As China deals with its most serious bout of inflation in 15 years, the debate rages as to whether the country is losing its competitiveness in the global economy. Inflation and China’s enactment of tougher labor laws are often given as the reasons why factories in lower wage countries such as Vietnam, Cambodia and Sri Lanka are now getting work that was once done in Chinese factories.

There is no doubt that jobs are being re-sourced from China to lower cost countries, mostly in Asia. Dan’s recent post, Trickling Down - Chinese Off-shoring, described how even state-run Chinese companies are moving production out of China. But inflation is not the reason.

Most of China’s inflation today is due to higher food costs, which are in turn caused by greater demand for grain, which is increasingly being used to produce bio-fuels in the United States and elsewhere. Oil priced at over $100 per barrel is not only driving up production and transportation costs for everyone, but it is also driving up the cost of food, as grain is diverted to feed new ethanol plants rather than people.

Moreover, higher food prices are not a China only issue. In addition to incidents like the stampede for cooking oil at a supermarket in Chongqing that killed 31 people, there have also been tortilla demonstrations in Mexico and pasta protests in Italy. Likewise, rising raw material costs affect factories everywhere, not just those in China.

Rather than inflation, Dan quite correctly attributed the movement of production out of China to the process whereby countries pass low-value-add industries off to less developed markets as they develop—the so-called “Flock of Geese” effect. It is not inflation, but increasing productivity which raises standards of living and brings changes in the relative economics of countries in a fluid global economy.

Wang Qing, chief China economist at Morgan Stanley, has stressed that Chinese competitiveness is not about to disappear and goods from Asia’s most populous nation will remain cheap for years. This is the case as products move up the value chain from toys and clothes to cars and high-tech machinery, according to Mr. Wang. “What’s more important is that you should not just focus on nominal wage growth, you also need to pay attention to labor productivity growth.” In other words, an average person in China is being paid more today, but it is not inflationary because productivity is going up much faster.

Nonetheless, it might seem as though this shift in production is happening relatively early in China’s industrialization process, and that China has arrived at this point much faster than other economies. That speaks to another important aspect of China’s development—the fast rate of change of its economy. China changes so quickly that facts about the country need to be frequently checked and re-checked. Even though I know this to be the case, I am constantly reminding myself to do so.

For example, I have tended to think of China as a $1 trillion economy with an average per capital income of about $1,000. That’s more or less where China was at the beginning of this century and those were the numbers I had stuck in my head. You can imagine my shock when I rechecked the numbers recently as I began thinking about this subject of rising wages. China is now a $3.3 trillion economy, with an average per capita income of approximately $2,500. Both numbers are quite a bit larger than those I was carrying around in my head. I should have known that double-digit economic growth for more than five years would have had a substantial impact on GDP and per capita income, but I did not make the connection until I checked the facts. I was also somewhat startled to find that per capita income in Shenzhen is now $10,628; Guangzhou, $9,302; Shanghai, $8,594; and Beijing $7,370. These also are much higher than the numbers I have been using and explain why jobs are moving elsewhere.

Chinese factories are moving up the economic ladder and are now producing higher value-added products. Increasing amounts of capital are supporting each worker. Competition, both in China and in the global economy, requires that production costs be reduced to absorb higher raw material costs. Managerial skills are improving; training is prevalent; and tools such as lean manufacturing and Six Sigma are being employed throughout the country. As a result, companies in China and their employees are becoming more efficient. Under these circumstances, it is no wonder that productivity is on the rise in China. You can see it in the numbers.

Rather than being an end to China’s competitiveness in the global economy and its reign as the world’s workshop, the re-sourcing of production to other countries is sign that China is still in its early stages of industrialization. As productivity increases, and Chinese workers become better paid, better trained and more adept at producing more sophisticated products, China will begin to manufacture products that have only been possible to produce in the most developed economies in the world.