LI, Tao @ Hong Kong

Hong Kong businessman Peter Lam used to run a toy factory in Dongguan, an important industrial city in neighboring Guangdong province that is a foreign capital magnet. After 10 years’ dedication to the business he is familiar with, Lam nevertheless decided to quit, as he found it was no longer easy to find cheap labor.

“It was tough,” said Lam. “Competition was fierce and my profit margin was diminishing. The pool of low-cost labor shrank so fast that I could no longer recruit enough eligible workers at the wages I used to pay.”

While some small businesses are struggling with a labor shortage, big factories are under mounting wage inflation pressure, after the breakout of several walkouts on the mainland.

Japan’s Toyota, the world’s largest automaker, last Thursday confirmed production has resumed after the company agreed to discuss wage increases with workers who went on strike at an assembly plant in Tianjin two days earlier.

It followed disruptions in the production of another Japanese automaker, Honda, which has agreed to raise wages 24 percent for workers at a parts plant in Foshan, Guangdong, after all its mainland production halted due to pay-related walkouts.

The world’s largest contract manufacturer of electronics, Foxconn Technology Group, even doubled every employee’s basic salary after a spate of worker suicides in its Shenzhen factories, which triggered public outrage regarding the mainland’s “sweatshop” conditions.

“Factories on the mainland can no longer avoid rising labor costs, as wage increases, particularly among the long underpaid groups, are both urgent and necessary,” Simon Zhao, director of the International Center for China Development Studies at the University of Hong Kong, told China Daily.

The enormous labor pool out there, according to Zhao, has long stifled wages on the mainland, which has resulted in significant disprities between wage progress and economic growth.

Official figures show that mainland urban residents’ disposable income grew at an average 7.2 percent per year since economic reform began three decades ago, and rural residents’ income grew by 7.1 percent, both lower than the average GDP growth rate of 8-11 percent since 2001, while tax revenues have been growing at a rate of above 20 percent in recent years.

Minimum wages across the nation have also risen slowly. Guangdong province is an instructive example: As of May 1 and after several adjustments over time, the minimum monthly wage was only 1,030 yuan in Guangzhou, 920 yuan in Dongguan, and 810 yuan in Shantou.

Shanghai adjusted upward its minimum wage by 16.7 percent this April, the highest on the mainland currently, which nevertheless stands at merely 1,120 yuan per month.

Zhao said his research, which comprises comparative studies of labor income across similar professions in different countries, showed that mainland workers are also paid at low-levels compared with their counterparts in other developing countries.

“Mainland skilled workers are paid only 5 percent of what American workers receive, about half of what workers in Indonesia and Malaysia earn, and only slightly more than what Vietnamese workers are paid,” said Zhao.

Zhao said temporary difficulties in some factories will be inevitable as rising labor costs will further eat into their thin profit margins. But he believes wage inflation “will not necessarily put them to an end,” as “those with advanced technologies and high productivities will have the bargaining power to transfer the costs to the buyers.”

“Edging out these cheap-labor-dependent low-end businesses is a good thing for the economy in the long run, which also protects the benefits of the mainland workers,” Zhao added.

Pansy Yau, deputy chief economist of the Hong Kong Trade and Development Council (HKTDC) holds a similar view. Yau said a survey carried out by the council indicates that the mainland’s competitiveness as a production base will not be hampered by wage inflation, as its advantages are not due to price alone.

“Despite rising production costs, the mainland’s share of manufactured exports in world trade continues to increase, from 4.7 percent in 2000 to 12.7 percent in 2008, which emphasized that the competitiveness of the mainland as a production base is not linked to prices alone,” Yau said, adding that the mainland’s well-established industrial clusters, highly efficient and skilled labor force and infrastructure systems are able to offset the disadvantage of rising costs associated with wage increases.

The survey, which interviewed over 4,500 manufactures across the Pearl River Delta (PRD) region, also indicated that over 53 percent of respondents in the second quarter of this year said they can pass at least part of the rising labor costs to overseas buyers. Only 43 percent showed the same confidence in the first quarter.

“The PRD region went from a surplus to a shortage of workers over the years – currently a 50 percent shortfall in experienced workers. A higher wage is necessary to ensure the labor supply in the region,” HKTDC’s senior economist Billy Wong observed, as he commented on the survey.

“The mainland definitely needs to transform the economic model from relying on low-cost labor to developing higher value-added and sophisticated products,” said Wong.

China Daily

(HK Edition 06/24/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-06/24/content_10011286.htm

Workers assemble a wind turbine at Goldwind Science & Technology Co, Ltd in Urumuqi, Xinjiang Uygur Autonomous Region in Northwestern China. The company announced Monday it has called off its planned IPO in Hong Kong.  Qilai Shen / Bloomberg News

Deterioration in market conditions cited as a reason

Xinjiang Goldwind Science & Technology Co, China’s No 2 and the world’s fifth largest wind-turbine manufacturer, has called off its initial public offering (IPO) in Hong Kong – in another sign that indicates a further cooling in the IPO market.

Goldwind’s is the fourth Hong Kong IPO to have been shelved since last month.

“In light of the deterioration in market conditions and recent unexpected and excessive market volatility, the company formed the view that it would be inadvisable to proceed with the global offering at this time,” the company said in a statement filed with the Hong Kong stock exchange Monday.

The Shenzhen-listed company was planning to raise as much as HK$9.09 billion in a share sale in Hong Kong. Reports last Friday said it has decided to lower the low end of its indicative price range by about 9 percent as buy orders from public investors failed to reach the “target”.

“The lackluster market is easy to tell from the low daily trade volume (of the market),” said Castor Pang, research director at Cinda International. “The average daily turnover of around HK$30 billion so far this month was only half of that in May, which indicated fear among investors who feel uncertain about the European economy as well as the Shanghai stock market.”

Goldwind’s fallout follows Swire Properties Ltd, Strikeforce Mining & Resources Plc and China Tian Yuan Mining Ltd, which all announced delays of their Hong Kong listings in May.

Separately, Asian Capital Holding Ltd, a corporate advisory group that had planned to list on the growth enterprise market in Hong Kong, announced Monday that it will sell 300 million shares through a private share placement to selected investors and certain employees only, rather than through a public offering.

“We chose to sell shares through a share placement instead of a public offering largely due to fear of the market’s volatility,” Executive Chairman Patrick Yeung of Asian Capital said in a statement.

Reports, without citing sources, in the same day indicated that many investors decided to skip the Goldwind sale in expectation of the upcoming mega-IPO of Agricultural Bank of China Ltd in Shanghai and Hong Kong.

According to a term sheet released Monday, the bank is seeking to raise up to $14.4 billion in the Hong Kong portion of the offering, of which 95 percent will be placement shares for institution investors with the remaining 5 percent allocated to retail investors.

Excluding the over-allotment, the total $23.1 billion expected from the sale in the two markets would make it the largest IPO in history.

“It’s hard to say if Agricultural Bank of China’s dual listings will be welcomed or not in such a lukewarm market,” said Cinda’s Pang. “If the bank commands a valuation of 1.5 times its book value, the market is more likely to respond positively. It will be hard (for the bank to attract investors) if the stock is priced higher,” Pang added.

China Daily

(HK Edition 06/15/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-06/15/content_9977415.htm

After Foxconn, the world’s largest contract manufacturer of electronics, announced its third pay increase in two weeks, which would more than double every employee’s basic salary, experts believe it put immense pressure on many Hong Kong-funded manufacturers in the Pearl River Delta (PRD) region, as they may lack the ability to pass rising production costs to their overseas buyers.

“The wage hikes Foxconn proposed have gone far beyond my expectation, which will compel other manufacturers to inflate their pay,” Stanley Lau, deputy chairman of the Federation of Hong Kong Industries told China Daily. “Foxconn may be able to pass the wage increases to its customers, but those manufacturers who cannot will only have to move their plants elsewhere or close down the business.”

After a spate of worker suicides in its Shenzhen factories, Foxconn, a major manufacturer for many of the world’s top electronic gadget developers, said it will increase the basic salary for production-line staff to 2,000 yuan a month soon after they pass a three-month performance evaluation, a jump from 900 yuan per month previously established.

The Taiwanese-owned electronic manufacturer, which employs over 300,000 workers at its Shenzhen plants, said Tuesday it will seek higher prices from its clients, including the electronics giants Apple, Dell and Hewlett-Packard, to help offset the wage hikes.

“Foxconn is capable of making bargains with its clients, as products it is making, like iPhones and iPads, are so popular that some are even in short supply. But to most Hong Kong manufacturers, they lack the ‘irreplaceable’ position in the market and once losing their low-cost advantage, they will have nothing to gain,” said Lau.

In face of a labor shortage in the PRD region, Lau said wage hikes by some manufacturers will definitely affect the whole industry, as workers from similar factories are doing similar jobs and will inevitably compare wages with each other. But even if those factories raise wages by only the degree that Honda did, many of them will still have difficulty absorbing the costs of inflation.

The Japanese automaker has offered a 24 percent pay boost to its mainland workers, following a strike for a pay increase. According to a survey released by the Hong Kong Trade and Development Council last week, wage expenditures account for roughly 20 to 30 percent of total production costs of garment manufacturers, and an average 17 percent pay rise could translate into a 4-6 percent rise in their total production costs.

“These days, many manufacturers enjoy only some 5 percent profit margin as the export market is a buyer’s market. Those who cannot afford a pay increase are very likely to be edged out of the playground soon. But in the long run, it is a good thing for the Chinese economy,” Simon Zhao, director of International Center for China Development Studies at the University of Hong Kong, told China Daily.

China Daily

(HK Edition 06/10/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-06/10/content_9957995.htm

Residents advised to be cautious when planning to buy apartments

The city’s home supply in the next 3 to 4 years will be increased by as much as 60,000 units, which will likely be enough to meet demand, Financial Secretary John Tsang said Monday, emphasizing the government’s determination to maintain a healthy real estate market.

Tsang also advised residents to be cautious in making their home buying decision, as the recent volatility in equity markets is likely to affect the city’s property prices in the near future.

“When making investment plans on buying homes, I advise citizens to be aware of the potential risk, and making decisions according to their ability,” said Tsang, who fielded questions from lawmakers Monday. “Home prices have increased substantially over the past year, which I think is extremely unusual,” he added.

The number of property transactions was down 10 percent in May compared with one month earlier as the effect of recent government measures aimed at curbing speculative activities in the real estate market plays out gradually, according to the Financial Secretary.

Tsang said the government has been concerned about a potential bubble in the property market due to low interest rates and ample liquidity.

According to the Centa-City Index, a popular home price index complied by property agency Centaline Property Agency Ltd and the City University of Hong Kong, the city’s home prices rose to a 12-year high in April, despite an increase in the supply of local flats in the first quarter.

“Hong Kong’s property prices no longer reflect the real supply and demand (situation),” said Wong Leung-sing, associate director of research at Centaline. “Huge sums of cash will continue to flow into the property market amid a low-interest-rate environment and in anticipation of future inflation, though I believe the real demand is comparatively low.”

Wong said the overheated real estate market has outrun the city’s economic recovery, which has led to corrections in property prices recently. He expects the transaction volume to continue to drop in the next two months until the third quarter, when Hong Kong’s economic outlook becomes clearer.

Hong Kong’s home prices increased as much as 29 percent in 2009, and gained another 8.4 percent in the first quarter this year. Adressing concerns about soaring property prices, the Hong Kong government has come up with a series of measures to curb possible price manipulations by developers and announced increased stamp duties on some property transactions, as well as acceleration of government land auctions.

But auctions on the Tung Chung site and Fanling site in May received lukewarm response from the developers. Both were sold at low prices and failed to live up to surveyor’s expectations.

China Daily

(HK Edition 06/08/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-06/08/content_9945934.htm

Failing to renegotiate a watered-down price with American International Group (AIG), Hong Kong-listed UK insurer Prudential Plc has decided to walk away from the takeover of AIG’s Asian life insurance unit, at a cost of approximate 450 million pounds.

“We listened carefully to shareholders over the price and initiated a renegotiation of the terms with AIG. Unfortunately, it has not been possible to reach agreement,” Chairman of Prudential Harvey McGrath said in a statement Wednesday. “We are therefore withdrawing from the transaction.”

The total cost of 450 million pounds, including 152.6 million pounds breakup fees and 81 million pounds in underwriting charges and currency hedges, may put further pressure on Tidjane Thiam, the group chief executive officer, to resign for failing to renegotiate the terms for the deal, some reports said.

A poll titled “Should Prudential’s Tidjane Thiam resign?” on the Guardian’s website reveals that almost 60 percent of voters believe the insurer’s chief executive officer should step down.

Though Thiam said in a statement that he views Asia as offering excellent growth opportunities for the group and, accordingly, entered into this potential transaction, Kenny Tang, executive director with Redford Securities Ltd in Hong Kong, believes Prudential has been “too hasty” in making the takeover decision.

“AIG originally planned to list its AIA unit in Hong Kong to raise cash. In fear of another formidable rival to its business in Asia, Prudential formulated plan to buy it out in a very short time, leaving the potential risk and huge loss aside in case the takeover could not be achieved,” said Tang.

The breakup cost amounts to about a third of Prudential’s entire 2009 operating profit. Tang said the insurer’s management, including Thiam and possibly others on the board, are indeed responsible for the huge loss this time.

Prudential previously offered $35.5 billion for AIA, AIG’s wholly-owned pan-Asia life insurance subsidiary, but has proposed to lower the price tag to $30.4 billion earlier this week, after protests by some of its shareholders that the UK insurer is overpaying for AIA.

AIG turned down the revised offer Tuesday, a move welcomed by investors of Prudential. Both the insurer’s London-listed and Hong Kong-listed shares jumped Tuesday after investors learned news of Prudential’s likely withdrawal from the deal.

On Wednesday, the share price of the UK insurer rose further HK$1.2 or 1.89 percent to HK$ 64.70, bucking a weaker broad market.

China Daily

(HK Edition 06/03/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-06/03/content_9925900.htm