l Global Research l

On the Ground | 06:00 GMT 05 March 2012

China More than 200 clients talk wages in the PRD

Manufacturing wages are up by an average 10% this year, our survey suggests Majority of clients see output per worker rising faster than wages; productivity growth is keeping pace More firms are opting for capital investment to boost productivity, as opposed to moving locations Orders situation does not look too bleak; CNY appreciation expectations are alive and kicking

Summary
Wages are still rising in Chinas manufacturing heartland, albeit at a slower pace than last year, according to the results of our third annual survey of clients about wage trends in the Pearl River Delta (PRD). Conducted after the Lunar New Year holiday in late January, the survey received an overwhelming 204 responses all from Hong Kong manufacturers, big and small, who operate in the PRD. We would like to thank the clients who took part, and the Standard Chartered relationship managers who facilitated everything. Our main findings are as follows: Wages in the PRD are up 10% this year, less than last years 11% and the 15-20% rates sometimes reported in local media. Most respondents are seeing labour shortages at least as bad as those seen last year. Formal wage negotiations are still uncommon, but companies are facing stricter enforcement of social insurance requirements. Investing in capital equipment to replace workers is by far the most common response to labour shortages. More companies are considering moving inland than are considering leaving China. Higher productivity helps to explain (and absorb) higher wages; the majority of companies say output per worker has risen faster than wages. More companies saw orders improve than decline over the past six months; the outlook for the next six months is not too bleak. Most companies expect the Chinese yuan (CNY) to appreciate 0-5% against the US dollar (USD) this year. Chart 2: How is the labour shortage compared to 2011? No. of respondents
Kelvin Lau, +852 3983 8565
Kelvin.KH.Lau@sc.com

Wei Gu, +852 3983 8568

Wei.Gu@sc.com

Betty Rui Wang, +852 3983 8564

Betty-Rui.Wang@sc.com

Stephen Green, +852 3983 8556

Stephen.Green@sc.com

Chart 1: Did wages go up this year? No. of respondents (average % increase in brackets)

Yes, already

2011 (11.3%) 2012 (10.4%)

113

164 More difficult 71

Not yet, but will do so

(11.1%) 31 (9.0%) 66

The same

100

9 No plans for this year 25 0 50 100 150 200 0 20 Less difficult

30

40

60

80

100

120

Source: Standard Chartered Research

Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2012

Source: Standard Chartered Research

research.standardchartered.com

On the Ground

Labour shortages No let-up

Another year of low-double-digit increases in wages
Respondents reported 10% wage hikes on average this year; finding workers appears to be as difficult as last year Of the 204 respondents, 113 (55%) said they raised their workers hourly wages just before or after the Lunar New Year, by an average of 10.4% and a median of 10%. Increases ranged from 5-30%. Our forecast for official CPI inflation in 2012 is 2%; even factoring in a more realistic level of price appreciation, say 5%, real wages should still go up in 2012. This is supported by the fact that 66 of the remaining 91 survey respondents said they plan to raise wages this year, by an average of 9.0% (Chart 1). This compares with an average of 11% in 2011. Only 25 companies said they had no plans to raise wages this year. In line with still-evident wage pressure, only 30 respondents considered it less difficult to find workers compared to the same time last year (Chart 2; note that in some charts, total responses add up to less than 204 because not all respondents answered the question).

Policy push to create better employers continues

Shenzhen was one of the first cities to increase the minimum wage this year, by 13.6% Most of the employers we interviewed are already paying above the local minimum wage. Actual monthly salaries are usually CNY 2,000+, compared to the newly revised minimum wage of CNY 1,500 in Shenzhen (up from CNY 1,320), effective 1 February. The other cities in the PRD are set to follow. Guangzhou, for example, is expected to increase its minimum wage to CNY 1,470 from CNY 1,300, according to recent media reports. A 13% increase would be in line with the annual wage-hike th target set under the governments 12 Five Year Plan. Only 15 of our 204 respondents (7%) considered the impact of the mandated minimum wage increases to be huge. About half of the sample said the new mandates forced them to raise wages more than they had planned, while 83 reported that wages would have gone up anyway (Chart 3). Formal wage negotiations with labour unions or worker representatives remain rare 18 clients of the 204 we surveyed (9%) had engaged in negotiations in the past six months. Half of the employers accepted a 5-10% raise, while the other half accepted a 10-20% raise. Only 28 companies (14%) think they will have to hold such talks this year (Chart 4). Stricter social insurance requirements have created an additional cost burden for many The labour challenge in Guangdong does not stop with salaries. Close to 60% of our respondents faced requirements to pay more in social insurance for their workers (Chart 5). This insurance includes pensions, medical and maternity coverage, Chart 4: Have you negotiated wage increases in the past six months, or do you plan to? No. of respondents

Chart 3: What was the impact of the mandated minimum wage hikes? No. of respondents

Huge impact, would not have hiked wages otherwise

15

Yes

18

Some impact, raised wages more than initially planned

105

No, don't think I will this year

157

No impact, will raise wages the same anyway 0 20 40 60 80

83

No, but probably have to this year

28

100

120

50

100

150

200

Source: Standard Chartered Research

GR12JA | 05 March 2012

Source: Standard Chartered Research

2

On the Ground

coverage for work-related injuries, and unemployment coverage. Actual implementation varies by region, but if fully paid, insurance is equivalent to around 40% of an employers basic salary. Guangdong province has been known for its relaxed implementation of social insurance requirements over the past two decades, but this now seems to be changing.

A still-favourable productivity story

Higher labour productivity helps to absorb, and therefore justify, higher wages. If productivity growth keeps up with wage growth, this is healthy. If wage growth significantly exceeds productivity growth, we have a wage inflation problem. Productivity, though, is notoriously difficult to measure. There are few reliable official numbers. Asking managers will provide only an impressionistic response, but we asked anyway. As Chart 6 shows, the majority (almost 60%) of our respondents said their per-worker output has risen more than wages. A large minority, however, reported that this was not the case, which raises some concern about what is happening here. Given this split in opinion, we would expect some but not all of the increased wage costs to spill over into factory gate prices. Productivity growth has outpaced wage growth, but firms see the need for more capital investment to keep up There is no surprise, then, that companies are responding to labour shortages by investing in more capital equipment (131 respondents of 204, or 64%), to improve per-worker output or to replace workers. Some have also outsourced less sophisticated operations to contractors, introduced new product designs, or improved benefits for employees. Of those who have decided (or plan) to relocate their factories to places with cheaper labour, 21 respondents said they would move capacity inland, while only six clients planned to move capacity out of China (Chart 7). The small number of employers planning to move locations suggests that many believe that wage arbitration is not a sustainable strategy. Moving a factory is a costly option; businesses can lose proximity to suppliers and customers, and they have to bear higher transport costs. Popular inland locations include Guangxi, Jiangxi, Hunan and Hubei (provinces west and north of Guangdong). Respondents said labour-cost savings ranged from 1040%, with an average of 16%. For those looking to relocate overseas (four respondents in the garment industry, one in the printing business and one car-part manufacturer), Cambodia, Bangladesh and Vietnam were mentioned most, followed by India and the Philippines. By relocating to Cambodia and Bangladesh, companies estimated wage savings of 45% and 50%, respectively. Chart 5: Were social insurance payments more strictly enforced? No. of respondents Chart 6: Has per-worker output risen more than wages, in your opinion? No. of respondents

Yes, a lot Yes 121

10

Yes, a bit

111

No

83 No 82

20

40

60

80

100

120

140

20

40

60

80

100

120

Source: Standard Chartered Research

GR12JA | 05 March 2012

Source: Standard Chartered Research

3

On the Ground

Beyond wages Perception versus reality

Orders are not too bleak, and idle capacity is manageable
More clients see orders improving rather than declining We also asked our clients about their orders over the past six months, and about their outlook. Encouragingly, the majority of companies have seen orders improve over the past six months (see Chart 8), by an average of 15%; those that reported declines said they also fell by an average of 15%. This is significantly better than Chinas overall export numbers, which were basically flat in H2-2011. There is good news ahead, too: An even larger number of companies foresee orders improving over the next six months (by an average of 14%). Less than 18% expect orders to decline, by an average of 13%. There is a selection bias in our sample our clients are likely to be the best at what they do but their views are still an encouraging signal. Utilisation ratios also are not bad. As Chart 9 shows, one-third of our 204 respondents are operating at full capacity. A few are operating at less than 80% of capacity, however, which we would call a danger level.

Onshore firms say there will be no CNY depreciation

Manufacturers forecast more CNY appreciation to come Our clients do not buy the story that Beijing will allow the CNY to depreciate in 2012. The majority of respondents see the CNY appreciating 0-5% against the USD this year (Chart 10). We forecast that the CNY will appreciate by 1.4% to 6.21 by the end of the year. We believe many of the gains will take place in H2, however. Our clients are more aggressive than we are almost 50% expect CNY appreciation of 3-5% in 2012.

Chart 7: How do you plan to respond to labour shortages? No. of respondents

Chart 8: What is the orders situation like? No. of respondents

Invest more in capital equipment

131

Improve

Past 6 months Next 6 months

87 99

63 Move capacity inland 21 No change 71

Move capacity out of China

53 Decline 31

20

40

60

80

100 120 140

20

40

60

80

100

120

Source: Standard Chartered Research

GR12JA | 05 March 2012

Source: Standard Chartered Research

4

On the Ground

Final thoughts The PRD has pockets of stress

There is every indication that labour shortages and upward pressure on wages are here to stay in the PRD. Wages will rise by some 10% in nominal terms, maybe 5-6% in real terms. This is less than in 2011, suggesting that the economy has cooled. Companies costs are also rising as social insurance contributions are enforced. Local governments are happy to follow the wage trend, even if it appears to be driven by job creation in the interior and shifting population dynamics (see On the Ground, 27 January 2011, China Wanted: 25mn workers). There is limited evidence that this trend is leading to a loss of competitiveness in Chinas manufacturing sector, and that the real income growth it is generating for households is to be welcomed. For those with an eye on near-term demand trends, this wage growth suggests that Chinas labour market remains pretty healthy, meaning that some in Beijing remain reticent about loosening monetary policy.

Chart 9: What utilisation levels are you operating at? No. of respondents

Chart 10: How do you think the CNY will perform against the USD between now and year-end? No. of respondents

100%

Capacity Workforce 33 34

57 67

Appreciate more than 5%

10

90-99%

Appreciate 3-5% 63 60

103

80-89% 29 31 18 12 0 10 20 30 40 50 60

Appreciate less than 3%

79

70-79%

No change

10

Less than 70%

Depreciation 70 80 0

1 20 40 60 80 100 120

Source: Standard Chartered Research

Source: Standard Chartered Research

GR12JA | 05 March 2012

On the Ground

Disclosures Appendix
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Document approved by

Data available as of

Document is released at

Stephen Green Regional Head of Research, Greater China

06:00 GMT 05 March 2012

06:00 GMT 05 March 2012

GR12JA | 05 March 2012