Chinese Mainland Production Costs: September 2014 Update
29 September 2014
Labour costs rising at slower pace
In 2013, 26 provinces/regions across China raised their minimum wage levels by an average of 18%. This was slightly lower than the 20.2% average seen in 2012. In the first half of 2014, it was reported that 16 provinces/regions raised their minimum wage levels, with the average increase being 14.2%.
According to official figures, in the first half of 2014, the average wage of employees in Guangdong increased by 5.8%. This compares with average national growth across China of 10.2%.
According to an HKTDC survey, carried out in the third quarter of 2014, 67% of responding Hong Kong companies experienced a rise in labour costs on the mainland compared to the previous quarter. Of those respondents who experienced higher labour costs, 29.9% said the increase was more than 10%, while 49.2% said the increase ranged between 5% and 10%.
China’s food prices moderating
With the majority of Hong Kong manufacturers operating on the mainland - especially in the Pearl River Delta (PRD) - obliged to provide dormitory accommodation and meals to migrant workers, higher food prices inevitably have an impact on overall operating costs. China’s average increase in food prices fell from 4.1% in May 2014 to 3% in August. In the first eight months of 2014, the consumer price index (CPI) increased by 2.2%, with food prices rising 3.4% on average.
Mainland gasoline prices facing more frequent adjustment
The mainland adjusted its mechanism for determining the retail prices of gasoline and diesel in April 2013. As a result, retail prices have been adjusted with increased frequency and have stayed more in line with world oil price movements. Since Sep 2013, the retail prices of gasoline and diesel in China have been adjusted 18 times. The retail price of gasoline in Guangdong, for instance, went up by 7.3% in June 2014, following a drop in November 2013. This was then followed by a 7% drop in mid-Sep 2014.
Metal prices increase, but cost of other commodities reduced
The average price of metals has generally been on an upward trend since March 2014. According to The Economist Metal Price Index, the general price level of metals dropped slightly in early September 2014, although the cost was still 9% higher compared to the low recorded in March 2014.
The prices of different metal types have exhibited individual variations. While aluminium alloy was up by about 18% in mid-September 2014, compared to early February 2014, copper prices also edged up by about 7% in mid-September 2014 compared to mid-March. The price of polypropylene (PP) in mid-September 2014 was about 2% higher than in mid-March, while crude oil prices dropped by about 16% in mid-September 2014 compared to mid-June.
Source: London Metal Exchange, China Plastic Information Web, Pacific Exchange Rate Services of the University of British Columbia
While the general metal price level has moved up in recent months, the price level of agricultural commodities (such as wheat, corn and soya beans,) have shown a downward trend over the last few months. The average price of cotton in August 2014 dropped by about 24% compared to March 2014. Pulp prices, however, have continued to rise. The average price of pulp in August 2014 was about 9% higher than a year ago.
Source: IMF, Royal Bank of Canada
The Rmb exchange rate returns to upwards trend
Rmb appreciation has long been a major challenge for those Hong Kong manufacturers operating on the mainland. From February to May 2014, the RMB depreciated against the US dollar by about 3%. As of the start of June 2014, however, the RMB was again on an upward trend. By mid-September 2014, the Rmb had appreciated by about 1.8% against the US dollar when compared early June. Although a depreciating Rmb may come as a relief to the majority of Hong Kong manufacturers operating on the mainland, volatile fluctuations of the Rmb exchange rate may pose a decided threat.