China maintains manufacturing edge despite higher costs

Toh Han Shih

Despite recent wage increases, China, especially the Pearl River Delta, will remain the world's factory for the foreseeable future, according to the Hong Kong Trade Development Council. But in the short term, increasing costs will hurt profit margins and production of Hong Kong manufacturers.

"In the long run, they will continue to buy from China," said TDC deputy chief economist Pansy Yau. "China remains competitive."

The Pearl River Delta remains the favourite investment destination for Hong Kong manufacturers, with 46.2 per cent saying they will set up factories there, according to a TDC survey of 4,500 respondents, including 2,400 Hong Kong manufacturing companies.

Another 12.7 per cent will opt for the Yangtze River Delta, while 6.2 per cent prefer Vietnam, 3.8 per cent Cambodia, 3.1 per cent Indonesia and 2.3 per cent Bangladesh.

However, 70 per cent of the respondents experienced increased labour costs, with wages rising an average 17 per cent in the past six months. This led to a 4 to 6 per cent rise in production costs. Most Hong Kong manufacturers' factories are in the Pearl River Delta.

A 5 per cent appreciation of the yuan will result in a 2.5 per cent rise in production costs, TDC senior economist Billy Wong said.

"These rising costs are eating into Hong Kong manufacturers' thin margins," Yau said.

But while costs grew, the mainland's share of manufactured exports in world trade increased from 4.7 per cent in 2000 to 12.7 per cent in 2008. "It shows the mainland's competitiveness is not due to price alone," Yau said.

The global manufacturing share of India was 1.07 per cent in 2008, while Vietnam, Indonesia, Cambodia and Bangladesh had less than 1 per cent each.

In the United States, the world's biggest consumer market, China's share of US non-oil imports rose from 18.8 per cent in 2006 to 23 per cent last year, while India's share was only 1.6 per cent in 2009, Indonesia 1 per cent and Cambodia, Bangladesh and Vietnam were less than 1 per cent each.

Despite the rise in production costs, the average output per mainland worker is significantly higher than in Vietnam, Cambodia and Bangladesh, Wong said.

The average annual output of one worker in China was US$22,500 in 2008, while in Vietnam it was US$8,100, in Bangladesh US$7,200 and in Cambodia US$4,200, according to TDC estimates.