More Signs of Asia’s Credit Bubble: Soaring Wages

I have pointed out that Thailand’s minimum wages surprisingly polevaulted by 89% in 2012. This led me to discover a massive build up in systemic debt, particularly weighted on the short term which makes the Thai’s economy highly sensitive or vulnerable to a spike in interest rates. 

Well soaring wages have not been limited to Thailand but a symptom evident throughout Asia.

From the Bloomberg,

Average pay in Asia almost doubled between 2000 and 2011, compared with a 5 percent increase in developed countries and about 23 percent worldwide, according to the International Labour Organization in Geneva. The gain was led by China, where average remuneration more than tripled during the period. Southeast Asia is catching up, with new minimum pay levels in at least five nations eroding companies’ ability to make cheap toys, clothes and furniture.

“Producers are no longer able to absorb rising wage costs and ultimately will have to jack up prices for consumers in the West,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong and a former consultant on Asian economics and politics to the World Bank. “It’s the manufacturing hub of the world, and if prices rise here, then inevitably the global price level will have to rise as well.”

The threat of inflation prompted Pacific Investment Management Co., which runs the world’s biggest bond fund, to plan Asia’s first fund to protect against it. The investment will aim to return at least 2 percentage points more than the average consumer-price gains in Singapore and Hong Kong, Michael Thompson, head of Pimco’s wealth-management group for the region excluding Japan, said in a March 7 interview in Singapore.

Unfortunately this comes amidst falling labor productivity and deteriorating balance of payments.

More on Southeast Asia’s wage gains.

In Jakarta, the capital of Indonesia and home to 10 million people, Governor Joko Widodo last year approved a 44 percent increase in minimum pay for workers, to 2.2 million rupiah ($226) a month. The national government is considering extending the plan across the country, which has the world’s fourth-largest population, after China, India and the U.S.

Thailand raised its national daily minimum wage to 300 baht ($10) in January. Malaysia introduced a base salary last year, benefitting about 3.2 million workers before elections that must be held within three months. A similar tactic helped Taiwanese President Ma Ying-jeou, who won a second term in 2012 after increasing the lower limit on earnings by 5 percent.

Credit booms, which will be compounded by public works or government spending, will mean competition for scarce resources. Such dynamic will be expressed through higher costs of factors of production or input prices for industries experiencing such boom.

As I previously wrote,

we should expect that pressures to build on either relative input prices (wages, rents, and producers prices), particularly on resources used by capital intensive industries experiencing a boom, and or, but not necessarily price inflation.

Such dynamics would exert an upside pressure on interest rates that would eventually put marginal projects, including margin debts on financial assets operating on leverage, on financial strains which lay seeds to the upcoming bust.

The bottom line is that unless Asia’s central banks desist from her current engagement in accommodative policies, which signifies an attempt to align with policies of developed economies (yes central banks collaborate with each other), malinvestments will eventually unravel in the fullness of time. 

Yes, Asia’ bubble cycle is in progress.