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China Needs a Service-Sector Revolution

With a wave of strikes pushing up wages and making exports of manufactures more expensive, China will have to grow by producing something else. It will have to move away from a strategy in which manufactures are the engine of growth toward the model of a more mature economy, in which employment is increasingly concentrated in the service sector.

BEIJING – China is getting its exchange-rate adjustment whether it likes it or not. While Chinese officials have announced their intention of letting the exchange rate move, only time will tell whether their talk is accompanied by deeds. In the meantime, manufacturing workers are voting with their feet – and their picket lines.

Honda has offered its transmission-factory workers in China a 24% wage increase to head off a crippling strike. Foxconn, the Taiwanese contract manufacturer for Apple and Dell, has announced wage increases of as much as 70%. Shenzhen, to head off trouble, has announced a 16% increase in the minimum wage. Beijing’s municipal authorities have preemptively boosted the city’s minimum wage by 20%.

The result will be to raise the prices of China’s exports and fuel demand for imports. The effect will be much the same as a currency appreciation.

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