An update on production costs on the Chinese mainland

Labour costs continue to rise

The challenge of finding enough suitable workers continues to be an issue for many manufacturers on the Chinese mainland. This problem is one that has consistently forced up average wages. In 2012, 25 provinces/regions across China raised their minimum wage levels by an average of 20.2%. In the first half of 2013, 17 provinces/ regions raised their minimum wage levels, this time by an average of 17.6%. In Guangdong province, the minimum wage level increased by an average of 19.1% as of 1 May 2013.

According to official figures, in the first half of 2013, the average wage of staff and workers in Guangdong increased by 11.5%, while the average growth across China was only 10.8%.

According to an HKTDC survey in the third quarter of 2013, 62% of responding Hong Kong companies experienced a rise in labour costs on the mainland when compared to the previous quarter. Of those respondents who experienced higher labour costs on the mainland, 27.4% said the increase was more than 10% and 53.2% said the increase was between 5% to 10%. Compared to the third quarter of 2012, the rates of increase appear to be moderating, but the general wage level still shows an upward trend.

As of July 2013, Guangdong implemented new regulations requiring businesses to contribute to the labour union fund. This levy, equal to 2% of any enterprise’s total monthly wage bill, is now collected by the relevant local tax authority. This will directly raise the labour cost of manufacturers in the PRD region and eat into already thin profit margins.

China’s food prices outpaced CPI

China’s inflation remained relatively stable in 2013 with the Consumer Price Index (CPI) increasing by just 2.5% in the first eight months of the year. Food prices, however, have been increasing at a faster rate. In the first eight months of 2013, food prices increased by an average of 4.2%. With most Hong Kong manufacturers operating on the mainland, especially in the PRD, obliged to provide dormitories as well as meals to migrant workers, higher food prices would obviously have an impact on overall operating costs.

Mainland gasoline and diesel prices facing more frequent review

The mainland adjusted its mechanism for determining the retail prices of gasoline and diesel in April 2013. As a result, the retail prices of gasoline and diesel will now be adjusted more frequently in line with the world's oil price movements. Following the recent global rise in oil prices, China followed suit and raised the retail price of gasoline and diesel. The retail price of gasoline in Guangdong, for instance, is now 7.3% higher than it was in July 2013. These increases in gasoline and diesel prices will inevitably act to push up transportation costs.

Metal prices edged up in the last two months

The average price of metals has shown downward a trend since February 2013. According to the Economist Metal Price Index, by early July 2013, the general price level of metals had declined by about 18.7% compared to early February 2013. The general metal price level, however, has edged up somewhat since July 2013. By early September 2013, the general metal price index had increased by about 5% over the previous two months. Over the last six months, the price of aluminium alloy has been fluctuating within the US$1,750 - 1,800 per tonne range, while the price of copper has varied across the US$6,500 - 7,500 per tonne range.

Oil prices started to move up again around mid-April 2013. Oil prices in early-September 2013 were about 21% higher than their lowpoint in mid-April 2013. Prices of downstream products, such as plastics, have also risen since early-May 2013. The price of polypropylene (PP) in mid-September 2013, for example, has increased by about 9% compared to early-May 2013.

The price of cotton started to move up as of November 2012. The average price of cotton in August 2013 was about 14.6% higher than its November 2012 level. The average price of pulp has also started to rise since September 2012. The average price of pulp in July 2013 was up by 13.6% when compared to its level in September 2012.

Source: IMF, Royal Bank of Canada

The Rmb continues to appreciate

Rmb appreciation has long been a major challenge for Hong Kong manufacturers operating on the mainland. Since June 2010, China has continued with its reform of the Rmb exchange rate mechanism and has allowed greater flexibility in the movement of its exchange rate. Since the end of July 2012, the exchange rate of the Rmb against the US dollar has generally shown an upward trend. By mid-September 2013, the Rmb had appreciated by about 1.8% compared to its level at the end of December 2012 (or by 3.2% compared to a year ago).

China’s export prices declining

The growth of China’s export price index continued to slow down in 2012 and has shown a continuous decline since February 2013, partly reflecting the lower cost of some material inputs. The US import price index of goods with China has remained in decline since October 2012, reducing exporters' profit margins.