China's Ascending Middle Class

by: Cindy Reed

Yesterday, August 18, 2010, Lorraine Luk from Marketwatch reported that

Hon Hai Precision Industry Co, the world's biggest contract manufacturer of electronics products, said Wednesday it plans to significantly boost its China workforce to underpin growth ... [and] said it would increase its workforce in China by 9% this year to 1 million. It also plans to boost its total China workforce by a further 20%-30% in 2011.

With this report as inspiration, I decided to look closer at what has recently been published regarding China's workforce growth and minimum wage levels.


As a country with a 1.3 billion population, China obviously has a surplus in labor supply. Early in July 2010 an article by Quin Xiaoying, researcher at the China Foundation for International and Strategic Studies, points out that

The country's accelerated urbanization drive has led to the flow of hundreds of millions of laborers from less developed rural areas into the cities. As a result of this migration, China's labor supply has long exceeded market demand and the wages of ordinary workers has been comparatively lower for a long time.


A series of wage increases was planned for back in China's 2004 labor reform--which required local governments to raise minimum wages at least every other year--but the increases did not happen since November 2008 because of the depth of the global financial crisis.

However, Chen Xin of China Daily reports today, August 19, 2010, that so far 27 provinces, autonomous regions and municipalities have recently enacted significant wage increases and that the remaining autonomous regions have already made plans to also enact wage increases before the end of 2010. "The minimum wage adjustment is a dynamic mechanism. It should have been made much earlier since the Chinese economy rebounded quickly after the crisis," Yang Yansui, a labor expert with Tsinghua University, said on Wednesday. But it is a signal that the government has started to pay more attention to the majority's basic income."


Understanding the workforce growth and wage increases for the middle class directly translates to increased purchasing power and internet activity. The number of Internet users in China reached 420 million in June and Baidu (NASDAQ:BIDU) is commonly known as the "Google of China."

In 2010, Google (NASDAQ:GOOG) essentially discontinued its direct presence in the china market (i.e. in China) and instead Google points would-be users to in Hong Kong. The Hong Kong site is more difficult for users to consistently access and thus significant market share has been lost by Google to Baidu.

By December 2009 Baidu had moved from 58.4 percent market share to 64% (see here); and recent reports indicate 70% market share. In June, BIDU told Reuters (see here) "that it believes that with Google, Inc. out of the way its piece of the largest internet market in the world will move to 79 percent."

Internet users in China generally use the Baidu (BIDU) search tool to find out more about products and services. Other internet resources that are used for gaming, social networking, and blogging are Netease (NASDAQ:NTES), Shanda (NASDAQ:SNDA), and Sina (NASDAQ:SINA).

The hard working people of China are now more able to improve their standard of living. I'm optimistic that China is performing as an important economy in the stabilization of the current global economic crisis.

The following quotes are from the BIDU executive's presentation on July 21, 2010 second quarter report.

Robin Li, Baidu's Chairman and Chief Executive Officer:

This quarter's strong performance also underscores the vast Internet market opportunities for us and the growing appreciation for search engine marketing in China. Baidu continues to focus on user experience and has many initiatives on this front to ensure Baidu remains at the center of China's Internet ecosystem.

Jennifer Li, Baidu's Chief Financial Officer:

Effective execution resulted in impressive revenue growth and healthy margin improvements for second quarter 2010. Over the next quarters, we will continue to aggressively invest in R&D, sales and infrastructure to drive innovation, enhance monetization and support our growth.

Analyst price ranges for BIDU are from $84 to over $100 per share (current closing price $82.92); the S&P target is $90. 3rd quarter earnings that will be released in October 2010 are projected to grow an impressive 77% compared to the 3rd quarter of 2009. China's increase in the quantity of average middle class workers and their wage levels will obviously improve the remainder of BIDU's 2010 year performance.

Disclosure: Author is long BIDU

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