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Feeling the PRD pulse Special Report: Shop Talk – China, ASEAN and robotics PRD manufacturers reflect the challenges China faces as its economy transforms China through the PRD lens The slow, painful economic transition continues We conducted our seventh annual survey of PRD manufacturers between February and March 2016, with responses from close to 290 Hong Kong-based and Taiwanbased manufacturers operating in the PRD. Our clients tell us that the labour shortage is marginally less severe, and that wage growth (and expectations thereof) is relatively steady despite a slowing economy; there is greater divergence in workforce utilisation among manufacturers, but there are also more wage negotiations with workers; pessimism is rising, while orders appear more difficult to come by; and a weaker CNY is having a mixed impact on PRD manufacturers. It is through the PRD lens that we get a glimpse into China’s ongoing economic transition. Higher wages are an integral part of the country’s structural shift towards a consumption-driven, services-oriented growth model. Wage increases can also be justified and absorbed by productivity growth. The likelihood of nominal wages increasing almost 8% on average this year – similar to last year – should, therefore, be good news, although it comes at the expense of manufacturers. Our survey shows that persistent wage pressure will likely further compress manufacturers’ margins, explaining the increase in policy support to the struggling corporate sector. Provinces have been allowed to hike minimum wages at a slower rate and to lower social security payments by companies. Respondents also generally expect to benefit from the ‘Belt and Road’ and ‘Made in China 2025’ initiatives. Meanwhile, manufacturers who want to control costs continue to favour investing in automation; a growing minority is looking to move capacity out of China. We note here that our surveyed clients are likely among the more successful PRD firms. This may skew the results somewhat; things probably look bleaker beyond our sample. However, allowing weaker manufacturers to fail has been, and will continue to be, a key part of China’s much-needed transformation. Figure 1: Wages set to rise 7.7% in 2016 vs 7.8% in 2015 Actual and expected wage increase, % of respondents Figure 2: Is labour shortage better or worse than before? % of respondents Others Up 20% More difficult 2016 2015 Up 15% Up 10% Up 5% No change 2016 2015 Same Less difficult 0% 10% 20% 30% 40% 50% Source: Standard Chartered Research 0% 10% 20% 30% 40% 50% 60% Source: Standard Chartered Research 19 July 2016 8
2015 Feeling the PRD pulse Special Report: Shop Talk – China, ASEAN and robotics Wages are still rising, despite easing expectations Gauging the challenges, starting with wages Wage expectations on a multi-year downtrend On the face of it, wage growth pressure has barely eased despite a slowing economy. Our respondents say they are raising (or planning to raise) wages by 7.7% on average in 2016, close to last year’s 7.8% (Figure 1). This is, however, down from increases of 8.1% in 2014 and 8.4% in 2013. Wage expectations are coming off at a faster rate, with 2016 being the first time that current-year wage expectations are lower than the prior year’s actual increase (Figure 3). This suggests increasingly cautious sentiment among employers. On a same-company basis, 22% of respondents plan to raise wages more than they did last year, down from 26% prior; those who expect to raise them less stayed steady at 18% (Figure 4). Using official CPI inflation as a deflator, real wage growth is around 5.6% in 2016, down from 6.3% in 2015, 6.1% in 2014 and 5.8% in 2013. While not material enough to undermine China’s pursuit of more consumption-driven growth, this does soften the tone of an otherwise relatively steady headline wage growth story. The labour market is still tight; strong companies are getting stronger and more competitive Diverse workforce utilisation amid a labour shortage The PRD is still facing a labour shortage, which is keeping wages well supported. 27% of our respondents say the labour shortage has worsened in the past 12 months, versus 20% seeing less labour-market tightness. The 7ppt difference, however, is smaller than last year’s 15ppt, indicating an easing trend (Figure 2). Workforce utilisation shows a similar easing picture – 53% of respondents reported operating at 80-90% of their workforce, a material drop from 63% last year (Figure 5). In contrast, 18% of respondents are operating at 70% or less of their workforce, up from 15% in 2015, and 13% in 2014. Interestingly, the proportion of those reporting 100% utilisation also rose, to 29% from 22% in 2015, either reflecting more nimble manufacturers getting leaner amid challenging times or more competitive manufacturers gaining market share at the expense of others. We think this is a sign of success for China’s transformation strategy – stronger companies moving up the value chain, despite the challenges of limiting the fallout of weaker companies folding as a result. Figure 3: Respondents expect milder wage growth acceleration than in the previous year, for the first time Actual and expected wage increase, this and past surveys 9.5 9.0 8.5 8.0 7.5 Current year expectation Prior year actual Figure 4: Wage growth, 2015 actual vs 2016 expectations % of respondents; blue shading indicates faster expected wage growth this year versus 2015 No change 2016 Up 5% Up 10% Up 15% Up 20% No change 6.3% 3.5% 0.3% 1.0% 0.0% Up 5% 3.8% 30.4% 8.7% 1.0% 0.3% 7.0 6.5 6.0 2013 2014 2015 2016 Source: Standard Chartered Research Up 10% 1.4% 4.5% 15.4% 5.9% 0.3% Up 15% 1.0% 0.3% 2.8% 4.2% 1.0% Up 20% 0.7% 1.0% 1.4% 1.4% 1.7% Source: Standard Chartered Research 19 July 2016 9
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