan.

“Some Japanese companies are waging such reckless price wars, they’re wringing their own necks,” said Masamitsu Sakurai, who heads the influential business lobby Keizai Doyukai. “Companies need to be more creative. They should come up with products that add value.”

Economists say it is absurd to blame individual companies for Japan’s deflation. “For prices to fall during an economic downturn is natural. That stimulates demand and facilitates an eventual recovery,” said Takuji Aida, chief economist for UBS in Tokyo. “But this mechanism doesn’t work when there is such a big demand shortfall.”

The government has vowed to lift household incomes through a series of subsidies, including new cash payments to families with small children. But the scale of government payments — 2.3 trillion yen in the case of the child subsidies — is hardly enough to fill the nation’s huge demand shortfall. With interest rates close to zero, Japan also has few options left in monetary policy.

In the meantime, cutthroat price battles are already driving laggards out of business. Wendy’s, the American burger chain, left Japan on Dec. 31.

It is not surprising, considering the competition. A mere stone’s throw from Tokyo’s celebrated Ginza district is Shokuan, the kind of restaurant that is undercutting everyone.

Shokuan, which has vending machines but no table service, is an inexpensive place to eat.   Ko Sasaki for The New York Times

Shokuan, which has no chairs nor table service, is a cluster of beer vending machines huddled under the train tracks. A man behind a tiny counter sells dirt-cheap morsels: fish sausages for 50 yen, prawn crackers for 60 yen, canned yakitori for 160 yen. Many days of the week, Shokuan is spilling over with customers.

“I don’t think there’s anything around here cheaper than this. That’s why I started to come,” said Yasunori Miura, a manufacturing company employee and a recent regular. “This here,” he said, pointing to his fish sausage, “is deflation.”

Makiko Inoue contributed reporting

View Article in The New York Times

JAPAN: Japan In Jeopardy

01.22.10, 12:01 AM EST

Gordon G. Chang

Nothing seems to be going the country's way at the moment.

Does anything work in Japan?

Certainly not the floundering economy. Analysts think it may have contracted by as much as 6% last year. If so, China's economy, which grew by 8.7% according to numbers released Jan. 21, zoomed past Japan to become the world's second largest.

How about Japan's biggest companies? Japan Airlines ( JALSY - news - people ), the nation's flag carrier, filed for bankruptcy Jan. 19.

It's no mystery how the once-mighty corporate giant, commonly known as JAL, collapsed. For one thing, Tokyo bureaucrats forced the airline to service little-used airports. A third of its 151 domestic routes had load factors below 50%. Load factors on only 11 of those routes exceeded 70%. JAL, in short, was used to keep local airports--and local economies--going. Eventually the carrier, in reality a social welfare agency with landing rights, could no longer stand the financial strain.

In one sense JAL's bankruptcy is a sign of progress. Instead of keeping the airline going indefinitely with additional government subsidies--in other words, instead of subsidizing a subsidizer--the government of Prime Minister Yukio Hatoyama decided to permit the bankruptcy. Yet Tokyo is still guiding the process. As a part of a complex prepackaged reorganization to shrink JAL, the Japanese government is providing $10 billion, two-thirds of which will be in credit lines and a third in a cash infusion.

"This is not the end of JAL," said Transport Minister Seiji Maehara on the announcement of the reorganization. "Today is the beginning of a process to keep JAL alive." Is that what Tokyo should be trying to do at this time? Japan, after all, needs one fewer airline.

Among other things. The country, unfortunately, is shrinking. There are 127 million Japanese today. Due to one of the world's lowest fertility rates, Japan is in a "death spiral." Projections indicate the population will fall to 89 million by 2055.

The Washington Post put it this way: "Japan is on course for a population collapse unlike any in human history."

Whole regions are being depopulated with nature reclaiming abandoned villages. The largest cities seem to be thriving, but that's about it.

So JAL will not be the only company forced to adapt to a shriveling customer base.

Japan, as it makes the painful adjustments to a smaller society, will need an effective political system, but the country's politics are not working either. There was great optimism last August when the Japanese people, fed up with just about everything, ditched the Liberal Democratic Party, which had governed since 1955 with only one short interruption. Hatoyama's Democratic Party of Japan, which had captured the upper house of the Diet in 2007, rode into power with a resounding majority in the lower one.

Yet this, unfortunately, was not change the Japanese could believe in. Not long after taking over the DPJ stumbled, looking unsure and unsteady.

Worse, the party was soon caught up in the money politics that had tarred its predecessor. Ichiro Ozawa, who as the DPJ's secretary-general is the organization's nominal No. 2 official, is now embroiled in a political funding scandal involving a parcel of land in Tokyo. Prosecutors have raided his office and arrested three former aides, the last one on Jan. 15. Ozawa, known as the Shadow Shogun for being the most powerful politician in Japan, denies wrongdoing. "I will stay on to fulfill my given duty," the kingmaker of Japanese politics said at the end of last week.

So far Hatoyama is supporting the wily Ozawa. But that endorsement may not mean much, because the prime minister has his own scandal to fight off. Two former aides have been arrested for trying to hide the source of $4.4 million in campaign funds, some of which came from Hatoyama's mother. The prime minister, incredibly, denies knowledge that his mom was making donations. That may be good enough for the Tokyo Prosecutors Office, which has stated it will not go after Japan's leader, but it is not sufficient for others.

There have not surprisingly been calls for him to resign. "Talking about whether I will stay or leave would be tantamount to abandoning my responsibilities to the public," Hatoyama said at the end of last month. In the meantime, his popularity--and that of his government--declines.

DPJ politicians say the investigations of their top leaders have been motivated by bureaucrats resisting reform efforts. Maybe they are right, but that is no excuse for indulging in the type of behavior they campaigned so hard against. Is it too much to expect Hatoyama to change the ingrained culture of Tokyo's elite? Perhaps, but that is besides the point.

What's important is that nothing seems to be working in Japan at the moment. At a time when the country needs especially forceful leadership, the DPJ is distracted by scandal.

Hatoyama appears to be waiting for the Upper House elections, when he hopes to win a clear majority and thereby end his party's reliance on pesky coalition partners. But once those elections occur this July, the prime minister will have run out of excuses not to act.

Japan needs to completely restructure itself--from its economy to its corporate giants to its society to its politics. And despite its ability to take things slowly, the country is reaching a point where it can no longer defer the change that must occur.

Gordon G. Chang is the author of The Coming Collapse of China. He writes a weekly column for Forbes.

View Article in Forbes

CHINA: China Could Learn From Henry Ford

Published: January 19, 2010

Letter from China

By MICHAEL FORSYTHE

BEIJING — “Little” Xie says he wants to own one of the vehicles he helps build at the Ford assembly plant in the Yangtze River city of Chongqing. With his mortgage payment taking about 60 percent of his 2,000 renminbi [less than UD$300] monthly pay, that won’t happen soon.

“It isn’t even worth talking about company incentives to help buy a car, since I can’t afford one in the first place,” said Xie, 28, a six-year Ford employee, as he approached the factory gates for his night shift. Xie, whose nickname comes from his youthful age, asked that his full name not be used.

Higher wages for people like Xie would help resolve China’s biggest economic challenge: shifting away from growth fueled by exports and investment and moving toward an economy driven more by domestic consumers. China’s Communist leaders might learn a lesson about how to create a more prosperous working class from the American industrialist Henry Ford.

The founder of the auto manufacturer that bears his name generated headlines around the world in January 1914 by doubling the average autoworker’s pay to $5 a day. The move made Ford’s Model T more affordable, created a more stable work force and helped stoke the growth of the U.S. middle class, according to Bob Kreipke, the historian for the company, based in Dearborn, Michigan.

“This allowed people to increase their buying power and, at the same time, they produced a better product,” Mr. Kreipke said.

Low wages in the world’s third-largest economy are slowing the rise of a consumer culture that Premier Wen Jiabao and President Hu Jintao have said China needs to maintain expansion at the 8 percent a year that will generate jobs for its 1.3 billion people. The current growth pattern is “unsustainable,” Mr. Wen said Dec. 27.

That hasn’t stopped China’s auto industry from booming, with sales last year of 13.6 million vehicles, eclipsing the United States as the world’s top market for the first time, according to figures from the China Association of Automobile Manufacturers in Beijing. The surge in purchases was driven partly by government subsidies to help farmers buy vehicles.

Encouraging higher pay might help sustain the boom and bolster consumption, which currently accounts for about 35 percent of China’s gross domestic product, compared with 70 percent in the United States. It would also help ease income gaps between the rich and poor, which are greater than those in South Korea and Taiwan at similar stages of development and have led to riots and other labor unrest.

Ford’s $5 daily pay allowed an employee to buy a Model T that cost $440 with the equivalent of about four months of wages. Chinese factory workers averaged 24,192 renminbi, or $3,544, a year in 2008, according to figures from the National Bureau of Statistics in Beijing, so it would take more than three years of wages for them to afford the cheapest car advertised on the company’s Chinese-language Web site: a four-door hatchback with a 1.3 liter engine listed for 78,900 renminbi.

While the auto company declined to comment on worker pay, Ellen Hughes-Cromwick, Ford’s chief economist, said Ford was projecting growth 10 years into the future for the countries where it operates, and it saw China’s economy in a period of expansion characterized by rapid rises in employee compensation similar to South Korea’s economy starting in the 1960s.

“We are at a situation where wages are moving up and doubling in a very short period of time,” Ms. Hughes-Cromwick said in a telephone interview from Dearborn. “We do expect takeoff to generate pretty substantial wage gains.”

One way the Chinese government might help raise pay would be to increase the value of the renminbi, said Nicholas Lardy, who studies the Chinese economy as a senior fellow at the Peterson Institute for International Economics in Washington.

U.S. and European officials have said that China keeps the renminbi artificially low to improve sales in foreign markets. An undervalued currency encourages manufactured exports at the expense of developing the more labor-intensive service sector, depressing job growth and keeping wages low, Mr. Lardy said.

“Appreciation would lead to more rapid growth in the demand for labor and thus to more employment growth and more wage growth,” he said.

China should also spend more on education for peasants and migrants to raise their skill levels and employment prospects, said Xiao Geng, director of the Brookings-Tsinghua Center for Public Policy in Beijing.

Henry Ford employed some of the millions of East European immigrants who poured into the United States a century ago, as well as migrants from the South and Midwest lured by high wages. China’s leaders must deal with hundreds of millions of rural laborers coming to cities, who put downward pressure on salaries.

“Unskilled workers are condemned for generations to low wages,” Mr. Xiao said.

Even a skilled worker like Gong — who also asked that his full name not be used — said he makes only 6 renminbi an hour as a welder at Ford’s Chongqing plant, 9 renminbi an hour for overtime. “I have a dream of someday buying a car,” said Gong, 29, as he walked home in the rain after a 10-hour shift. “I guess it will take six years of saving.”

Bloomberg News

View Article in The New York Times