By EDWARD WONG

BEIJING - For years, Chinese leaders looked to the millions of poor workers from the country’s interior as the engine of a roaring export economy. They would move to coastal provinces, toil in factories and churn out the world’s household goods.

These days, the workers are crucial for China’s economy in another way: they must start buying the very products they manufacture, spending their paychecks on lipstick and lingerie, plastic lawn chairs and plasma television sets. Officials see them as the linchpin of China’s move away from a lopsided economic model that relies too heavily on foreign consumption.

Some of China’s top leaders, including Prime Minister Wen Jiabao, have emphasized the need for that restructuring for years, especially since the global financial crisis pummeled the export industry. But China’s move late last month to make its currency, the renminbi, more flexible and the authorities’ apparent tolerance of recent factory strikes that have led to significant wage increases both signal that Chinese leaders could be serious about re-engineering the nation’s economic model.

The breaking of the renminbi’s de facto peg to the dollar means the currency is likely to appreciate in value, making Chinese exports somewhat less competitive in the global marketplace but strengthening the purchasing power of Chinese consumers. Likewise, government policies to encourage wage increases for poor laborers - there are an estimated 150 million migrant workers in cities - could also spur consumption, if the pay increases outpace inflation.

“The central government attitude toward raising wages is undoubtedly positive because it’s directly tied to boosting domestic consumption and restructuring the economy,” said Liu Cheng, a scholar of labor law at Shanghai Normal University. “For a long time, wage growth has lagged behind economic growth, and that has forced China to continue to depend on exports.”

Chinese leaders have little choice but to overhaul the model. For one thing, the pool of cheap labor is drying up. China’s population of 15- to 24-yearolds has already peaked and will continue to shrink over the next decade, even if China were to change its onechild policy, according to projections by the United Nations. Just as important, young workers are no longer willing to toil under the same conditions tolerated by laborers a decade ago.

Analysts say that a currency revaluation by itself will not necessarily make China’s exports significantly less competitive or rein in China’s dependence on its export industry. From mid-2005 to mid-2008, the renminbi appreciated 21 percent against the United States dollar, but China’s trade surplus with the United States continued to grow by an average of 21 percent during that period. In recent months, China’s exports have shown a strong recovery, with nearly 50 percent growth year-on-year in May. Chinese officials obviously felt confident enough in the recovery to go forward with the currency shift.

Besides exports, China’s economic growth has depended on state-led investment, especially infrastructure building, and that too leads to big risks, some analysts say. Stimulus spending and a surge in lending by state banks during the economic crisis helped China power through the slump. But the lending spree has contributed to inflationary pressures and a soaring property market that the central government is trying to cool down.

But effective infrastructure projects are literally the road to more widespread wage increases across China, and thus greater domestic consumption. An explosion of highways and rail lines in the central interior provinces means companies are now operating more factories in those areas, where costs are lower.

Some workers in the interior are seeing wages increase at the same rates as those on the coast, or at even higher rates.

Anne Stevenson-Yang, head of the Beijing office of Wedge MKI, an equity analysis firm, said her research into at least 15 companies across China showed that some in the interior had raises of up to 30 percent this year, a higher rate than those on the coasts. But absolute wages are still lower in the interior, so more and more lowmargin manufacturing companies are setting up shop there, especially as provinces on the coast slowly push out some assembly-line factories in favor of higher-end businesses.

In theory, many laborers will no longer have to flock to the coast, and consumption in the interior will rise, leading to more uniform economic growth across China.


China tolerates some demands for higher wages. A striking auto worker in Guangdong. / TYRONE SIU/REUTERS