The Chinese mainland production costs: March 2014 update
26 March 2014
Labour remains in short supply
The problem of finding enough suitable workers remains an issue for most manufacturers on the Chinese mainland, particularly in the period following Chinese New Year. According to official estimates for Guangdong Province, labour shortages have reached 800,000 to one million workers after the Chinese New Year holiday. The situation has improved recently, with the estimated shortage narrowing to between 600,000 to 800,000 workers towards the end of February 2014. Different sectors still face various levels of difficulty in recruiting suitable workers, especially small- to medium-sized enterprises operating in labour-intensive industries such as garments and toys. Shenzhen and Dongguan are the two cities in Guangdong facing the most serious labour shortfalls.
According to an HKTDC survey conducted in the first quarter of 2014, half of the respondents said they experienced a post-Chinese New Year labour shortage on the mainland. Of those respondents, 19% indicated that the situation was “much more severe” than last year, and 37% considered the situation was “more severe”.
Labour costs continue to rise but at a slightly slower pace
In 2013, 26 provinces/regions across China raised their minimum wage levels by an average of 18%, slightly slower than the 20.2% average in 2012. Shenzhen was the first city in Guangdong to raise its minimum wage in 2014; since February, the minimum monthly wage in Shenzhen has been increased by 13% to Rmb1,808.
According to official figures, in the first nine months of 2013, the actual average wages of staff and workers in Guangdong increased by 11.6%, while the average growth across China was up 10.8%.
An HKTDC survey carried out in the first quarter of 2014 found that 71% 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, 28.2% said the increase was more than 10%, while 50.7% said the increase ranged from 5% to 10%. Compared to the first quarter of 2013, the rates of increase appear to be moderating, but the general wage level still shows an upward trend.
|Distribution of labour cost increases on the Chinese mainland|
among Hong Kong companies
|5% - 10%||51.3%||50.7%|
|Less than 5%||15.4%||21.1%|
|* Rate of increase compared to three months ago|
Source: HKTDC Survey
China’s CPI appears to be moderating
China’s inflation remained relatively stable in 2013 with the Consumer Price Index (CPI) increasing by 2.6%. Food prices, however, have been increasing at a faster rate, rising by an average of 4.7% in 2013. With the majority of Hong Kong manufacturers operating on the mainland, especially in the Pearl River Delta (PRD), being obliged to provide dormitory accommodation as well as meals to migrant workers, higher food prices obviously would have an impact on overall operating costs. In the first two months of 2014, CPI increased by 2.2% and food prices rose 3.2%.
Mainland gasoline prices moving up in recent months
The mainland adjusted its mechanism for determining the retail prices of gasoline and diesel in April 2013 and as a result retail prices have been adjusted more frequently in line with world oil price movements. Over the last 12 months, China’s retail prices of gasoline and diesel have been adjusted 18 times. The retail price of gasoline in Guangdong, for instance, is now 5% higher than it was in November 2013. These price increases will inevitably act to push up transportation costs.
Metal prices decline slightly but other commodities are edging up
The average price of metals has shown downward a trend since February 2013 and reached a trough around July 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 from the low recorded in July 2013, fluctuating narrowly in the ensuing months before dropping again on entering March 2014. By mid-March 2014, the general metal price index fell by about 7% from the recent peak at the end of 2013.
Prices of different metal types may have different performances. While aluminium alloy was up by about 5% by mid-March 2014 compared to early February 2014, copper prices have dropped markedly in recent months. The price of polypropylene (PP) in mid-March 2014 declined by about 4% compared to the end of 2013, but was still about 8% higher than the level recorded towards the end of April 2013.
|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 edged down in recent months, the price levels of agricultural commodities, such as wheat, corn or soya beans, have shown an upward trend in the last two to three months. The average price of cotton started to move up as of November 2013, and in February 2014 was about 10% higher than its November 2013 level. Pulp prices have also been rising since September 2012, and in February 2014 the average price was up by about 13% year-on-year.
Source: IMF, Royal Bank of Canada
The Rmb exchange rate may have more fluctuations
Rmb appreciation has long been a major challenge for Hong Kong manufacturers operating on the mainland. By the end of January 2014, the Rmb had appreciated by 2.6% against the US dollar from a year earlier, before starting to fall on entering February. By 20 March 2014, the Rmb had depreciated by about 2.7% against the greenback compared to the end of January. Although a depreciating Rmb may be a relief to the majority of Hong Kong manufacturers operating on the mainland, volatile fluctuations of the Rmb exchange rate may pose another threat.
China’s export prices show some improvement
China’s export price index showed some improvement in the last quarter of 2013, posting positive growth in September, October and December. The US import price index of goods with China origin has remained in decline since October 2012, but the rate of decline has been narrowing in recent months.