China Sourcing Quarterly

Transcription

1 Fung Business intelligence centre China Sourcing Quarterly July 2014 Issue 20 Major Price Indicators CPI growth edged down in June Ex-factory prices of industrial products continue to drop Raw Material Prices Cotton price indices have fallen markedly since April Price index of viscose staple fiber has trended slightly downward since late June Price index of PP rose in the past three months Other Costs of Production Crude prices continue to be volatile Migrant workers' income gained 10.1% yoy as of end-ch Chinese yuan has appreciated slightly against the US dollar Highlights Minimum wage levels in some provinces were adjusted upward in the past few months Price index for US imports from China stayed high in June Export growth has improved in recent months

2 IN THIS ISSUE: Part One: Major Price Indicators 3 Part Two: Raw Material Prices 5 Part Three: Other Costs of Production (Energy, Transportation 14 and Labour) and Exchange Rate Part Four: Highlights 19 Helen Chin, Timothy Cheung, Ronald Mak Tel: (852) helenchin@fung1937.com timothycheung@fung1937.com ronaldmakkk@fung1937.com The Fung Business Intelligence Centre 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong Phone: (852) Fax: (852) lfdc@lf1937.com 2

3 July 2014 Issue 20 Part One: Major Price Indicators 1. China s CPI growth edged down in June The yoy growth rate of China s consumer price index (CPI) 1 has been fluctuating in recent months. The CPI growth dropped from 2.4% in ch to the recent low of 1.8% in April, but then rebounded to a four-month high of 2.5% in, before edging down to 2.3% yoy in June. The fluctuation in the CPI growth was due largely to changes in food prices. The growth of the food component in the CPI fluctuated within the range of 2.3% yoy to 4.7% yoy throughout ch to June. Meanwhile, the growth of the nonfood component in the CPI edged up from 1.5% yoy in ch to 1.6% yoy in April, and further to 1.7% yoy in and in June (see exhibits 1 and 2). On a month-on-month (mom) basis, China s CPI went down by 0.5% mom and 0.3% mom in ch and April respectively. Afterwards, in, the CPI rose by 0.1% mom in, as the downtrend of the food component in the CPI reversed. Then, in June, the CPI edged down by 0.1% mom. Looking ahead, we expect the CPI growth to fluctuate between 1.8% yoy and 2.8% yoy in 3Q14, largely affected by food price variations. Our view is that the downside risk on CPI growth derives mainly from the negative impact of the government s frugality campaign on consumption. Exhibit 1: China s CPI growth, July 2012 to June 2014 Jul % 4.0 Aug 2.6% 3.1% Oct 3.2% 3.0% Dec 2.5% Jan % Feb 2.0% 2.4% Apr 1.8% 2.5% Jun 2.3% yoy growth (%) Jul 12 Aug Oct Dec Jan 13 Feb Apr Jun Jul Aug Oct Dec Jan 14 Feb Apr Jun Source: National Bureau of Statistics, PRC 1 The CPI, compiled by the National Bureau of Statistics of China, measures the price of a basket of goods and services purchased by a typical household. 3

4 China Sourcing Quarterly Exhibit 2: China s CPI growth by selected commodity, January to June 2014 yoy growth (%) Jan 14 Feb Apr Jun Clothing Household services, maintenance and renovation Recreational, educational products & services Source: National Bureau of Statistics, PRC 2. China s ex-factory prices of industrial products have continued to drop The yoy growth rate for China s producer price index of industrial products (PPI) 2 rose all the way from minus 2.3% in ch to minus 1.1% in June (see exhibits 3 & 4). On a mom basis, the PPI fell by 0.3%, 0.2%, 0.1% and 0.2% in ch, April, and June respectively, indicating that ex-factory prices of industrial products have continued to drop. Looking ahead, we expect China s PPI to stay low in the near term, unless there is a strong rebound in the domestic prices of production inputs. Exhibit 3: China s PPI growth, July 2012 to June 2014 Jul % Aug -1.6% -1.3% Oct -1.5% -1.4% Dec -1.4% Jan % Feb -2.0% -2.3% Apr -2.0% -1.4% Jun -1.1% yoy growth (%) Jul 12 Aug Oct Dec Jan 13 Feb Apr Jun Jul Aug Oct Dec Jan 14 Feb Apr Jun Source: National Bureau of Statistics, PRC Exhibit 4: China s PPI growth by selected industry, January to June 2014 yoy growth (%) Jan 14 Feb Apr June Textile industry Textile and clothing Timber processing & wood, bamboo, cane, palm fiber and straw products Source: National Bureau of Statistics, PRC 2 The PPI, compiled by the National Bureau of Statistics of China, measures the prices of industrial products when they are sold for the first time after production. 4

5 July 2014 Issue 20 Part Two: Raw Material Prices 1. Domestic prices of production inputs inched down in June After registering minus 2.5% in ch, the yoy growth rate of the purchaser price index of industrial products rebounded all the way to minus 1.5% in June (see exhibits 5 & 6). The mom growth rates of the purchaser price index were minus 0.5%, minus 0.4%, minus 0.1% and minus 0.1% in ch, April, and June respectively, indicating a slight drop in the domestic prices of production inputs over recent months. The input prices sub-index of China s manufacturing PMI, a leading indicator of upstream prices, rose all the way from 44.4 in ch to 50.1 in June, close to the critical 50 mark. The latest index reading suggests that the domestic prices of production inputs are likely to stabilize in the coming months. Exhibit 5: Growth of China s purchaser price index of industrial products, July 2012 to June 2014 Jul % Aug -1.6% -1.6% Oct -1.6% -1.5% Dec -1.4% Jan % Feb -2.1% -2.5% Apr -2.3% -1.8% Jun -1.5% yoy growth (%) Jul 12 Aug Oct Dec Jan 13 Feb Apr Jun Jul Aug Oct Dec Jan 14 Feb Apr Jun Source: National Bureau of Statistics, PRC Exhibit 6: China s purchaser price index of industrial products by selected commodity, January to June 2014 yoy growth (%) Jan 14 Feb Apr Jun Fuel & power Non-ferrous metals Raw materials for the chemical industry Timber and paper pulp Textile raw materials Source: National Bureau of Statistics, PRC 5

6 China Sourcing Quarterly (i) Purchaser price index of fuel & power The growth rate of the purchaser price index of fuel and power has trended upward over recent months, increasing all the way from minus 3.1% yoy in ch to minus 1.3% yoy in June (see exhibit 6). (ii) Purchaser price index of non-ferrous metals After falling to the recent low of minus 7.4% yoy in ch, the growth rate of the purchaser price index of non-ferrous metals rose all the way to minus 3.6% yoy in June (see exhibit 6). (iii) Purchaser price index of raw materials for the chemical industry The purchaser price index of raw materials for the chemical industry posted a slighter drop in recent months, down by 2.1% yoy, 1.8% yoy and 1.2% yoy in April, and June respectively (see exhibit 6). (iv) Purchaser price index of timber and paper pulp The growth rate of the purchaser price index of timber and paper pulp fluctuated within the range of minus 0.5% yoy to minus 0.8% yoy throughout ch to June (see exhibit 6). (v) Purchaser price index of textile raw materials The purchaser price index of textile raw materials has continued to show negative yoy growth, declining by 0.9% yoy in April, 1.0% yoy in and 1.1% yoy in June (see exhibit 6). 2. China s cotton price indices have dropped markedly since April The price indices 3 of cotton have dropped markedly since April. The government ended the stockpiling scheme on 31 ch as scheduled and reduced the selling price of state stockpiles of cotton to 17,250 yuan per tonne on 1 April (from 18,000 yuan per tonne previously). The CC Index 3128B, for example, fell from 19,403 on 1 April to 17,518 on 30 April (see exhibit 7). Since early, the price indices of cotton have dropped at a slower pace (as of 30 June). The CC Index 3128B edged down from 17,465 on 4 to 17,332 on 30 June. Looking ahead, the domestic cotton prices are likely to stay low, as the Chinese government is under pressure to clear the large amount of state stockpiles of cotton. Another reason is that the government will no longer launch the stockpiling scheme in tember this year. According to the government announcement on 19 January 2014, a target price subsidy scheme for cotton producers in Xinjiang, China s largest cotton-producing province, will be introduced later this year (Author s remark: the start date has not been disclosed as of the time of writing). Under the subsidy scheme, if the market price drops below the target price, the government will offer subsidies to cotton producers in Xinjiang. On 5 April, the government announced to set the target at 19,800 yuan per tonne. 4 We believe that the target price subsidy scheme will continue to encourage cotton farmers in Xinjiang to produce cotton, which will help stabilize the domestic supply of cotton. 3 The indices, compiled by the China Cotton Association, track cotton prices quoted from two hundred textile enterprises. 6

7 July 2014 Issue 20 Exhibit 7: China s cotton price indices, October 2013 to June Oct Dec 8 Jan 14 8 Feb 8 8 Apr 8 8 Jun CC Index 1129B CC Index 1228B CC Index 2129B CC Index 2227B CC Index 3128B CC Index 4128B * Since 8 October 2013, the China Cotton Association has officially published the price indices of cotton based on a new classification for cotton. The price indices based on the previous classification system for cotton (i.e. CC Index 229, CC Index 328 and CC Index 527) were discontinued on 8 October Source: China Cotton Association 3. The Nanjing Wool ket Composite Index has rebounded since April The Nanjing Wool ket Composite Index 5, one of the major wool price indices in China, dropped from yuan per kg at end-february to yuan per kg at end-ch, but then rebounded to yuan per kg at end-april and further to yuan per kg at end- (see exhibit 8). The rise in the wool price index was driven mainly by the increase in prices of wool imported from Australia, one of the major wool exporters in the world. According to the media reports, the domestic demand for wool has been improving lately. Wool prices are therefore likely to stay firm in near term. Exhibit 8: Nanjing Wool ket Composite Index, June 2013 to 2014 Jun 13 Jul Aug Oct Dec Jan 14 Feb Apr Month-end index (yuan/kg) Source: The Nanjing Wool ket 4. Price indices of polyester have rebounded strongly since late The price indices of polyester 6 rose markedly between late and late June, due largely to the pick-up in prices of purified terephthalic acid (PTA), a major raw material of polyester. The price index of polyester POY, for example, climbed from 8,900 on 20 to 10,600 on 30 June (see exhibit 9) The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). 7

8 China Sourcing Quarterly Looking ahead, the recent uptrend of polyester is unlikely to be sustained in the coming months, in view of the weak downstream demand and the expected increase in the supply of PTA. Exhibit 9: Price indices of polyester, July 2013 to June Jul 13 1 Aug 1 1 Oct 1 1 Dec 1 Jan 14 1 Feb 1 1 Apr 1 Polyester POY Polyester DTY Polyester FDY 1 Jun Source: China Chemical & Fiber Economic Information Network 5. Price index of acrylic staple fiber has stayed stable in recent months The price index of acrylic staple fiber 7 has stabilized at 17,900 in recent months (as of 30 June) (see exhibit 10). It is noteworthy that the prices of acrylonitrile, the major raw material of acrylic staple fiber, trended upward in mid to late, and have then stayed high since late. The rise in upstream prices could, in turn, put upward pressure on the prices of acrylic staple fiber. Exhibit 10: Price indices of acrylic, July 2013 to June Jul 13 1 Aug 1 1 Oct 1 1 Dec 1 Jan 14 1 Feb 1 1 Apr 1 1 Jun Acrylic staple fiber Acrylic top Source: China Chemical & Fiber Economic Information Network 7 The index is compiled by the China Chemical & Fiber Economic Information Network (CCFEI). 8

9 July 2014 Issue Price indices of various types of nylon have stayed relatively stable since early April The price indices of nylon 8 trended downward until early April. Since then, prices of nylon POY, nylon FDY and nylon DTY have stayed relatively stable. For example, the price index of nylon POY was 20,900 on 30 June, compared to 20,800 on 4 April. In contrast, the price index of nylon-chip has trended upward since early April (see exhibit 11). According to the local media, the domestic demand for nylon has remained sluggish, as downstream manufacturers have been cautious about placing orders for nylon lately. Nevertheless, given the latest rise in prices of caprolactam, one of the major raw materials of nylon, we expect nylon prices to stay firm in the near term. Exhibit 11: Price indices of nylon, July 2013 to June Jul 13 1 Aug 1 1 Oct 1 1 Dec 1 Jan 14 1 Feb 1 1 Apr 1 1 Jun Nylon POY Nylon FDY Nylon DTY Nylon chip Source: China Chemical & Fiber Economic Information Network 7. Price index of viscose staple fiber has trended slightly downward since late June The price index of viscose staple fiber stayed flat throughout late April to mid-june. Nevertheless, since late June, the price index has trended slightly downward, falling to 11,970 on 30 June from 12,030 on 20 June (see exhibit 12). As viscose staple fiber is commonly used as a substitute for cotton, the price movement of viscose staple fiber has been significantly affected by cotton prices. With the domestic cotton prices staying low, the prices of viscose staple fiber are unlikely to trend upward in coming future. 8 The index is compiled by the China Chemical & Fiber Economic Information Network (CCFEI). 9

10 China Sourcing Quarterly Exhibit 12: Price indices of viscose, July 2013 to June Jul 13 1 Aug 1 1 Oct 1 1 Dec 1 Jan 14 1 Feb 1 1 Apr 1 1 Jun Viscose filament Viscose staple fiber Source: China Chemical & Fiber Economic Information Network 8. Price index of silk has trended downward in recent months The price index of silk has trended downward in recent months, falling all the way to at end-june (see exhibit 13). The drop in silk prices was mainly attributable to the sluggish foreign demand for silk. Going forward, we expect silk prices to stay soft in the near term, with foreign demand for silk remaining weak. Exhibit 13: Price index of silk, July 2013 to June End-Jul 13 End-Aug End- End-Oct End- End-Dec End-Jan 14 End-Feb End- End-Apr End- End-Jun Source: Ministry of Commerce 9. Prices of various types of grey goose down have continued to trend downward in the past months Due to sluggish downstream demand, prices of grey goose down have plunged by 40% as of end-june as compared to end-january (see exhibit 14). The price of 70% grey goose down, for instance, declined sharply from yuan per kilogram at end-january to yuan per kilogram at end-june. 10

11 July 2014 Issue 20 Looking ahead, down prices are likely to hover at low levels in the near future, as the rising temperature continues to dampen downstream demand. 800 Exhibit 14: Prices of grey goose down, July 2013 to June End-Jul 13 End-Aug End- End-Oct End- End-Dec End-Jan 14 End-Feb End- End-Apr End- yuan per kg End-Jun Source: cn-down.com 90% 80% 70% 50% 10. Price index of ABS resin edged up in June The price index of ABS resin 9 has fluctuated within a narrow range in recent months. The price index edged down by 0.2% mom in ch, and then rose by 0.8% mom in April. Afterwards, in, it inched down by 0.2% mom again, only to rise again by 0.3% mom in June (see exhibit 15). Going forward, the prices of ABS resin are likely to stay soft in the near term, given the weak downstream demand for ABS resin. Exhibit 15: Price index of ABS resin, July 2013 to June 2014 Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun ABS resin (mom growth %) ABS resin (yoy growth %) Source: China Logistics Information Center 11. Price index of PP rose in the past three months The price index of polypropylene (PP) 10 continued to drop in ch, but then rebounded in the following months. The price index of PP rose by 1.2% mom, 1.4% mom and 1.2% mom in April, and June respectively (see exhibit 16). According to the local media, the supply of PP was tight in April and, as many PP plants were shut down for regular maintenance. Accordingly, PP prices in China rose during the period. 9 The index is compiled by the China Logistics Information Center (CLIC). The CLIC is a sub-division of the China Federation of Logistics & Purchasing (CFLP), which is the first logistics and purchasing industry association approved by the State Council. One of the CFLP s missions is to push forward the circulation of factors of production in China. 10 The index is compiled by the China Logistics Information Center (CLIC). 11

12 China Sourcing Quarterly Going forward, we do not expect the uptrend of PP prices to continue in the near term, in view of the sluggish downstream demand. Exhibit 16: Price index of PP, July 2013 to June 2014 Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun PP (mom growth %) PP (yoy growth %) Source: China Logistics Information Center 12. Price index of natural rubber edged up in June After falling by 4.9% mom in ch, the price index of natural rubber 11 slightly rebounded by 1.1% mom in the following month. However, the price index of natural rubber reverted to downward trend and declined by 4.3% mom in (see exhibit 17). The drop in the price index could be associated with the marked fall in the global prices of natural rubber, as Thailand s government announced to sell its state reserves of natural rubber in early. Then, in June, the price index edged up again by 0.2% mom. Looking ahead, in view of rising stockpiles of auto in the domestic market and the abundant supply of natural rubber, we expect natural rubber prices to stay soft in the coming months. Exhibit 17: Price index of natural rubber, July 2013 to June 2014 Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun Natural rubber (mom growth %) Natural rubber (yoy growth %) Source: China Logistics Information Center 13. Prices of various types of non-ferrous metals picked up in recent months After falling by 4.1% mom in ch, the price index of non-ferrous metals rose by 1.8% mom, 3.5% mom and 0.3% mom in April, and June respectively (see exhibits 18,19,20,21 &22). 12 The export restrictions imposed by the Indonesian government since early 2014 and the gradual recovery of advanced economies might support the prices of certain types of non-ferrous metals. However, the lingering problem of excessive production capacity for non-ferrous metals in China should remain the primary fundamental factor driving price movements in the markets. Against this backdrop, we expect the prices of non-ferrous metals to stabilize or trend slightly downward in the near future. 11 The index is compiled by the China Logistics Information Center (CLIC). 12 The indices are compiled by the China Logistics Information Center (CLIC). 12

13 July 2014 Issue 20 Exhibit 18: Price index of non-ferrous metals, July 2013 to June 2014 Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun Non-ferrous metals (mom growth %) Non-ferrous metals (yoy growth %) Source: China Logistics Information Center Exhibit 19: Price index of copper, July 2013 to June 2014 Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun Copper (mom growth %) Copper (yoy growth %) Source: China Logistics Information Center Exhibit 20: Price index of aluminum, July 2013 to June 2014 Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun Aluminum (mom growth %) Aluminum (yoy growth %) Source: China Logistics Information Center Exhibit 21: Price index of lead, July 2013 to June 2014 Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun Lead (mom growth %) Lead (yoy growth %) Source: China Logistics Information Center Exhibit 22: Price index of zinc, July 2013 to June 2014 Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun Zinc (mom growth %) Zinc (yoy growth %) Source: China Logistics Information Center 13

14 China Sourcing Quarterly Part Three: Other Costs of Production (Energy, Transportation and Labour) and Exchange Rate 1. China s crude prices have been volatile In line with the movement of global crude prices, China s crude prices have been volatile in recent months. 13 The Daqing 14 crude price, for example, fluctuated within the range of US$ per barrel throughout late ch to late June (see exhibit 23). According to the Monthly Oil ket Report published by the OPEC in June, the global oil demand is predicted to increase by 1.14 million barrels a day in The report also projects that the non-opec oil production will rise by 1.44 million barrels a day in Meanwhile, it is worth noting that, on 11 June 2014, the Organization of the Petroleum Exporting Countries (OPEC), whose members supply about 40% of the world s crude oil, announced to maintain its current production level of 30.0 million barrels a day. We therefore expect the growth of global oil output to outpace the growth of global oil demand in the near term, which will put downward pressure on crude prices. That being said, member countries of the OPEC do not always comply with their production targets; and the ongoing crisis in Iraq could disrupt crude supplies from the country. Therefore, upside risk on oil prices exists Exhibit 23: China s crude prices, June 2013 to July 2014 US$ per barrel Jul 13 Source: ifeng.com 1 Aug 1 1 Oct 1 2. Wholesale price index of refined oil products continued to fluctuate in the past few months 1 Dec Daqing crude 1 Jan 14 1 Feb 1 Shengli crude 1 Apr 1 1 Jun The wholesale price index of refined oil products continued to fluctuate in the past few months. 16 After edging up by 0.3% mom in ch, the wholesale price index of refined oil products fell by 2.2% mom in April. The index rebounded by 1.5% mom in, only to fall again by 1.1% mom in June (see exhibit 24) From the year 2000 onwards, China s crude prices were determined with reference to global crude prices. 14 Daqing Field is the largest oil field in China pdf 16 The index is compiled by the China Logistics Information Center (CLIC). 17 Details of the policy on the upgrade of fuel standards released by the National Development and Reform Commission are available at Each phase of the upgrade of fuel standards would normally result in a one-off increase in the maximum retail prices of gasoline or diesel. 14

15 July 2014 Issue 20 The fluctuation in the price index was mainly driven by the government moves to adjust the refined oil prices in recent months, in our view. The Chinese government adjusted the maximum wholesale prices of gasoline and diesel on 27 ch, 25 April, 10, 24 and 24 June. Looking ahead, the future movement of the wholesale prices of refined oil products will depend mainly on the movement of global crude prices. According to the pricing mechanism of refined oil, the fuel prices will be adjusted every 10 working days, based on the change in a basket of global crude prices. If the computed amount of fuel price change is less than 50 yuan per tonne, no adjustment will be made, and the amount will be accumulated for the next round of adjustment. Exhibit 24: China s wholesale price indices of refined oil products, July 2013 to June 2014 mom growth (%) Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun Refined oil products Diesel Gasoline yoy growth (%) Jul 13 Aug Oct Dec Jan 14 Feb Apr Jun -8.0 Refined oil products Diesel Gasoline Source: China Logistics Information Center 3. The benchmark Qinhuangdao coal prices have stayed stable since late ch Since late ch, the benchmark Qinhuangdao coal prices have stayed stable (as of 30 June). For instance, the price of coal with calorific value of 5,800 kcal/kg was 555 yuan per tonne on 30 June, the same as on 24 ch (see exhibit 25). Looking ahead, we expect the domestic coal prices to stay at relatively low level in the near term, due to the weak demand and high stockpiles of coal. 15

16 China Sourcing Quarterly Exhibit 25: Qinhuangdao coal prices, July 2013 to June 2014 yuan per tonne Jul 13 1 Aug 1 1 Oct 1 1 Dec 1 Jan 14 1 Feb 1 1 Apr 1 1 Jun Coal with calorific value of 5,800 kcal/kg Coal with calorific value of 5,500 kcal/kg Coal with calorific value of 5,000 kcal/kg Coal with calorific value of 4,500 kcal/kg Source: Cqcoal.com 4. The China Containerized Freight Index has trended slightly downward since early June Buoyed by the solid demand for container transport in major advanced economies, the China Containerized Freight Index (CCFI) was on a rising trend between early April and early June (see exhibit 26). The index climbed all the way from 1, on 4 April to 1, on 6 June. However, due largely to an increase in new capacity, the index has trended slightly downward since then, falling to 1, on 11 July. Looking ahead, we do not expect container freight rates to drop much in the near term as the economic recovery in the US and Europe is gaining ground. Exhibit 26: China Containerized Freight Index, July 2013 to July ,200 1,150 1,100 1,050 1, Jul Aug Oct Dec 12 Jan Feb Apr Jun Source: Shanghai Shipping Exchange 16

17 July 2014 Issue Labour costs (i) Wages in urban private units grew 13.8% last year The average annual wage of employees in urban private units grew by 13.8% yoy to 32,706 yuan in Amongst regions in the country, the average annual wage of employees in urban private units in the eastern region reached 35,847 yuan in 2013, significantly higher than those in the central region (27,149 yuan), the western region (30,454 yuan) and the northeastern region (28,737 yuan). All of the four regions witnessed double-digit growth ranging from 13.5% to 16.0% (see exhibit 27). Exhibit 27: Average annual wages of employees in urban private units, 2012 to Average annual wage (RMB) Average annual wage (RMB) yoy growth (%) China (overall) 28,752 32, Of which: Manufacturing sector 28,215 32, Eastern region 31,579 35, Central region 23,761 27, Western region 26,252 30, Northeastern region 25,162 28, Source: National Bureau of Statistics, PRC (ii) Wages in urban non-private units rose 10.1% last year The average annual wage of employees in urban non-private units rose by 10.1% yoy to reach 51,474 yuan in Amongst various regions, the western region saw the strongest growth of 11.9% yoy, while the growth in the central region was the slowest (6.6% yoy ) (see exhibit 28). Exhibit 28: Average annual wages of employees in urban non-private units, 2012 to Average annual wage (RMB) Average annual wage (RMB) yoy growth (%) China (overall) 46,769 51, Of which: Manufacturing sector 41,650 46, Eastern region 53,444 58, Central region 40,110 42, Western region 41,959 46, Northeastern region 39,245 43, Source: National Bureau of Statistics, PRC

18 China Sourcing Quarterly 6. Migrant workers income gained 10.1% yoy as of end-ch According to the National Bureau of Statistics of China, the average monthly income of migrant workers in China rose to 2,681 yuan as of end-ch, representing a growth of 10.1% yoy. The growth rate was slower than the growth of 13.9% yoy recorded as of end Still, the latest figure indicates that the wage growth of migrant workers remains robust. 7. The Chinese yuan has appreciated slightly against the US dollar After depreciating against the US dollar in the first five months of 2014, the daily fixing rate (also known as the central parity rate) of the Chinese yuan fluctuated within a narrow range in the following weeks. The daily fixing rate has stayed within since early June (as of 9 July). 20 The USD-CNY spot exchange rate has, on the other hand, risen slightly since early June. The spot exchange rate went up to on 8 July, compared to on 30. The daily fixing rate of the Chinese yuan against the Euro appreciated all the way from on 7 to its recent peak of on 11 June (see exhibit 29). Afterwards, the daily fixing rate fell to on 1 July, before rebounding to on 9 July. According to the Bank for International Settlements, the real effective exchange rate (REER) of the yuan dropped further to in, down from in April. 21 Overall, the Chinese yuan depreciated 4.0% in real terms against its trading partners in the first five months of 2014, due largely to the depreciation of its nominal exchange rate (see exhibit 30). Looking forward, the Chinese yuan s exchange rate against the US dollar is likely to stay low in the near term, with hot money outflows expected. Nonetheless, we still maintain that the yuan will appreciate, albeit at a slow and gradual pace, against the US dollar in the medium to long term. Exhibit 29: USD-CNY and EUR-CNY daily fixing rates, July 2013 to July Jul Aug Oct Dec 10 Jan Feb Apr Jun USD-CNY EUR-CNY Source: State Administration of Foreign Exchange 20 The daily fixing rate (also known as the central parity rate) of the Chinese yuan against the US dollar is released by the China Foreign Exchange Trade System (CFETS), a sub-institution of the People's Bank of China, at 9:15 am on each working day. 21 The Bank for International Settlements (BIS) calculates effective exchange rate (EER) indices for a total of 61 economies (including individual Eurozone countries and, separately, the Eurozone as an entity). Nominal EERs are calculated as geometric weighted averages of bilateral exchange rates. Real EERs are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices. The weighting pattern is time-varying, and the most recent weights are based on trade in

19 July 2014 Issue 20 Exhibit 30: Real effective exchange rate of the Chinese yuan, June 2013 to Jun 13 Jul Aug Oct Dec Jan 14 Feb Apr Source: Bank for International Settlements Part Four: Highlights 1. The minimum wage levels in some provinces were adjusted upward in the past few months In recent months, the local governments of several provinces, such as Shanxi, Qinghai, Yunnan, etc. announced upward adjustments in minimum wage levels in their jurisdictions. See below for more details. Shanxi province On 1 April 2014, the levels of minimum monthly wage in various regions within Shanxi province were raised to 1,150 yuan, 1,250 yuan, 1,350 yuan and 1,450 yuan, up by 14.2% on average. 22 Qinghai province The levels of minimum monthly wage in various regions within Qinghai province were adjusted upward to 1,250 yuan, 1,260 yuan and 1,270 yuan on Yunnan province Effective on , the levels of minimum monthly wage in various regions within Yunnan province were adjusted upward to 1,070 yuan, 1,270 yuan and 1,420 yuan. 24 Sichuan province With effect from 1 July 2014, the levels of minimum monthly wage in various regions within Sichuan province were raised to 1,100 yuan, 1,250 yuan, and 1,400 yuan, up by 14.5% on average

20 China Sourcing Quarterly Jiangxi province On 1 July 2014, the minimum wage levels in various regions within Jiangxi province were raised to 1,390 yuan, 1,300 yuan, 1,210 yuan and 1,060 yuan, up from the previous levels of 1,230 yuan, 1,150 yuan, 1,070 yuan and 980 yuan respectively. 26 Inner Mongolia autonomous region On 1 July 2014, the local government in Inner Mongolia autonomous region raised the levels of minimum monthly wage in various districts within the region to 1,500 yuan, 1,400 yuan, 1,300 and 1,200 yuan. 27 In accordance with the 12 th Five-year Plan, the minimum wage levels in China are targeted to rise by at least 13% per annum during We therefore expect that the local governments in other provinces, municipalities or autonomous regions to also raise the minimum wage levels in the rest of this year, in a bid to boost household income. 2. Local governments in a few provinces have issued new guidelines on salary rise Over the past few months, local governments in provinces such as Henan, Hubei, Liaoning and Sichuan issued new guidelines on salary rise (see exhibit 31). For instance, according to the announcement issued by the Sichuan provincial government, enterprises with improving performance in the province are recommended to raise the salaries of their workers by around 11%, the pay rise benchmark for Enterprises with good performance are recommended to offer pay rise of at most 18% to their workers in 2014; while enterprises with worsening performance should consider raising the salaries of their workers by at least 4%, the lower limit of the pay rise benchmark. 28 Although these guidelines are not mandatory for employers to follow, they will affect workers expectations of salary rise and are thus regarded as an important reference. Exhibit 31: Guidelines on salary rise issued by local governments, April to June 2014 Province/ municipality/autonomous region Upper limit Benchmark Lower limit Issue date Beijing 16% 12% 4.5% June 2014 Henan - 15% 3.5% 2014 Hubei 16% 10% 4% 2014 Liaoning 17% 12% 5% 2014 Shaanxi 19% 13% 6% June 2014 Sichuan 18% 11% 4% 2014 Xinjiang 18% 15% 5% 2014 Source: Announcements by various local governments abbodjbkhidbmcjgiligg&fileid= &moduleidpage=ljbeahnieldobbodkjgmpmkmjikdnbfk&siteidpage=nmrsw&infochec ked=null

21 July 2014 Issue The Chinese government adjusted the fuel prices four times between April and June In response to fluctuating global crude oil prices between mid-april and late June, the Chinese government adjusted maximum retail prices of gasoline and diesel on 25 April, 10, 24 and 24 June. Overall, maximum retail prices for gasoline and diesel have been raised by between 3.5% and 4.3% after these four adjustments. The rise in fuel prices is set to increase transportation costs, as well as the energy costs of manufacturers who run their own electrical generators. According to the revised pricing mechanism for refined oil adopted since ch 2013, fuel prices are adjusted every 10 working days, based on changes in a basket of global crude oil prices. As the adjustment interval has been shortened to 10 working days from 22 working days and the 4% price change threshold has been removed, we expect the Chinese government to adjust fuel prices more frequently. 4. The price index for US imports from China stayed high in June Compiled by the US Department of Labor, the price index for US imports from China rose to a 13-month high of in and in June, after registering in ch and in April (see exhibit 32). As compared to the same month of the previous year, the index gained 0.4 points in June. Going forward, it is likely for the price index to peak in the short term as the ex-factory prices of Chinese products have continued to drop Exhibit 32: Price index for US imports from China, July 2012 to June Jul 12 Jan 13 Jul Jan 14 Source: US Department of Labor 5. China s export growth has improved in recent months China s export growth improved from minus 6.6% yoy in ch to 0.9% yoy in April, and further accelerated to 7.0% yoy in and 7.2% yoy in June (see exhibits 33, 34 and 35). The strong recovery in export growth in could be highly associated with the lower comparison base in 2013 due to a reduction in fake trade activities. According to the local media, the government has made great efforts to crack down on fake trade activities since

22 China Sourcing Quarterly Overall, in 1H14, China s exports amounted to US$ 1,061.9 billion, up by 0.9% yoy. Over the same period, China s exports to the US, the EU and Japan posted positive growth of 5.1% yoy, 9.4% yoy and 4.1% yoy respectively, showing relatively strong demand from the major developed economies. China s trade surplus increased sharply to US$ 85.9 billion in 2Q14 from US$ 16.7 billion in 1Q14, attributed mainly to a seasonal rise in total export value. Looking ahead, we expect that China s exports will register high single digit growth in coming months, supported by improving demand from the US and the EU. Besides, the recent depreciation of the Chinese yuan as well as the drop in ex-factory prices of industrial products should enhance the competitiveness of Chinese products. Exhibit 33: China s quarterly foreign trade data, 3Q13 to 2Q14 USD billion (yoy growth) Exports Imports Trade Balance FY13 2,210.0 (7.9%) 1,950.3 (7.3%) Q (3.9%) (8.4%) Q (7.5%) (7.2%) Q (-3.4%) (1.6%) Q (4.9%) (1.4%) 85.9 Source: China Customs Exhibit 34: China s monthly foreign trade data, July 2013 to June 2014 USD billion (yoy growth) Exports Imports Trade Balance July (5.1%) (10.9%) 17.8 August (7.2%) (7.0%) 28.5 tember (-0.3%) (7.4%) 15.2 October (5.6%) (7.6%) 31.1 ember (12.7%) (5.3%) 33.8 December (4.3%) (8.3%) 25.6 January (10.6%) (10.0%) 31.9 February (-18.1%) (10.1%) ch (-6.6%) (-11.3%) 7.7 April (0.9%) (0.8%) (7.0%) (-1.6%) 35.9 June (7.2%) (5.5%) 31.6 Source: China Customs 22

23 July 2014 Issue 20 Exhibit 35: Growth rates of exports and imports, July 2012 to June yoy growth (%) Jul 12 Aug Oct Dec Jan 13 Feb Apr Jul Jul Aug Oct Dec Jan 14 Feb Apr Jun Exports Imports Source: China Customs 23

24 China Sourcing Quarterly The Fung Group is a privately held multinational group of companies headquartered in Hong Kong whose core businesses are trading, logistics, distribution and retailing. The Fung Group employs over 45,000 people across 40 economies worldwide, generating total revenue of more than US$22.6 billion in Fung Holdings (1937) Limited, a privately held business entity headquartered in Hong Kong, is the major shareholder of the Fung group of companies. Please visit for more about the Fung Group. The Fung Business Intelligence Centre, through its unique relationships, collects and analyses market data on China's economy, with special reference to sourcing, supply chains, distribution and retail. It also produces reports on sourcing and trading in other Asian countries and has recently expanded its research services on the global retail industry, where unprecedented change is being driven by technological innovation, the advent of multi-sales channels and greater supply chain efficiency. Serving as a knowledge bank for the Fung Group, the Centre also makes its market data and analysis available to businesses, scholars and governments around the world. It is an impartial thought leader on issues shaping the future of manufacturing, distribution, logistics and retailing in China, and retailing globally. It regularly provides advice and consultancy services to internal and external clients. Copyright 2014 The Fung Business Intelligence Centre. All rights reserved. Though the Fung Business Intelligence Centre endeavours to ensure the information provided in this publication is accurate and updated, no legal liability can be attached as to the contents hereof. Reproduction or redistribution of this material without prior written consent of the Fung Business Intelligence Centre is prohibited. 24