Summary
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Export sentiment has turned pessimistic and certain commodity prices are coming down, but operating costs in China have continued to rise.
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The Guangdong government has indicated that it is considering deferring the increase of the minimum wage in 2012, however, Shenzhen, the special economic zone, has formally announced it will raise its minimum wage by 13.6% effective 1 February 2012.
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According to HKTDC survey in the last quarter of 2011, 79% of Hong Kong companies still experienced a rise in labour costs on the Chinese mainland compared to the previous quarter, slightly lower than the 88% recorded in the third quarter of 2011.
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The average wages of staff and workers in Guangdong Province increased by 10.9% in 2010 and rose further at an accelerated pace of 12.2% in the first three quarters of 2011.
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While Guangdong may defer the increase of the minimum wage, it may create a dilemma for manufacturers as migrant workers may flow to other regions which continue to increase the minimum wage levels.
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Although the rise in the sub-index of food prices was edging down to 8.8% in November 2011, it was still increasing but only at a more moderate pace. Effective 1 December 2011, China adjusted upward its on-grid power prices and electricity rate for industrial users.
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Towards the end of December 2011, the general metal price level was about 19% lower compared to a year ago, but was still 9% higher compared to the trough in July 2010. Oil prices remained at a high level on average in recent months.
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By end-2011, China’s Rmb appreciated by nearly 5% against the US$ compared to the end of 2010 and by 8.5% compared to mid-June 2010.
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To some extent, the upward pressure on export prices is likely to persist in 2012. While weakening demand in overseas markets will translate into downward price pressure on Chinese exports, the continued rise in labour costs on the Chinese mainland, an unremitting revaluation of the Rmb and the still-high prices of crude oil and certain commodities will continue to exert upward pressure on input costs.
Exports may contract but operating costs on the Mainland not conceding
The HKTDC Export Index fell further to 40.6 in the fourth quarter of 2011, from 49.5 in the third quarter of 2011.[1] The sub-index of new export orders of China’s Manufacturing Purchasing Managers’ Index (PMI) also dropped below the watershed of 50 for three consecutive months from October to December 2011.
On the supply side, while major world commodities prices are coming down, crude oil prices remain at a relatively high level. Fluctuations in input prices may cause uncertainties to production plans. Labour costs in China have continued to rise and this is likely to continue though at a more moderate pace. This together with an appreciating Rmb will continue to affect the operating costs of most Hong Kong manufacturers on the Mainland.
Hong Kong manufacturers continue to experience higher labour costs
While export orders are shrinking, production costs on the mainland have not declined, though they are expected to rise at a slower pace. It was reported that given the declining export orders, more migrant workers are returning home earlier this year, resulting in an unexpected shortage in labour in certain locations in the coastal areas of China.
By the end of September 2011, 21 provinces or regions of China have already raised the minimum wage levels by an average of 21.7% compare to last year. Although the Guangdong government has indicated that the province is considering deferring the increase of the minimum wage in 2012, individual cities are still planning to raise the minimum wage, for example, Guangzhou is planning to raise it by 13%. Shenzhen, the special economic zone, has formally announced it will raise its minimum wage by 13.6% effective 1 February 2012.
According to HKTDC surveys in the last quarter of 2011, 79% of the responding Hong Kong companies still experienced a rise in labour costs on the mainland compared to the previous quarter, slightly lower than the 88% recorded in the third quarter of 2011. For those respondents who experienced higher labour costs on the mainland, 47% said the increase was more than 10% and 33% said the increase was between 5% to 10%. Compared to the last quarter of 2010, the rates of increase appear to be moderating but the general wage level is still moving upward.
Companies need to employ different levels of staff for different jobs. According to official figures, the average wages of staff and workers in Guangdong Province (consisting of all types of jobs of different levels) increased by 10.9% in 2010 and went up further at an accelerated pace of 12.2% in the first three quarters of 2011 while the nation as a whole increased by 14.9%.
While Guangdong may defer the increase of the minimum wage, it may create a dilemma for manufacturers as migrant workers may flow to other regions which continue to increase the minimum wage levels. For example, Sichuan, a major supplier of migrant workers, has announced it will raise the minimum wage by an average of 23.4% (compared to its last increase in August 2010) starting January 2012.
China’s food prices continue to rise though at a moderating pace
China’s consumer price index (CPI) has been basically on an upward trend since November 2009, which can mainly be attributed to increases in food prices. The CPI increased by 6.5%, a recent peak in July 2011 with food prices increasing by 14.8%.
Although the rise in the sub-index of food prices edged down to 8.8% in November 2011, it was still increasing but only at a more moderate pace. While most Hong Kong manufacturers operating on the mainland, especially the Pearl River Delta (PRD), need to provide dormitories as well as meals to migrant workers, higher domestic food prices would inevitably have an impact on operating costs. High inflation also raises workers’ expectations for wage rises.
China’s PPI rising at slower pace
After remaining at more than 10% for February to September 2011, the pace of increase for China’s purchasing price index of raw materials, fuels and power slowed down in November 2011 in line with a general decline in world commodity prices, but still increased by more than 5% compared to a year ago.
However, effective 1 December 2011, China adjusted upward its on-grid power prices and electricity rate for industrial users. It was reported that China’s State Electricity Regulatory Commission was projecting that a tight supply of electricity would continue in this winter and the spring of 2012. China will push ahead price reforms for resources-based products, including petroleum, electricity and natural gas. More price increases are likely in the future.
Commodity prices adjusting downward with oil price relatively high
The world commodity prices have declined markedly since September 2011. According to the Economist Commodity Price Index, towards the end of December 2011, the general metal price level was about 19% lower compared to a year ago, but was still 9% higher compared to the trough in July 2010.
The price of copper recorded a recent peak in about early February 2011 and has shown a major adjustment since September 2011. By the end of 2011, the copper price level was lower than a year ago, but was still about 25% higher compared to the trough in June 2010. The price of aluminium alloy has also adjusted down since September 2011 and was only slightly higher than the ebb recorded in June 2011.
Oil prices remained at a high level and hovered around US$110 per barrel (Brent Crude) on average in recent months, compared to US$92 per barrel at the end of 2010 and US$71 per barrel in June 2010.
The price of cotton has surged markedly since July 2010 and recorded a peak in March 2011 before starting a major correction in April. The average price of cotton in November 2011 was 32% lower than a year ago.
The Rmb appreciates more than 8% from mid-June 2010
Furthermore, Rmb appreciation has been a major challenge to Hong Kong manufacturers operating in China. Since June 2010, China has continued with its reform of the exchange rate mechanism of the Rmb by allowing more flexible movement in its exchange rate.
After depreciating for a few days in early December 2011, the exchange rate of the Rmb against the US$ picked up again towards the end of December 2011. On 30 December 2011, the exchange rate of the Rmb against the US$ appreciated to 6.2933, representing an appreciation of nearly 5% compared to the end of 2010 and by 8.5% compared to mid-June 2010.
According to the HKTDC Research survey, the local content (the part of production costs settled in Rmb) of Hong Kong companies producing on the Mainland ranges from 34.4% to 53.9%, with an average of 49.8%. This represents quite a marked increase from an average of 30% a few years ago. Given the marked increase in local content, more than 8% appreciation of the Rmb against the US$ translates into a 4% rise in production costs.
Rise in export price slower eroding margins of exporters
The rising input costs has put upward price pressure on China’s exports as manufacturers operating in the region cannot absorb all the cost increases for a sustained period. China’s export prices index started to record continued positive increases since May 2010 and grew by more than 10% on average in the first seven months of 2011 but edged down to 9.6% in November 2011. On the other hand, the US import price index with China as origin also engaged in an upward trend since September 2010.
To some extent, the upward pressure on export prices is likely to persist in 2012. While weakening consumer demand in overseas markets will translate into downward price pressure on Chinese exports, the continued rise in labour costs on the Chinese mainland, an unremitting revaluation of the Rmb and the still-high prices of crude oil and certain commodities will continue to exert upward pressure on input costs.
[1] A reading below 50 indicates a pessimistic export sentiment during the quarter and signals contraction in Hong Kong’s exports over the short term.
