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China Markets: On High Alert for Inflation

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Wages are depressed owing to the sheer numbers of graduates looking for jobs, even as prices keep going up.

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Emerging markets took a hit this week from China's inflation problems as the country's CPI is expected to hit 4.4% in October. Beyond the markets, however, lies a workforce attempting to capture the land of opportunity that now comes at a hefty price tag.

Despite certain internal problems I've discussed before, China seems to offer limitless potential to career seekers as the developing nation is full of fragmented markets and industries with untapped potential. Convert the cost of living into US dollars and you'll question why you aren't already here. A cab ride across the city never costs more than $5 and my rent in a gated compound in the heart of Shanghai totals less than $500 per month.

Sounds too good to be true - because it is.

College graduates are far outpacing brisk job growth, causing China's major cities to face rapidly rising costs with lingering low salaries.

While US unemployment is relatively high, consider that 27.8% of China's 2006 graduates are jobless. Not all that surprising given that more than 6.3 million graduates were thrown into the country's job market this year, six times the number a decade ago.

The law of supply and demand naturally puts downward pressure on wage rates.
The average college graduate is lucky to earn $450 per month (RMB 3000) and a recent positing for a private equity analyst position with experience and an advanced degree paid just $880 (RMB 6000) per month. Those not fortunate enough to land a job utilizing their degree end up working in a factory earning just $130 (800 RMB) per month.

Young professionals are forced to live at home if the parents live near the city or share not just a room, but also a bed, to afford the opportunity to someday build a very successful career. While salaries are slightly increasing, as the government is diligently striving to create incentives for companies and employees to offer high-quality services rather than duplicated manufacturing, they simply can't keep up with the rising cost of life.

Rent in some of China's major cities is rising at nearly a 20% clip. My lease in Shanghai was renewed with a 10% hike. Food prices have soared 19% in the last three years, with some items rising 30% or more. There's a reason the Chinese government has put a high alert for inflation risk.

While the number of entrants to the labor force over the next decade is expected to fall 30%, due to the impact of the one-child policy, the growing percentage of migrant workers educating themselves and the sea turtles returning from abroad, calls for continued concern.

The state media suggests that almost 70% of high school graduates this year will attend college, compared to just 20% in the 1980's. And the number of returnees to Beijing alone in 2009 rose 28% year over year.

Because many young Chinese live with their parents or receive a subsidized income (adult allowance), the near term spending power of young professionals may not be at risk. But this is a troubling trend as China's next workforce generation can't self-sustain itself.

The Communist Party's 12th Five Year plans calls to take measures to increase wages to meet inflation and recapture a larger portion of GDP. While the government's efforts will once again contrast the free market theory and consequently diminish the attractiveness of China's talent pool to foreign companies, it is absolutely necessary to assist China's transition from an export-based economy to a self-sustaining one.


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