China's unrivaled manufacturing dominance rests on a subsidy far larger than anything provided by state-controlled banks - the wages its workers never received. Yasheng Huang, a professor of global economics and management at MIT's Sloan School of Management, has laid out a case that decades of systematic wage suppression have generated a massive capital surplus, enabling China to outbuild and outproduce the rest of the world.
The scale of this hidden advantage is striking, "Hvylya" reports, citing Huang's analysis in Foreign Affairs. In 2016, China's manufacturing output equaled the combined output of the next nine largest manufacturing economies. But after wages are deducted, that figure expands to the next 12 - a gap that shows just how much of China's industrial power rests on underpaid labor.
Huang argued that foreign critics have been looking at the wrong target. "Other countries complain that Chinese firms have an unfair advantage because of credits and grants from state-controlled banks," he wrote. "But the far bigger subsidy comes from Chinese workers who, having been underpaid, generate a massive capital surplus, which in turn reduces the cost of capital."
The wage squeeze has deepened over decades. In 1992, when Chinese export manufacturing began its rapid expansion, factory wages stood at 6.3 percent of total manufacturing output. By 2024, that figure had dropped to 3.3 percent. Across the broader real economy - agriculture, industry, and utilities - labor compensation fell from 21 percent of total economic inputs in 1987 to 15 percent in 2023.
Huang described the dynamic as a form of "labor extraction" - one that has allowed China to build the most complete supply chain in the world, dominating everything from electric vehicles and rare-earth elements to shoes, toys, and T-shirts.
Also read: Japan's Decade-Long Struggle Exposes a Hard Truth About Breaking Free From China.