LI & FUNG China Sourcing Quarterly

Transcription

1 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: 10 Other Costs of Production (Energy, Transportation and Labour) and Exchange Rate Part Four: 15 Highlights 1. China s CPI growth rebounded in March April 2012 Issue 11 The year-on-year (yoy) growth rate of China s consumer price index (CPI) 1 rose from 4.1% yoy in December 2011 to 4.5% yoy in January Afterwards, the CPI growth dropped to 3.2% yoy in February, the lowest in twenty months, and then rebounded to 3.6% yoy in March. (See exhibits 1 & 2) On a month-on-month (mom) basis, the CPI growth rose from the recent low of -0.1% in February to 0.2% in March, boosted by the increase in both food prices and non-food prices. The growth of the CPI of the food component rebounded from -0.3% mom in February to 0.2% mom in March, while that of the nonfood component accelerated to 0.2% mom in March, compared to 0.0% mom in February. Despite the rebound in the CPI growth in March, we expect China s inflation to ease in the near term, owing to softening consumption demand. Besides, the government actions to cool the property sector and to increase the supply of public housing will continue to put downward pressure on housing prices, which would help alleviate the inflationary pressure. Upside risks, however, come mainly from the increase in wages and fuel prices, the adverse weather conditions, pass-through of upstream price pressures and the acceleration of the reform of resources pricing mechanisms. Exhibit 1: China s CPI growth, Apr Mar 2012 Helen Chin, Timothy Cheung Tel: (852) helenchin@lf1937.com timothycheung@lf1937.com 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Hong Kong Tel : (852) Fax : (852) lfdc@lf1937.com Apr % May 5.5% Jun 6.4% Jul 6.5% Aug 6.2% Sep 6.1% Oct 5.5% Nov 4.2% Dec 4.1% Jan % Feb 3.2% Mar 3.6% 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, Oct Mar 2012 yoy growth (%) Oct 11 Nov Dec Jan 12 Feb Mar Clothing Household services, maintenance and renovation Recreational, educational products & services Source: National Bureau of Statistics, PRC 2. PPI posted positive mom growth in February and March The yoy growth rate of China s producer price index of industrial products (PPI) 2 dropped all the way from 1.7% yoy in December to -0.3% yoy in March. On a mom basis, the PPI growth was 0.1% and 0.3% in February and March respectively, after posting negative growth in December and January. The figures indicate a rebound in ex-factory prices of industrial products in the recent months. (See exhibits 3 & 4) Looking ahead, we expect China s PPI to post positive growth this year, due to the pass-through of upstream price pressures and increasing labour costs. It is noteworthy that the domestic prices of crude have recently reached the highest levels since July 2008, which have put upward pressure on prices of petrochemical products. In addition, Chinese manufacturers will continue to suffer from increasing labour costs, owing to the limited labour supply and the upward adjustments in minimum wages 3. In recent months, there have been reports on the resurgence of labour shortages in many provinces in China. Many enterprises thus have to offer higher salaries in a bid to hire or retain workers. Exhibit 3: China s PPI growth, Apr Mar 2012 Apr % May 6.8% Jun 7.1% Jul 7.5% Aug 7.3% Sep 6.5% Oct 5.0% Nov 2.7% Dec 1.7% Jan % Feb 0.0% Mar -0.3% Source: National Bureau of Statistics, PRC Exhibit 4: China s PPI growth by selected industry, Sep Feb 2012 yoy growth (%) Sep 11 Oct Nov Dec Jan 12 Feb 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. 3 According to the 12th Five-year Plan, the minimum wage is targeted to increase by at least 13% per annum in 2011 to 2015, and local governments in many provinces are widely expected to raise the minimum wage levels in their jurisdictions this year. 2

3 April 2012 Issue 11 Part Two: Raw Material Prices 1. The purchaser price index of industrial products registered positive mom growth in February and March The yoy growth rate of the purchaser price index of industrial products 4 decelerated all the way from 3.5% yoy in December to 0.1% yoy in March. (See exhibits 5 & 6) On a mom basis, the purchaser price index gained 0.1% in February and in March, after dropping by 0.4% and 0.3% in December and January respectively. Looking ahead, we expect the domestic prices of production inputs to continue the upward trend, due to the passthrough of global commodity prices. Exhibit 5: The purchaser price index of industrial products, Apr Mar 2012 (% yoy growth) Apr % May 10.2% Jun 10.5% Jul 11.0% Aug 10.6% Sep 10.0% Oct 8.0% Nov 5.1% Dec 3.5% Jan % Feb 1.0% Mar 0.1% Source: National Bureau of Statistics, PRC Exhibit 6: The purchaser price index of industrial products by selected commodity, Oct Mar 2012 yoy growth (%) Oct 11 Nov Dec Jan 12 Feb Mar Fuel & power Non-ferrous metals Raw materials for the chemical industry Timber and paper pulp Textile raw materials Source: National Bureau of Statistics, PRC (i) Purchaser price index of fuel & power The growth rate of the purchaser price index of fuel & power dropped all the way from 8.4% yoy in December to 5.1% yoy in March. (See exhibit 6) 4 The purchasing price index of raw material, fuel and power was renamed the purchaser price index of industrial products, effective from January The price index, 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. 3

4 Li & Fung China Sourcing Quarterly (ii) Purchaser price index of non-ferrous metals The purchaser price index of non-ferrous metals declined by 2.5% yoy, 3.3% yoy and 4.0% yoy in January, February and March respectively, after rising by 0.6% yoy in December. (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 -0.9% yoy and -1.9% yoy in February and March respectively, after gaining 0.3% yoy in January. (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 stayed low, registering 1.8% yoy, 1.6% yoy and 1.1% yoy in January, February and March respectively. (See exhibit 6) (v) Purchaser price index of textile raw materials The growth rate of the purchaser price index of textile raw materials declined all the way from 3.7% yoy in December to 0.0% yoy in March. (See exhibit 6) 2. China s cotton price indices have trended slightly upward in recent months China s cotton price indices 5 have trended slightly upward in recent months. The CC Index 328, for example, went up from 19,180 on 31 December to 19,557 on 21 March. (See exhibit 7) Looking ahead, we expect the domestic cotton prices to stay relatively stable in the near term, amid the sluggish downstream demand and abundant supply. In late February, the Chinese government announced that the stockpiling scheme, which ended on 31 March 2012, would be implemented again during September 2012 to March In our view, such a move will encourage farmers to maintain their cotton output, and thus help stabilize the domestic prices of cotton. Exhibit 7: China s cotton price indices, Mar Mar 2012 Source: China Cotton Association 5 The indices, compiled by the China Cotton Association, track cotton prices quoted from two hundred textile enterprises

5 April 2012 Issue The Nanjing Wool Market Composite Index rebounded in January and February After dropping from yuan per kg at end-november to yuan per kg at end-december, the Nanjing Wool Market Composite Index 7, one of the major wool price indices in China, rebounded to yuan per kg at end- January, and further reached yuan per kg at end-february. The rise in the wool prices was mainly driven by the appreciation of the Australian dollar against the RMB. 8 (See exhibit 8) Looking ahead, wool prices may trend further upward in the near term, given the limited supply of wool. On the other hand, according to the local media, the domestic demand for wool products has remained weak. In response to the high wool prices and sluggish downstream demand, many domestic manufacturers have been cautious about placing orders for wool. Exhibit 8: Nanjing Wool Market Composite Index, Mar Feb 2012 Mar 11 apr May Jun Jul aug sep Oct nov Dec Jan 12 Feb Month-end index (yuan/kg) 80.83* * Monthly average (instead of month-end index) Source: The Nanjing Wool Market 4. Price indices of polyester have declined since mid-february Due largely to the low stockpiles of polyester and the rise in crude prices, the price indices of polyester 9 bottomed out in early December and trended upward till early February. Since mid-february, the price indices have declined, driven by the drop of upstream prices and the weakening downstream demand. (See exhibit 9) The price index of polyester FDY, for example, fell from 13,850 on 15 February to 12,400 on 22 March. Looking ahead, as the downstream demand is likely to remain weak, we expect polyester prices to stay soft in coming months. Exhibit 9: Price indices of polyester, Mar Mar 2012 Source: China Chemical & Fiber Economic Information Network The wool price index is 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 main wool exporters in the world. 9 The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). 5

6 Li & Fung China Sourcing Quarterly 5. Price index of acrylic staple fiber has stayed stable since late February Boosted by the increase in upstream prices and the tight supply, the price index of acrylic staple fiber 10 trended upward throughout late December to late February. Since then, the price index has stabilized at 21,800. (See exhibit 10) Looking ahead, we expect the prices of acrylic staple fiber to stay flat in the near future, unless upstream prices rise further. Exhibit 10: Price indices of acrylic, Mar Mar 2012 Source: China Chemical & Fiber Economic Information Network 6. Price indices of nylon peaked in mid-february As a result of the rise in caprolactam prices, one of the major materials of nylon, the price indices of nylon 11 were on an upward trend throughout late December to early February. The price indices peaked in mid-february. Afterwards, the price index of nylon-chip has declined since late February, and the price indices of nylon DTY, nylon FDY and nylon POY have moderated since early March. The drop of nylon prices could be attributed to the decline in upstream prices, the slowing downstream demand, as well as the abundant supply. (See exhibit 11) Looking ahead, we expect nylon prices to soften in the near term, unless upstream prices show a strong rebound. Exhibit 11: Price indices of nylon, Mar Mar 2012 Source: China Chemical & Fiber Economic Information Network 10 The index is compiled by the China Chemical & Fiber Economic Information Network (CCFEI). 11 The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). 6

7 April 2012 Issue Price index of viscose staple fiber has started to fall since mid-february The price index of viscose staple fiber 12 trended upward in January to early February, supported by the restocking demand. Since mid-february, however, the prices of viscose staple fiber have started to fall. The main reason is that the downstream demand has slowed recently. Against this backdrop, many manufacturers of viscose staple fiber have cut prices of their products, in a bid to reduce their inventories. (See exhibit 12) Looking ahead, we expect the prices of viscose staple fiber to stay soft, unless the domestic cotton prices start a strong upward trend. As viscose staple fiber is commonly used as a substitute for cotton and cotton pulp is the major raw material of viscose, the price movement of viscose staple fiber has been significantly affected by cotton prices. Exhibit 12: Price indices of viscose, Mar Mar 2012 Source: China Chemical & Fiber Economic Information Network 8. Price index of ABS resin rebounded in 1Q12 After dropping by 1.9% mom in December, the price index of ABS resin 13 rebounded by 1.3% mom, 5.5% mom and 2.0% mom in January, February and March respectively, boosted by the rise in upstream prices. (See exhibit 13) Looking ahead, despite the weak downstream demand, we do not expect ABS resin prices to go down in the near term, with the prices of crude, a major raw material of ABS resin, remaining at high levels. Exhibit 13: Price index of ABS resin, Apr Mar 2012 apr 11 May Jun Jul aug sep Oct nov Dec Jan 12 Feb Mar ABS resin (mom growth %) ABS resin (yoy growth %) Source: China Federation of Logistics & Purchasing 12 The index is compiled by the China Chemical & Fiber Economic Information Network (CCFEI). 13 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. 7

8 Li & Fung China Sourcing Quarterly 9. Price index of PP rebounded in February and March The price index of polypropylene (PP) 14 declined by 4.7% mom and 1.2% mom in December and January respectively, as a result of the destocking activities of domestic petrochemical enterprises. Afterwards, the price index rose by 1.3% mom and 2.5% mom in February and March respectively, triggered by the increase in the prices of crude, a major raw material of PP. (See exhibit 14) Looking ahead, we do not expect PP prices to rise much, amid the weak downstream demand. Exhibit 14: Price index of PP, Apr Mar 2012 apr 11 May Jun Jul aug sep Oct nov Dec Jan 12 Feb Mar PP (mom growth %) PP (yoy growth %) Source: China Federation of Logistics & Purchasing 10. Price index of natural rubber rose markedly in February and March After staying relatively stable in December to January, the price index of natural rubber 15 gained 5.6% mom and 3.2% mom in February and March respectively. We believe that the marked rise in the natural rubber prices was highly associated with the increase in the global prices of natural rubber, as well as the reduction in the domestic output of natural rubber in recent months. 16 (See exhibit 15) Nevertheless, as the domestic supply of rubber should increase with more harvest activities from late-april onwards and the downstream demand is likely to remain sluggish, we expect natural rubber prices to moderate in coming months. Exhibit 15: Price index of natural rubber, Apr Mar 2012 apr 11 May Jun Jul aug sep Oct nov Dec Jan 12 Feb Mar Natural rubber (mom growth %) Natural rubber (yoy growth %) Source: China Federation of Logistics & Purchasing 11. Prices of various types of non-ferrous metals showed strong rebound in February After trending downward in the past few months, the price indices of copper, lead and zinc went up in February, gaining 4.7% mom, 3.7% mom and 5.4% mom respectively. 17 On the contrary, the price index of aluminum stayed weak in February, dropping by 0.8% mom. Afterwards, in March, the price indices of copper and aluminum edged up by 0.2% mom and 0.1% mom respectively, while the price indices of lead and zinc fell by 0.8% mom and 0.4% mom respectively. (See exhibits 16, 17, 18, 19 & 20) 14 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 15 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 16 Harvest activities in major rubber producing regions in China decrease every December to April. 17 The indices are compiled by the China Federation of Logistics & Purchasing (CFLP). 8

9 April 2012 Issue 11 Looking ahead, the domestic demand for non-ferrous metals is likely to be weak, against the backdrop of the cooling property market in China. We expect the prices of non-ferrous metals to trend downward again soon. Upside risks mainly come from an increase in the speculative demand, as well as a faster-than-expected recovery of the US economy. Exhibit 16: Price index of non-ferrous metals, Apr Mar 2012 apr 11 May Jun Jul aug sep Oct nov Dec Jan 12 Feb Mar Non-ferrous metals (mom growth %) Non-ferrous metals (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 17: Price index of copper, Apr Mar 2012 apr 11 May Jun Jul aug sep Oct nov Dec Jan 12 Feb Mar Copper (mom growth %) Copper (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 18: Price index of aluminum, Apr Mar 2012 apr 11 May Jun Jul aug sep Oct nov Dec Jan 12 Feb Mar Aluminum (mom growth %) Aluminum (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 19: Price index of lead, Apr Mar 2012 apr 11 May Jun Jul aug sep Oct nov Dec Jan 12 Feb Mar Lead (mom growth %) Lead (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 20: Price index of zinc, Apr Mar 2012 apr 11 May Jun Jul aug sep Oct nov Dec Jan 12 Feb Mar Zinc (mom growth %) Zinc (yoy growth %) Source: China Federation of Logistics & Purchasing 9

10 Li & Fung China Sourcing Quarterly Part Three: Other Costs of Production (Energy, Transportation and Labour) and Exchange Rate 1. China s crude prices have reached the highest levels since July 2008 In line with the movement of global crude prices, the domestic crude prices were on a strong upward trend throughout mid-december to early March. 18 For example, the Daqing 19 crude price rose markedly from the recent low of US$ per barrel on 19 December to US$ per barrel on 2 March, the highest since July Since then, it has fluctuated within the range of US$ per barrel. (as of 23 April 2012). (See exhibit 21) Looking ahead, we expect the global crude prices to stay at high levels in the near term, given the geopolitical tensions in the Middle East. To put pressure on Iran to abandon its nuclear program, the US government has pushed other countries to cut their imports of crude from Iran. According to the US government, ten member countries of the EU and Japan have already significantly reduced their purchases of crude oil from Iran. It is also likely that many other countries will take similar actions in the coming future. Such moves imply that many countries have to increase their imports of crude from other oil-producing countries, which would greatly affect the global crude prices. Exhibit 21: China s crude prices, Apr Apr 2012 Source: ifeng.com 2. Wholesale price index of refined oil products rose in February and March After edging up by 0.1% mom in December, the wholesale price index of refined oil products 20 edged down by 0.1% mom in January. Afterwards, the price index gained 2.2% mom and 3.9% mom in February and March respectively, attributable to the government actions to raise the maximum retail and wholesale prices of gasoline and diesel on 8 February and on 20 March. (See exhibit 22) Looking ahead, the future movement of the wholesale prices of refined oil products will mainly depend on the movement of global crude prices. According to the refined oil pricing mechanism, the government officials would consider adjusting fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. 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). 10

11 April 2012 Issue 11 Exhibit 22: China s wholesale price indices of refined oil products, Apr Mar 2012 Source: China Federation of Logistics & Purchasing 3. The benchmark Qinhuangdao coal prices have shown slight rebound since late February The benchmark Qinhuangdao coal prices trended downward throughout mid-november to late February, due mainly to the slowing domestic demand from coal-fired power producers amid the moderation in industrial activities, weakening export demand, as well as the implementation of the government s price control policy. Since late February, the domestic coal prices have shown slight rebound. One of the main reasons for the rise in coal prices was the tighter supply of coal in April, due to the maintenance of the Daqin railway, the railway which connects the major coal-producing region with the largest coal shipping port in the country. (See exhibit 23) Nevertheless, the domestic coal prices are set to trend downward soon, for the following reasons: First, driven by the expansion of production capacity in the year, the total coal output in China is expected to further increase in Second, the power demand is set to soften in coming future, amid the slowing growth of the Chinese economy. 11

12 Li & Fung China Sourcing Quarterly Exhibit 23: Qinhuangdao coal prices, Apr Apr 2012 Source: Cqcoal.com 4. The China Containerized Freight Index has soared since early March The China Containerized Freight Index (CCFI) 21 showed a strong rebound in January to early February, and then softened in the following weeks. Since early March, the freight index has soared, going up from on 2 March to on 20 April. The main reasons are that the major shipping companies have continued to raise the container freight rates and tighten the active capacities of their carriers recently. (See exhibit 24) Looking forward, we expect the container freight rates to stay at high levels in the near term, unless the major shipping companies increase the active capacities of their carriers. In particular, the container freight rates for the China-America routes are likely to rise further, given the improving economic prospect of the US. Exhibit 24: China Containerized Freight Index, Apr Apr 2012 Source: Shanghai Shipping Exchange 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. 12

13 April 2012 Issue Average monthly income of migrant workers in China increased by 16.6% yoy in 1Q12 According to the National Bureau of Statistics of China, the average monthly income of migrant workers in China increased by 16.6% yoy to reach 2,173 yuan in 1Q12. We believe the rapid growth of the wage of migrant workers was attributable to factors such as labour shortages and the upward adjustments of the minimum wage levels in many provinces in recent months. Looking ahead, we expect that the average income of migrant workers will continue to show double-digit growth this year. 6. The nominal RMB/ USD exchange rate has continued to fluctuate The nominal RMB/ USD exchange rate has fluctuated within the range of so far this year (as of 23 April). On 23 April 2012, the nominal RMB/ USD exchange rate was , up slightly from on 30 December On the other hand, the RMB has depreciated against the Euro since mid-january: The nominal RMB/Euro exchange rate declined from the recent peak of on 16 January to on 29 February, before advancing to on 23 April. (See exhibit 25) According to the Bank for International Settlements, the real effective exchange rate (REER) of the RMB fluctuated within the range of throughout 1Q12, after softening from the recent peak of in December. 22 Overall, the RMB depreciated by 0.8% in real terms against its trading partners in 1Q12. (See exhibit 26) On 14 April 2012, China s central bank announced that the daily trading band of the RMB against the US dollar would be widened from ±0.5% to ±1.0% around the daily fixing rate (also known as the central parity rate) 23, effective from 16 April. 24 A major purpose of the move is to further improve the RMB exchange rate regime, which is largely based on market supply and demand and operates with reference to a basket of currencies. In our view, this shows that the Chinese government stays committed to its currency reform. The implication to Chinese exporters is that they will probably find it more difficult to sell products at the right prices, with the bigger volatility of the nominal RMB/ USD exchange rate. In view of the slowing export demand, we expect that the nominal RMB/ USD exchange rate will continue to fluctuate in coming months, as a significant RMB appreciation against the US dollar could greatly harm the foreign demand for Chinese products, especially the low value added products. However, as the international pressure for RMB appreciation is still intense, we maintain our forecast that the nominal RMB/USD exchange rate will appreciate by around 2-4% this year to reach at end 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 The China Foreign Exchange Trade System (CFETS), a sub-institution of the People's Bank of China, releases the central parity rate of the RMB against the USD at 9:15 am on each working day

14 Li & Fung China Sourcing Quarterly Exhibit 25: RMB/USD and RMB/Euro, Apr Apr 2012 Source: State Administration of Foreign Exchange Exhibit 26: RMB REER, Apr Mar 2012 Source: Bank for International Settlements 14

15 April 2012 Issue 11 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: Guangxi Zhuang autonomous region In January 2012, the minimum wage levels in various districts within Guangxi Zhuang autonomous region were adjusted upward to 1,000 yuan, 850 yuan, 780 yuan and 690 yuan. 25 Shandong province On 1 March 2012, the minimum wage levels in various districts within Shandong province were increased to 1,240 yuan, 1,100 yuan and 950 yuan respectively, up by %. 26 The previous adjustment was made on 1 March 2011, when the minimum wage levels in various districts were raised by 26% on average. Tianjin On 1 April 2012, the minimum monthly wage in Tianjin was adjusted to 1,310 yuan, up from the previous level of 1,160 yuan. 27 Shanghai On 1 April 2012, the minimum monthly wage in Shanghai was raised to 1,450 yuan, up by 13.3% from the previous level. 28 The previous adjustment was made on 1 April 2011, when the minimum monthly wage in the municipality was increased by 14.3%. Gansu province On 1 April 2012, the minimum wage levels in various districts within the province were increased to 980 yuan, 940 yuan, 900 yuan and 860 yuan, up by %. 29 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 that the local governments in other provinces will also raise the minimum wage levels in the rest of the year

16 Li & Fung China Sourcing Quarterly 2. New guidelines on salary rise were issued in Shandong and Sichuan In late February, the Shandong Provincial Government issued new guidelines on salary rise. Afterwards, in late March, the Sichuan Provincial Government followed suit. (See exhibit 27) According to the media reports, enterprises with average performance in Sichuan province are advised to raise the salaries for their workers by around 13%, the pay rise benchmark for 2012; while enterprises with good performance are recommended to offer higher pay rises to their workers. Enterprises with worsening performance may consider offering lower pay rises to their workers, but wage growth should not be below 5%, the lower limit of the pay rise benchmark. 30 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 27: Guidelines on salary rise issued by local governments in recent months Province/ municipality upper limit Benchmark Lower limit Issue date Shandong 22% 15% 6% 29 February 2012 Sichuan 20% 13% 5% 30 March 2012 Source: Announcement by the Shandong Provincial Government, Xinhua News Agency 3. The Chinese government raised the fuel prices on 8 February and 20 March So far this year (i.e. as of 24 April 2012), the domestic retail fuel prices have been raised two times, and have gained % overall. On 8 February 2012, the Chinese government raised the maximum retail prices of gasoline and diesel by %. Afterwards, on 20 March, the government further increased the maximum retail prices of gasoline and diesel by %. The purpose of the price adjustments was to allow the domestic fuel prices to reflect the upward movement in global crude prices between early October 2011 and mid-march 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 adjustments made on 20 March were smaller than the rise in the benchmark crude prices, as the 22-day moving average of a basket of global crude prices had risen by more than 10% between 8 February and 20 March. 31 This shows that the government was concerned about the impact of the fuel price hikes on inflation. 4. The US prices index for imports from China stayed unchanged in March According to the US Department of Labour, the US prices index for imports from China rose from in December to in February, hitting record high again, and then stayed unchanged in March. Compared to the same month of the previous year, the prices index gained 2.8 points in March, driven mainly by the RMB appreciation against the US dollar, as well as the higher labour costs in China. (See exhibit 28) 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%. 16

17 April 2012 Issue 11 Exhibit 28: US prices index for imports from China, Apr Mar 2012 Source: US Department of Labour 5. China s export growth decelerated in 1Q12 China s export growth decelerated from 14.3% yoy in 4Q11 to 7.6% yoy in 1Q12, indicating the sharp moderation in export demand. Overall, China s exports amounted to US$ billion in 1Q12. (See exhibits 29, 30 and 31) In 1Q12, China s exports to the US, Japan, and some major emerging economies such as the Association of South East Asian Nations (ASEAN), Brazil and Russia recorded double digit growth, while exports to the European Union (EU) posted negative growth. China s exports to the US and Japan increased by 12.8% yoy and 10.3% yoy respectively in 1Q12, higher than China s total export growth during the period (7.6% yoy). Such figures show that the demand from the US and Japan was relatively strong. In contrast, China s exports to the EU dropped by 1.8% yoy in 1Q12, down from the 14.4% yoy growth recorded in FY11. Meanwhile, China s export growth to ASEAN, Brazil and Russia decelerated to 13.2% yoy, 19.2% yoy and 14.6% yoy respectively in 1Q12, compared to the growth of 23.1% yoy, 30.2% yoy and 31.4% yoy respectively in FY11. Also noteworthy is that exports from some major exporting provinces in eastern China posted weak growth in 1Q12. For example, the growth rates of exports from Jiangsu, Shanghai and Shandong were as low as 2.8% yoy, 3.2% yoy and 1.3% yoy respectively in 1Q12. On the contrary, exports from Chongqing, Henan, Guangxi and Sichuan soared by 1.5 times, 1.4 times, 41.2% yoy and 31.9% yoy respectively in 1Q12. The strong growth of exports from these central and western provinces can be explained by the relocation of factories from the eastern provinces. For the first time since March 2011, China recorded a trade deficit of US$ 31.5 billion in February, due largely to the marked drop of the total export value. In our view, this was mainly due to a seasonal slowdown in production activities. In fact, China s trade balance turned positive again in March, with the normalization of production activities. Exhibit 32 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 rising above the critical 50-mark again, we have become more optimistic over China s export outlook. Besides, from exhibit 33 we can see that the new export orders index has been strongly correlated to the external economies, especially the developed economies. Having bottomed out at

18 Li & Fung China Sourcing Quarterly in October, the OECD composite leading indicator 32 resumed its uptrend in November and rose all the way to in February. We think China s export growth will pick up to around 10%-15% yoy in 2Q12. Downside risks include a deterioration in the European sovereign debt crisis and a weaker-than-expected recovery of the US economy, although China s exports will continue to be cushioned by orders from emerging markets. Exhibit 29: China s quarterly foreign trade data, 2Q11-1Q12 USD billion (yoy growth) exports imports Trade Balance FY11 1,898.6 (20.3%) 1,743.5 (24.9%) (-14.5%) 2Q (22.0%) (23.1%) 46.4 (13.2%) 3Q (20.5%) (24.8%) 62.7 (-3.5%) 4Q (14.3%) (20.1%) 48.2 (-21.8%) 1Q (7.6%) (6.9%) 0.6 (-130.4%) Source: China Customs Exhibit 30: China s monthly foreign trade data, Apr Mar 2012 USD billion (yoy growth) exports imports Trade Balance Apr (29.8%) (21.9%) 11.3 (666.7%) May (19.3%) (28.4%) 13.0 (-33.2%) Jun (17.9%) (19.2%) 22.2 (10.3%) Jul (20.4%) (23.9%) 30.4 (6.1%) Aug (24.4%) (30.1%) 17.8 (-10.0%) Sep (17.0%) (20.8%) 14.5 (-12.4%) Oct (15.8%) (28.6%) 17.1 (-36.3%) Nov (13.8%) (22.0%) 14.6 (-34.4%) Dec (13.4%) (11.8%) 16.5 (31.4%) Jan (-0.5%) (-15.3%) 27.3 (368.3%) Feb (18.4%) (39.6%) (302.7%) Mar (8.9%) (5.3%) 5.3 (-3,948.9%) Source: China Customs 32 The OECD composite leading indicator, compiled by the Organization for Economic Cooperation and Development, is designed to provide early signals of turning points (peaks and troughs) between expansions and slowdowns of economic activity, and covers Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. 18

19 April 2012 Issue 11 Exhibit 31: Growth rates of exports and imports, Apr Mar 2012 Source: China Customs Exhibit 32: New export orders index and export growth, Apr Mar 2012 Source: China Federation of Logistics & Purchasing, China Customs Exhibit 33: China s export growth and OECD composite leading indicator, Apr Mar 2012 Source: China Federation of Logistics & Purchasing, Organization for Economic Cooperation and Development 19

20 Li & Fung China Sourcing Quarterly Member of the Li & Fung Group 利豐研究中心 Founded in Guangzhou in 1906, the Li & Fung Group is a multinational group of companies headquartered in Hong Kong, operating in a few core businesses - export sourcing, logistics, distribution and retailing. The Li & Fung Group has a total staff of over 37,000 across more than 40 countries worldwide, with an annual turnover exceeding US$18.5 billion in One of its core competencies is Supply Chain Management (SCM). ( the Centre ) researches and publishes reports on wide-ranging topics: Chinese economy, consumer market, retail sector, trade-related issues, and consumer goods industries, etc. Apart from providing internal consultancy for the Group and its clients, the Centre also participates in formulating business strategies in the Mainland market. The Centre has been actively promoting the application of SCM. In 2003, the Centre published the book The Orchestrator of Global Supply Chain Management, which is regarded as a very useful reference among businessmen and academics in the Chinese mainland, Taiwan and Hong Kong. The revised and expanded edition was published in August Copyright All rights reserved. Though endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. 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 s prior written consent is prohibited. 20