BofA: Salary gains to damp capital spending

By Chua Kong Ho (China Daily)
Updated: 2010-06-08 10:51
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SHANGHAI - Investors should sell shares of Chinese cement and metal companies as increases in labor costs will curb capital spending in those industries, according to BofA Merrill Lynch Global Research.

"We believe the market may have underestimated the negative impact on corporate capex desire, and thus overall investment in China," Merrill Lynch strategists led by David Cui wrote in a report obtained on Monday. "Investors should continue to sell investment-led sectors, particularly cement and non-ferrous producers."

Seven Chinese provinces raised minimum wages in the first quarter after halting them last year amid the global recession, according to the Labor Ministry.

Higher salaries may deter foreign investment in China, which has been a low-cost manufacturing base for transnational companies such as Honda Motor Co.

The Japanese automaker raised the pay at its Chinese parts factory by 24 percent after a walk out forced it to stop production.

China's gross domestic product grew 11.9 percent in the first quarter, the fastest pace in three years, while property prices jumped by a record in April.

The above is prompting the government to tighten monetary policy including raising bank reserve requirements three times this year to prevent the economy from overheating.

More increases

Higher wages will help Premier Wen Jiabao's government boost domestic consumption and move the world's third-largest economy away from a reliance on exports for growth.

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Honda said on June 4 that operations at its car plants in China are returning to normal after all workers at its parts factory accepted a pay rise to 1,910 yuan ($280).

The workers walked out May 17, forcing Honda to shut its car-assembly plants last week and stop production in the world's biggest car market.

The increases "are just a prelude to a more widespread wage rise among manufacturers, especially as a labor shortage is likely to re-surface in September during peak shipment seasonality", JPMorgan Chase & Co analysts Alvin Kwock and Gokul Hariharan said in a report.

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