LI & FUNG China Sourcing Quarterly

Transcription

1 Li & Fung Research Centre LI & FUNG China Sourcing Quarterly IN THIS ISSUE : Part One: Major Price Indicators Part One : 1 Major Price Indicators Part Two: 3 Raw Material Prices Part Three: 12 Other Costs of Production (Energy, Transportation and Labour) and Exchange Rate Part Four: 17 Highlights October 2012 Issue China s CPI has rebounded in recent months The year-on-year (yoy) growth rate of China s consumer price index (CPI) 1 moderated from 3.0% yoy in May to 2.2% yoy in June and 1.8% yoy in July, but then rose to 2.0% yoy in August. (See exhibits 1 & 2) On a month-on-month (mom) basis, China s CPI has rebounded in recent months. The CPI gained 0.1% mom and 0.6% mom in July and August respectively, after declining throughout April to June. The rise in the CPI in August was driven mainly by the increase in food prices. The CPI of the food component went up by 1.5% mom in August, after falling by 0.9% mom, 0.8% mom, 1.6% mom and 0.1% mom in April, May, June and July respectively. Meanwhile, the CPI of the non-food component gained 0.2% mom in August. Looking ahead, China s consumer prices could go up later this year, in the expectation of the increase in pork prices and commodity prices. Pork prices may continue the upward trend in the near future, as the severe droughts in the US have disrupted agricultural production in recent months and thereby driven up the global prices of soybean and the cost of pig feed. Also noteworthy is that, on 13 September, the US Federal Reserve announced to launch a new round of quantitative easing (also known as QE3). It would purchase additional agency mortgage-backed securities at a pace of US$ 40 billion per month. In our view, the move is likely to fuel speculative demand, further boosting global commodity prices. Exhibit 1: China s CPI growth, Sep Aug 2012 Helen Chin, Timothy Cheung Tel: (852) helenchin@fung1937.com timothycheung@fung1937.com Li & Fung Research Centre 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Hong Kong Tel : (852) Fax : (852) lfdc@fung1937.com Sep % Oct 5.5% Nov 4.2% Dec 4.1% Jan % Feb 3.2% Mar 3.6% Apr 3.4% May 3.0% Jun 2.2% Jul 1.8% Aug 2.0% 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 that a typical household purchases.

2 Li & Fung China Sourcing Quarterly Exhibit 2: China s CPI growth by selected commodity, Mar - Aug 2012 yoy growth (%) Mar Apr May Jun Jul Aug Clothing Household services, maintenance and renovation Recreational, educational products & services Source: National Bureau of Statistics, PRC 2. China s PPI has continued to drop The yoy growth rate of China s producer price index of industrial products (PPI) 2 fell all the way from -1.4% yoy in May to -3.5% yoy in August. On a mom basis, the PPI posted negative growth of -0.4%, -0.7%, -0.8% and -0.5% in May, June, July and August respectively, indicating that China s ex-factory prices of industrial products have continued to drop. In our view, this was highly associated with the sluggish downstream demand as well as the fall in prices of production inputs. (See exhibits 3 & 4) Going forward, we expect China s PPI to increase again later this year, triggered by the recent rebound in global commodity prices. Exhibit 3: China s PPI growth, Sep Aug 2012 Sep % Oct 5.0% Nov 2.7% Dec 1.7% Jan % Feb 0.0% Mar -0.3% Apr -0.7% May -1.4% Jun -2.1% Jul -2.9% Aug -3.5% Source: National Bureau of Statistics, PRC Exhibit 4: China s PPI growth by selected industry, Mar - Aug 2012 yoy growth (%) Mar Apr May Jun Jul Aug Textile industry Textile, clothing and footwear production Leather, furs, down and related products 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. 2

3 October 2012 Issue 13 Part Two: Raw Material Prices 1. The purchaser price index of industrial products has been on a downward trend The yoy growth rate of the purchaser price index of industrial products 3 decelerated all the way from -1.6% yoy in May to -4.1% yoy in August. The mom growth rates of the purchaser price index were -0.8%, -0.8% and -0.5% in June, July and August respectively, indicating the continuous decline in the domestic prices of production inputs. (See exhibits 5 & 6) It is noteworthy that global commodity prices have shown a strong rebound recently. The Thomson Reuters/ Jefferies CRB index rose from on 22 June to on 14 September, before dropping to on 28 September. 4 Looking ahead, we expect the domestic prices of production inputs to rebound in the coming future, due to the passthrough of global commodity prices. Exhibit 5: The purchaser price index of industrial products, Sep Aug 2012 (% yoy growth) Sep % Oct 8.0% Nov 5.1% Dec 3.5% Jan % Feb 1.0% Mar 0.1% Apr -0.8% May -1.6% Jun -2.5% Jul -3.4% Aug -4.1% Source: National Bureau of Statistics, PRC Exhibit 6: The purchaser price index of industrial products by selected commodity, Mar - Aug 2012 yoy growth (%) Mar Apr May Jun Jul Aug Fuel & power Non-ferrous metals Raw materials for the chemical industry Timber and paper pulp Textile raw materials Source: National Bureau of Statistics, PRC 4 The purchaser price index of industrial products, compiled by the National Bureau of Statistics of China, measures the prices of production inputs such as raw materials, fuels and power purchased by industrial enterprises. 5 The Thomson Reuters/ Jefferies CRB Index, which comprises 19 commodities such as crude oil, aluminum, corn, cotton, gold, natural gas, soybeans, etc, has served as one of the most recognized measures of global commodities markets. 3

4 Li & Fung China Sourcing Quarterly (i) Purchaser price index of fuel & power The growth rate of the purchaser price index of fuel & power dropped all the way from 1.6% yoy in May to -2.6% yoy in August. (See exhibit 6) (ii) Purchaser price index of non-ferrous metals The purchaser price index of non-ferrous metals fell by 7.6% yoy, 9.1% yoy and 9.9% yoy in June, July and August respectively. (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 recorded negative growth of -5.0% yoy, -6.0% yoy and -6.5% yoy in June, July and August 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 softened from 0.7% yoy in May to 0.4% yoy in June, and then turned negative in July and August. The purchaser price index of timber and paper pulp edged down by 0.1% yoy in July, and further dropped by 0.9% yoy in August. (See exhibit 6) (v) Purchaser price index of textile raw materials The purchaser price index of textile raw materials posted negative growth of -1.1% yoy, -1.9% yoy, -1.8% yoy and -1.4% yoy in May, June, July and August respectively. (See exhibit 6) 2. China s cotton price indices have trended slightly upward since early July 2012 China s cotton price indices 5 declined throughout late February to early July Nevertheless, the cotton price indices have trended slightly upward since then. The CC Index 328, for example, went up from 18,156 on 4 July to 18,639 on 18 September. It is noteworthy that the Chinese government sold the state stockpiles of cotton to increase supply in the market throughout 3-29 September. (See exhibit 7) Looking ahead, the global cotton supply is likely to be abundant in the near term. The International Cotton Advisory Committee (ICAC) predicts that the global cotton stocks will increase by 10% to 15.1 million tons by the end of July 2013, equivalent to 64% of global consumption in 2012/13. 6 On the other hand, the Chinese government has implemented the stockpiling scheme again since early September. 7 We believe this will continue to regulate the prices of domestic cotton, and therefore the prices of domestic cotton are expected to stay relatively stable in coming months. 5 The indices, compiled by the China Cotton Association, track cotton prices quoted from two hundred textile enterprises According to the scheme, the government will buy cotton for its state reserve, if the market prices of cotton drop below the specific levels set by the policymakers. The Chinese government last implemented the stockpiling scheme throughout September 2011 to March

5 October 2012 Issue 13 Currently, the domestic cotton prices are higher than the global cotton prices. According to the local media, recently, some textile manufacturers in China have been pressing the government to raise import quotas of cotton or to sell off the state stockpiles of cotton at discounted prices. However, a senior official at the National Development and Reform Commission (NDRC) said in early September that the government would neither issue additional import quotas nor further sell the state stockpiles of cotton for the rest of the year, as the supply of cotton was expected to increase markedly from October onwards. Exhibit 7: China s cotton price indices, Sep Sep 2012 Source: China Cotton Association 3. The Nanjing Wool Market Composite Index continued its downward trend in recent months The Nanjing Wool Market Composite Index 8, one of the major wool price indices in China, continued its downward trend in recent months. It fell from yuan per kg at end-april to yuan per kg at end-may, and further declined to yuan per kg at end-august. Given that the Australian dollar appreciated against the RMB in early June to late August, we believe that the recent drop in the wool prices were mainly attributable to weakening demand. 9 (See exhibit 8) Looking ahead, we do not expect wool prices to show a strong rebound in the near term, amid the sluggish demand for wool. Exhibit 8: Nanjing Wool Market Composite Index, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug Month-end index (yuan/kg) Source: The Nanjing Wool Market Wool prices in China are significantly affected by the exchange rate movements of the currencies of Australia and New Zealand, as China imports a large amount of wool from these two countries, the major wool exporters in the world. 5

6 Li & Fung China Sourcing Quarterly 4. Price indices of polyester showed a rebound throughout late June to early August Driven by the rise in prices of crude, a major raw material of polyester, as well as restocking demand, the price indices of polyester 10 showed a rebound throughout late June to early August. (See exhibit 9) The price index of polyester FDY, for example, picked up from 11,475 on 27 June to 12,650 on 8 August. Afterwards, polyester prices softened towards the end of August. Since mid-september, the price indices of polyester have risen again, boosted by the improvement in demand and the increase in upstream prices. According to the local media, many downstream manufacturers increased their purchases of polyester ahead of China s national holiday and the mid-autumn festival holiday (30 September - 7 October). In the near future, it is unlikely that the polyester prices will start a downward trend, given the high crude prices. Exhibit 9: Price indices of polyester, Sep Sep 2012 Source: China Chemical & Fiber Economic Information Network 5. Price index of acrylic staple fiber has rebounded in recent months The price index of acrylic staple fiber 11 fell sharply throughout mid-april to late June, and then stayed flat until mid- July. Since then, the index has rebounded, triggered by the rise in prices of acrylonitrile, a major raw material of acrylic staple fiber. The price index of acrylic staple fiber rose all the way from 15,600 on 11 July to 17,600 on 18 September. (See exhibit 10) Looking ahead, we do not expect the prices of acrylic staple fiber to rise much in the near term, as the downstream demand will likely remain weak. 10 The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). 11 The index is compiled by the China Chemical & Fiber Economic Information Network (CCFEI). 6

7 October 2012 Issue 13 Exhibit 10: Price indices of acrylic, Sep Sep 2012 Source: China Chemical & Fiber Economic Information Network 6. Price indices of nylon have risen slightly since mid-september Due to the drop in prices of caprolactam, one of the major materials of nylon, the price indices of nylon 12 trended downward throughout mid-may to late July. Afterwards, nylon prices stayed stable in the following months. Since mid-september, however, with the increase in upstream prices, the price indices of nylon have risen slightly. (See exhibit 11) Going forward, we do not expect nylon prices to trend strongly upward in the near term, amid the weak downstream demand. Exhibit 11: Price indices of nylon, Sep Sep 2012 Source: China Chemical & Fiber Economic Information Network 12 The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). 7

8 Li & Fung China Sourcing Quarterly 7. Price index of viscose staple fiber has declined since late August After declining in mid-may to mid-june, the price index of viscose staple fiber 13 trended upward throughout late June to mid-august. However, since late August, the price index of viscose staple fiber has started to fall, as a result of the weakening downstream demand and high stockpiles of viscose staple fiber. According to the local media, downstream manufacturers have been cautious about placing orders for viscose staple fiber. (See exhibit 12) Looking ahead, we expect the prices of viscose staple fiber to stay soft in the coming future, as downstream demand is likely to remain sluggish. Exhibit 12: Price indices of viscose, Sep Sep 2012 Source: China Chemical & Fiber Economic Information Network 8. Price index of ABS resin has fluctuated in a narrow range in recent months Driven mainly by the decrease in upstream prices, the price index of ABS resin 14 dropped by 1.8% mom and 4.0% mom in May and June respectively. Afterwards, the price index fluctuated in a narrow range in the following months. It edged up by 0.5% mom in July, and then softened by 0.5% mom in August. (See exhibit 13) It is noteworthy that the global prices of crude, a major raw material of ABS resin, have increased markedly since late June. For example, the Daqing crude price went up from US$ per barrel on 22 June to US$ per barrel on 23 August, and has fluctuated within the range of US$ per barrel since then (as of 28 September). We therefore expect prices of ABS resin to rebound in coming future, driven by the increase in raw material costs. 13 The index is compiled by the China Chemical & Fiber Economic Information Network (CCFEI). 14 The index is compiled by 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. 8

9 October 2012 Issue 13 Exhibit 13: Price index of ABS resin, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug ABS resin (mom growth %) ABS resin (yoy growth %) Source: China Federation of Logistics & Purchasing 9. Price index of PP was on a downward trend throughout May to July Amid the weakening downstream demand, the price index of polypropylene (PP) 15 was on a downward trend, falling by 1.8% mom, 1.3% mom and 0.2% mom in May, June and July respectively. Nevertheless, the price index of PP reversed the downtrend in August, gaining 0.8% mom. (See exhibit 14) Looking ahead, PP prices are set to trend further upward in the near team, owing to the recent rebound in prices of crude, a major raw material of PP. Exhibit 14: Price index of PP, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug PP (mom growth %) PP (yoy growth %) Source: China Federation of Logistics & Purchasing 10. Price index of natural rubber dropped markedly in August With the seasonal rise in the supply of natural rubber and the weakening downstream demand, the price index of natural rubber 16 dropped sharply by 5.6% mom and 9.7% mom in May and June respectively. Afterwards, the price index of natural rubber rebounded slightly by 0.5% mom in July, but then went down markedly again by 5.0% mom in August. We believe that the fall in natural rubber prices was due largely to the decline in global prices of natural rubber and the high stockpiles. (See exhibit 15) According to the local media, Thailand, Indonesia and Malaysia, the world s major rubber producing countries, plan to reduce the exports of natural rubber in coming months. In our view, the action would drive up the global prices of natural rubber, triggering a rebound in the domestic prices of natural rubber. 15 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 16 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 9

10 Li & Fung China Sourcing Quarterly Exhibit 15: Price index of natural rubber, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug Natural rubber (mom growth %) Natural rubber (yoy growth %) Source: China Federation of Logistics & Purchasing 11. Prices of various types of non-ferrous metals were generally on a downward trend in recent months The price indices of various types of non-ferrous metals were generally on a downward trend in recent months. For example, the price index of zinc fell by 1.3% mom, 2.6% mom, 0.2% mom and 0.6% mom in May, June, July and August respectively. 17 (See exhibits 16, 17, 18, 19 & 20) It is noteworthy that, on 13 September, the US Federal Reserve announced to launch a new round of quantitative easing (also known as QE3). We believe that the move is likely to fuel speculative demand, which would boost the prices of non-ferrous metals. Exhibit 16: Price index of non-ferrous metals, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug non-ferrous metals (mom growth %) Non-ferrous metals (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 17: Price index of copper, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug Copper (mom growth %) Copper (yoy growth %) Source: China Federation of Logistics & Purchasing 17 The indices are compiled by the China Federation of Logistics & Purchasing (CFLP). 10

11 October 2012 Issue 13 Exhibit 18: Price index of aluminum, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug Aluminum (mom growth %) Aluminum (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 19: Price index of lead, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug Lead (mom growth %) Lead (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 20: Price index of zinc, Sep Aug 2012 Sep 11 Oct Nov Dec Jan 12 Feb Mar Apr May Jun Jul Aug Zinc (mom growth %) Zinc (yoy growth %) Source: China Federation of Logistics & Purchasing 11

12 Li & Fung China Sourcing Quarterly Part Three: Other Costs of Production (Energy, Transportation and Labour) and Exchange Rate 1. China s crude prices showed strong rebound throughout late June to late August In line with the movement of global crude prices, China s crude prices showed strong rebound throughout late June to late August, and then stayed at high levels till 14 September. Afterwards, the domestic crude prices fluctuated wildly in the following weeks. 18 For example, the Daqing 19 crude price went up from US$ per barrel on 22 June to US$ per barrel on 23 August, and fluctuated within the range of US$ per barrel till 14 September. The Daqing crude price then fell markedly to US$ per barrel on 20 September, before rebounding to US$ per barrel on 28 September. (See exhibit 21) Looking ahead, we do not expect the crude prices to start a downward trend in the near term, given the increasing speculative demand recently. Exhibit 21: China s crude prices, Sep Sep 2012 Source: ifeng.com 2. Wholesale price index of refined oil products rebounded in August and September The wholesale price index of refined oil products 20 declined markedly by 3.0% mom, 6.5% mom and 4.0% mom in May, June and July respectively. The main reason was that the government reduced the maximum retail and wholesale prices of gasoline and diesel on 10 May, 9 June and 11 July. The purpose of the government actions was to allow the domestic fuel prices to reflect the downward movement in the global crude prices between late March and early July. (See exhibit 22) 18 From the year 2000 onwards, China s crude prices were determined with reference to global crude prices. 19 Daqing Field ( 大慶油田 ) is the largest oil field in China. 20 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 12

13 October 2012 Issue 13 Triggered by the rise in the global crude prices between early July and early September, the government raised fuel prices on 10 August and 11 September. Consequently, the wholesale price index of refined oil products gained 2.6% mom in August and 5.7% mom in September. 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 refined oil pricing mechanism, the government officials would consider adjusting the fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. Exhibit 22: China s wholesale price indices of refined oil products, Oct Sep 2012 Source: China Federation of Logistics & Purchasing 13

14 Li & Fung China Sourcing Quarterly 3. The prices of various categories of coal have trended slightly upward since early August The benchmark Qinhuangdao coal prices were on a strong downward trend throughout early May to late July, due largely to the sharp fall in global coal prices and the moderation in demand from coal-fired power producers in China. Since early August, however, the prices of various categories of coal have trended slightly upward, driven by the restocking demand from domestic power producers. The price of coal with calorific value of 5,000 kcal/kg, for example, went up from 520 yuan per tonne on 6 August to 540 yuan on 24 September. (The price of coal with calorific value of 5,800 kcal/kg was an exception.) (See exhibit 23) Looking ahead, we do not expect the domestic coal prices to rise much in the near term, given the high stockpiles of coal and the moderation in demand from power producers in autumn. Exhibit 23: Qinhuangdao coal prices, Sep Sep 2012 Source: Cqcoal.com 4. The China Containerized Freight Index continued its downward trend in recent months The China Containerized Freight Index (CCFI) 21 continued its downward trend in recent months. It fell all the way from on 1 June to on 28 September. The drop in the freight index in recent months was due largely to the sluggish export demand as well as the major shipping companies move to increase the active capacities of their carriers. (See exhibit 24) Looking forward, we expect the container freight rates to stay soft in the near term, unless export demand shows significant improvement. 21 The index, compiled by the Shanghai Shipping Exchange, measures the freight rates of eleven freight routes. The destinations of these routes include Hong Kong, Korea, Japan, Southeast Asia, Australia and New Zealand, the Mediterranean, Europe, East and West Africa, America West, America East, South Africa and South America. The freight rates data are collected from the major shipping companies in the market, such as CMA-CGM, COSCO Container Lines, China Shipping Container Lines, Hanjin Shipping, Hapag-Lloyd, Kline, Maersk, MOL, NYK, OOCL, P&O Nedlloyd, PIL, Shanghai Hai Hua Shipping, Shanghai Jin Jiang Shipping, Sinotrans Container Lines, SITC Container Lines, etc. 14

15 October 2012 Issue 13 Exhibit 24: China Containerized Freight Index, Sep Sep 2012 Source: Shanghai Shipping Exchange 5. Average monthly income of migrant workers in China increased by 14.9% yoy in 1H12 According to the National Bureau of Statistics of China, the average monthly income of migrant workers in China increased to 2,200 yuan in 1H12, up from 2,173 yuan in 1Q12. The growth rate fell from 16.9% yoy in 1Q12 to 14.9% yoy in 1H12, indicating the moderation of wage growth in 2Q12. In our view, this could be attributed to the recent deceleration in economic activities in China. Enterprises, especially the manufacturing enterprises, have recently under less pressure to substantially increase wages of their workers. 6. The RMB/USD spot exchange rate has appreciated in recent weeks The daily fixing rate (also known as the central parity rate) of the RMB against the US dollar depreciated from on 4 July to the recent low of on 16 August, and has fluctuated within the narrow range of to since then (as of 10 October). 22 It is noteworthy that the gap between the daily fixing rate of the RMB against the US dollar and the RMB/USD spot exchange rate, which is allowed to fluctuate within the daily trading band of ±1.0% around the daily fixing rate, has widened recently. For example, according to the China Foreign Exchange Trade System (CFETS), the RMB/USD spot exchange rate closed at , while the daily fixing rate of the RMB against the US dollar was on 10 September. Afterwards, on 10 October, the spot exchange rate closed at , while the daily fixing rate was The differentials indicate that the RMB/USD spot exchange rate has been under stronger pressure to appreciate in recent weeks. On the other hand, the daily fixing rate of the RMB against the Euro depreciated from on 25 July to on 18 September, and then advanced to on 10 October. (See exhibit 25) 22 The daily fixing rate (also known as the central parity rate) of the RMB 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. 15

16 Li & Fung China Sourcing Quarterly According to the Bank for International Settlements, the real effective exchange rate (REER) of the RMB fluctuated within the narrow range of to throughout March to August. 23 Overall, the RMB appreciated by 0.5% in real terms against its trading partners in the first eight months of (See exhibit 26) In view of the slowing export demand, we expect the daily fixing rate of the RMB against the US dollar to continue to fluctuate, or even depreciate slightly in the near term. As the daily trading band of the RMB against the US dollar is ±1.0% around the daily fixing rate, the room for appreciation of the RMB/USD spot exchange rate is likely to be limited in coming months. That being said, in the medium to long term, the RMB is likely to continue to appreciate, albeit at a slow and gradual pace, against the US dollar. Exhibit 25: RMB/USD and RMB/Euro (daily fixing rate), Oct Oct 2012 Source: State Administration of Foreign Exchange Exhibit 26: RMB REER, Sep Aug 2012 Source: Bank for International Settlements 23 The Bank for International Settlements (BIS) calculates effective exchange rate (EER) indices for a total of 61 economies (including individual euro area countries and, separately, the euro area 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

17 October 2012 Issue 13 Part Four: Highlights 1. The minimum wage levels in some provinces/ municipalities were adjusted upward in recent months In recent months, the local governments in some provinces/ municipalities raised the minimum wage levels in their jurisdictions. See below for more details: Xinjiang Uygur autonomous region On 1 June 2012, the levels of minimum monthly wage in various districts within the region were raised by 16.6% on average. 24 Fujian province On 1 August 2012, the Fujian provincial government raised the levels of minimum monthly wage in various districts within the province to 1,200 yuan, 1,050 yuan, 930 yuan and 830 yuan. 25 Hainan province On 1 September 2012, the minimum wage levels in various districts within Hainan province were adjusted upward to 1,050 yuan, 950 yuan and 900 yuan, up from the previous levels of 830 yuan, 730 yuan and 680 yuan respectively. 26 Tibet autonomous region The minimum wage levels in various districts within the region were raised to 1,200 yuan and 1,150 yuan on 1 September The Chinese government plans to continue to increase the minimum wage levels in coming years. According to the 12 th Five-year Plan, the minimum wage levels in China are targeted to increase by at least 13% per annum during We therefore expect the local governments in some provinces to also raise the minimum wage levels later this year. 2. New guidelines on salary rise were issued in several provinces/ municipalities in the recent months In recent months, the local governments in several provinces/ municipalities such as Qinghai, Jiangxi, Yunnan, etc. issued new guidelines on salary rise. (See exhibit 27) For example, according to the announcement issued by the Jiangxi provincial government, enterprises in the province are recommended to follow the guideline on the pay rise benchmark, which is set at 13% in Enterprises with worsening performance should consider raising the salaries of their workers by at least 6%, the lower limit of the pay rise benchmark; while enterprises with good performance are recommended to offer pay rise of at most 18% to their workers in

18 Li & Fung China Sourcing Quarterly 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. Against the backdrop of slower growth of the Chinese economy, the profitability of many enterprises has declined. We therefore expect that most employers will offer smaller pay-rise to their workers in the near future. Exhibit 27: Guidelines on salary rise issued by local governments in the past year Province/ municipality Upper limit Benchmark Lower limit Issue date Qinghai 19% 12% 5% 14 June 2012 Jiangxi 18% 13% 6% 26 June 2012 Yunnan 20% 13% 4% 12 July 2012 Gansu 19% 15% 7% 7 August 2012 Source: Announcements by various local governments 3. The Chinese government reduced the fuel prices on 11 July and then raised the prices on 10 August and 11 September To reflect the movement in global crude prices between early June and early September, the Chinese government lowered the maximum retail prices of gasoline and diesel on 11 July, and then adjusted upward the prices on 10 August and 11 September. Overall, the maximum retail prices of gasoline and diesel were raised by 5.6%-6.8% from mid-july to mid-september. The rise in fuel prices would increase transportation costs, as well as energy costs for manufacturers who run their own electrical generators in China. It is noteworthy that the fuel prices have been adjusted more frequently in recent months, due largely to the sharp fluctuations in global crude prices. According to the refined oil pricing mechanism, the government official would consider adjusting fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. 4. The US prices index for imports from China stayed stable in recent months According to the US Department of Labour, the US prices index for imports from China stayed stable at throughout May to August, and then edged down to in September. Compared with the same month of the previous year, the import prices index gained 0.4 points in September Looking ahead, we expect that the prices index will stay stable or trend slightly downward in the near term, given the recent drop in ex-factory prices of Chinese products in RMB terms. (See exhibit 28) 18

19 October 2012 Issue 13 Exhibit 28: US prices index for imports from China, Oct Sep 2012 Source: US Department of Labour 5. China s exports posted low single-digit growth in July and in August China s export growth decelerated from 10.5% yoy in 2Q12 to 1.0% yoy and 2.7% yoy in July and August respectively, indicating a renewed weakening in export demand. In our view, this could be viewed as a sign that the global economy has remained weak. Overall, in the first eight months of 2012, China s exports amounted to US$ 1,309.1 billion and registered positive growth of 7.1% yoy, compared to the 20.3% yoy growth recorded in FY11. (See exhibits 29 and 30) China s export growth to the US decelerated from 13.6% yoy in 1H12 to 0.6% yoy and 3.0% yoy in July and August respectively. On the other hand, after edging down by 0.8% yoy in 1H12, China s exports to the European Union (EU) declined at a faster pace, down by 16.2% yoy and 12.7% yoy in July and August respectively. Also noteworthy is that exports from some major exporting provinces in the eastern region of China posted weak growth in the first eight months of For example, the growth rates of exports from Jiangsu and Zhejiang were as low as 2.2% yoy and 2.5% yoy respectively in January-August 2012, while exports from Shanghai and Shandong registered negative growth of -0.2% yoy during the same period. On the contrary, exports from Chongqing, Henan, Sichuan and Jiangxi soared by 1.7 times, 63.4% yoy, 47.8% yoy and 43.3% yoy respectively in January-August We believe that the robust growth of exports from these central and western provinces was highly associated with the relocation of factories from the eastern provinces. Amid the weak import growth, China s trade surplus rose from US$ 18.7 billion in May to US$ 31.7 billion in June, and then stayed high at US$ 25.2 billion and US$ 26.7 billion in July and August respectively. Exhibit 31 plots the new export orders sub-index of China s manufacturing PMI against the yoy growth rates of China s exports. The correlation between the two is fairly high, with the new export orders index leading the export yoy growth rate by about 3 months. With the new export orders index dipping below the critical 50-mark, we have become more conservative in our export outlook. Overall, we expect China s exports to post low single-digit growth in 3Q12 and 4Q12. Export growth will continue to be constrained by the stagnant economy in the EU, the US and Japan, although China s exports will continue to be cushioned by orders from emerging markets. 19

20 Li & Fung China Sourcing Quarterly Exhibit 29: China s quarterly foreign trade data, 3Q11-2Q12 USD billion (yoy growth) Exports Imports Trade Balance FY11 1,898.6 (20.3%) 1,743.5 (24.9% Q (20.5%) (24.8%) Q (14.3%) (20.1%) Q (7.6%) (6.9%) 0.6 2Q (10.5%) (6.5%) 68.9 Source: China Customs Exhibit 30: China s monthly foreign trade data, Sep Aug 2012 USD billion (yoy growth) Exports Imports Trade Balance Sep (17.0%) (20.8%) 14.5 Oct (15.8%) (28.6%) 17.1 Nov (13.8%) (22.0%) 14.6 Dec (13.4%) (11.8%) 16.5 Jan (-0.5%) (-15.3%) 27.3 Feb (18.4%) (39.6%) Mar (8.9%) (5.3%) 5.3 Apr (4.9%) (0.3%) 18.4 May (15.3%) (12.7%) 18.7 Jun (11.3%) (6.3%) 31.7 Jul (1.0%) (4.7%) 25.2 Aug (2.7%) (-2.6%) 26.7 Source: China Customs Exhibit 31: New export orders index and export growth, Oct Sep 2012 Source: China Customs, China Federation of Logistics & Purchasing, National Bureau of Statistics, PRC Copyright 2012 Li & Fung Research Centre. All rights reserved. Though Li & Fung Research Centre endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. Li & Fung Research Centre and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document. Reproduction or redistribution of this material without Li & Fung Research Centre s prior written consent is prohibited. 20