PRD's pain, China and ASEAN's gain - Special Report
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l Global Research l Special Report PRD’s pain, China and ASEAN’s gain Highlights Companies in the Pearl River Delta (PRD) – China’s leading Kelvin Lau +852 3983 8565 Kelvin.KH.Lau@sc.com manufacturing hub – still face plenty of challenges, according to our Macro Research Standard Chartered Bank (HK) Limited sixth annual survey of manufacturers in the region. A labour Chidu Narayanan +852 3983 8568 shortage persists, and wages are likely to rise 8.4% this year. Chidambarathanu.Narayanan@sc.com Macro Research Standard Chartered Bank (HK) Limited The PRD’s short-term pain is part of China’s longer-term pursuit of a Betty Rui Wang +852 3983 8564 more sustainable growth model, in our view. Rising wages reflect Betty-Rui.Wang@sc.com Macro Research China’s improving productivity and the increasing complexity of the Standard Chartered Bank (HK) Limited goods it produces as it moves up the value chain. Rising FDI flows Jeff Ng +65 6596 8075 Jeff.Ng@sc.com into the services sector reflect this shift. Macro Research Standard Chartered Bank, Singapore Branch Investing more in automation and streamlining processes is the most common response to labour shortages and rising wages for PRD manufacturers. Among those planning to relocate factories, the preferred offshore destinations are Vietnam and Cambodia. ASEAN – with its lower wages, abundant labour supply and rising household affluence – is well positioned to benefit from the PRD’s shift towards high-end manufacturing and services. Infrastructure development would allow it to become Asia’s next PRD, in our view. Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2015 research.standardchartered.com
Special Report: PRD’s pain, China and ASEAN’s gain Contents Overview 3 Infographics 4 Feeling the PRD pulse 6 Good news for the economy, less so for manufacturers 7 Tackling labour challenges – Invest or relocate? 11 Beyond wages 13 China through the PRD lens 15 Slowing growth is a headwind to the labour market 16 Transforming China’s manufacturing machine 18 Corporates face higher CNY volatility 21 ASEAN – The next PRD? 23 Opportunities for ASEAN 24 Vietnam: Emerging alternative for low-cost manufacturing 28 Global Research Team 32 Acknowledgements We would like to acknowledge the contribution of Karcy Chan to this report 5 May 2015 2
Special Report: PRD’s pain, China and ASEAN’s gain Overview The PRD has driven China’s The Pearl River Delta (PRD) region consists of nine cities in Guangdong Province: success as the world’s Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, manufacturing powerhouse Jiangmen, and Zhaoqing. Given its pioneering role in China’s Open Door Policy and its success as a manufacturing powerhouse, the region has been the ‘poster child’ for China’s spectacular economic ascent of recent decades. Endowed with only 0.6% of China’s land area and 4.2% of the national population, it accounts for 27% of the country’s exports and receives almost 20% of inward foreign direct investment (FDI) – particularly from Hong Kong, given close economic linkages between the two. The PRD epitomises China in many ways, exemplifying both the qualities that drive the country’s economic engine and the emerging challenges as the economy transitions towards a more sustainable growth model. At the centre of these challenges are labour shortages and the relentless rise in wages, which are eroding the region’s and the nation’s competitiveness. It is against this backdrop that we conducted our sixth annual PRD manufacturing survey, which provides unique insights into what is happening on the ground in China. Our survey allows us to feel the The first section of this Special Report (‘Feeling the PRD pulse’) highlights the results pulse of the PRD, helping us of our latest survey, conducted between late February and late March 2015. understand more about China’s Respondents reported little let-up in the labour shortage, despite the slowing current labour conditions economy. Over 85% said that labour shortages are at least as bad as last year. Migrant worker wages are expected to rise 8.4% on average this year, versus 8.1% in 2014. Our CPI inflation forecast of 1.6% this year translates into real wage growth of 6.8%. This should continue to provide important support to otherwise slowing consumption. Minimum wage hikes are also putting upward pressure on wages. In response, most companies plan to invest in automation or in streamlining processes. For those considering moving capacity outside of China, Vietnam and Cambodia are the top choices. For those considering moving inland, the outer areas of Guangdong, Guangxi and Hunan are the favoured destinations. The PRD exemplifies China’s shift In the next section (‘China through the PRD lens’), we extend our analysis from the towards high-end manufacturing PRD to the whole of China. Maintaining a stable labour market and healthy income and a more services-oriented growth are top priorities for Beijing. While our survey shows that the labour market economy has stayed tight so far, a challenging macro backdrop could create headwinds. While they pose challenges to manufacturers, China’s rising labour costs and wages also reflect the country’s improving productivity and the increasing complexity of the products it makes. We believe automation and robotics will help to drive China’s move up the manufacturing value chain. Recent FDI trends also confirm that China is transforming into a more services-oriented economy. ASEAN, the favoured destination for In ‘ASEAN – The next PRD?’, we focus on ASEAN as an attractive alternative for factory relocation from China, is factory relocation from the PRD. ASEAN is poised to become Asia’s next PRD, in our well positioned to be the next PRD view, benefiting from lower wage costs and abundant labour supply over the next 20 years. The region’s high growth and rising middle class mean that manufacturers moving production to ASEAN from the PRD can also capture a share of a large and growing consumer market. Vietnam, ASEAN’s emerging manufacturing powerhouse, is the prime example of how these fundamental advantages are converging to attract investment and drive growth. 5 May 2015 3
Special Report: PRD’s pain, China and ASEAN’s gain Infographics Figure 1: The PRD is a magnet for global FDI into China Map of the PRD, rest of China and selected Asian economies weighted by inward FDI, 2013 FDI (USD mn) Rest of China 241,734 PRD 106,114 Hong Kong 74,286 Singapore 63,772 India Indonesia 28,153 23,287 REST OF Thailand 12,650 South Korea Malaysia 12,221 11,583 CHINA Infographics Macau 9,875 Vietnam 8,900 Japan 3,715 JAPAN = USD 1bn SOUTH KOREA PEARL RIVER INDIA DELTA THAILAND VIETNAM SINGAPORE MALAYSIA HONG KONG M ACAU INDONESIA Source: World Bank, CEIC, Standard Chartered Research 5 May 2015 4
Special Report: PRD’s pain, China and ASEAN’s gain Figure 2: The PRD drives China’s export engine Map of the PRD, rest of China and selected Asian economies weighted by exports, 2013 Exports (USD mn) Rest of China 1,426,323 Japan 754,968 South Korea 635,890 PRD 607,093 Hong Kong 459,228 Singapore 434,498 India 352,473 Thailand 189,394 Malaysia 186,226 Indonesia Vietnam 160,972 80,770 REST OF SOUTH KOREA CHINA Infographics = USD 5bn JAPAN INDIA VIETNAM PEARL RIVER DELTA THAILAND HONG KONG MALAYSIA SINGAPORE INDONESIA Source: World Bank, CEIC, Standard Chartered Research 5 May 2015 5
Feeling the PRD pulse
Special Report: PRD’s pain, China and ASEAN’s gain Feeling the PRD pulse Good news for the economy, less so for manufacturers Kelvin Lau +852 3983 8565 Our sixth annual survey of PRD manufacturers was conducted between late Kelvin.KH.Lau@sc.com Macro Research February and late March 2015, with more than 290 responses from Hong Kong- and Standard Chartered Bank (HK) Limited Taiwan-based manufacturers operating in the PRD. The results suggest that at the Chidu Narayanan +852 3983 8568 macro level, China is still creating jobs and maintaining income growth for now. At Chidambarathanu.Narayanan@sc.com Macro Research the company level, however, persistent labour shortages mean more cost challenges Standard Chartered Bank (HK) Limited ahead for PRD manufacturers. Respondents also expressed continuing concerns about narrowing margins, tight credit conditions, the still-cautious outlook for orders, We surveyed more than 290 Hong and an increasingly volatile Chinese yuan (CNY). But for those willing to adapt, there Kong- and Taiwan-based are also opportunities. Increased capital investment, process automation and factory manufacturers operating in the PRD relocation are possible responses to challenging conditions in the PRD. As our infographics (pages 4-5) show, the PRD has not just been a key contributor to China’s growth in recent decade; it is also an economic powerhouse in its own right, comparable in size to most ASEAN economies. Given that the PRD receives a material share of China’s inward FDI, our sample of Hong Kong- and Taiwan-based manufacturers operating in the region provides a clear picture of what drives China’s manufacturing machine. Our clients are likely to be among the more successful firms Feeling the PRD pulse operating in the region, which may skew the results somewhat. However, given the paucity of reliable official data on wage and employment trends – and our large sample size – we think the survey provides an important on-the-ground picture of China’s economy. Figure 1: Wages set to rise 8.4% in 2015, vs. 8.1% in 2014 Figure 2: Is labour shortage better or worse than in 2014? Actual and expected wage increase, % of respondents % of respondents Others More difficult Up 20% Up 15% Same Up 10% 2015 2014 Up 5% Less difficult No change 0% 5% 10% 15% 20% 25% 30% 35% 40% 0% 10% 20% 30% 40% 50% 60% Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 7
Special Report: PRD’s pain, China and ASEAN’s gain Persistent labour shortage, steady wage pressure Rising real wages should support Higher wages – and the resulting higher income growth – are part of China’s consumption – a positive for structural shift towards a consumption-driven, services-oriented growth model. Higher China’s otherwise slowing economy wages are partly policy-driven (we will come back to this later), but demand and this year supply factors also play major roles. While the current rapid rise in migrant workers’ wages may hurt manufacturers, a broader concern is that labour demand may eventually slow in line with the economy, delaying China’s transformation. In this sense, the fact that our respondents are raising (or plan to raise) wages more this year than in 2014 is good news. Compared with last year’s survey, a larger share of respondents expect wages to rise by 10-15% (Figure 1). The average expected wage increase is 8.4% in 2015, up from 8.1% last year. However, the difference between current-year wage expectations and the prior year’s actual increase is the smallest in recent years (Figure 3), possibly reflecting more cautious sentiment among employers and more benign inflation expectations. Using the official CPI as a deflator, expected real wage growth is around 6.4% in 2015, up from 6.1% in 2014 and 5.8% in 2013. This continued rise in real wage growth should provide important support for household consumption – an overlooked positive story for China’s otherwise slowing economy this year, facilitating the structural shift towards more consumption-driven growth. Feeling the PRD pulse More than 70% of our respondents said they had already raised wages this year ahead of the Lunar New Year, by an average of 8.5%. On a same-company basis, 26% of respondents plan to raise wages more than they did last year, while 18% expect to raise them less (Figure 4). The remaining majority expects 2015 wage growth to be in line with 2014, indicating steady underlying momentum driven by a structural labour shortage. The PRD as a whole may be facing a deficit of more than 1mn migrant workers, according to media reports. 29% of our respondents said labour shortages have worsened over the past 12 months, similar to last year’s 30% (Figure 2). That said, a growing minority reported less labour-market tightness compared with a year ago (15% of respondents, versus 11% last year); this matches the softer macro backdrop. 84% of respondents reported operating with 80% or more of their full workforce (Figure 5) – marginally down from last year’s 87% utilisation level, but still high. However, 66% of respondents say their factory workers’ average hours have increased in the past 12 months, up from 64% prior (Figure 6). Figure 3: Respondents expect milder wage growth Figure 4: Wage growth, 2014 actual vs. 2015 expectations acceleration than in past surveys % of respondents; blue shading indicates faster expected Actual and expected wage increase, this and past surveys wage growth this year versus 2014 9.5 Current year 2015 expectation 9.0 No Up 5% Up 10% Up 15% Up 20% change 8.5 No change 4.8% 3.1% 1.4% 1.0% 8.0 Prior year actual Up 5% 2.0% 22.1% 11.9% 1.7% 7.5 2014 7.0 Up 10% 2.7% 6.5% 19.4% 5.1% 0.3% 6.5 Up 15% 0.7% 0.3% 3.4% 5.4% 1.0% 6.0 Up 20% 1.0% 1.0% 0.7% 2.7% 2013 2014 2015 Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 8
Special Report: PRD’s pain, China and ASEAN’s gain Minimum wage hikes and other push factors th Policy is also playing a key role in driving wages higher. The government’s 12 Five Year Plan (2011-15) targets minimum wage increases of “at least 13% a year on average”. So far this year, 11 provinces/cities have hiked their regulatory minimum wages, led by Shenzhen’s 12% increase to CNY 2,030 (Figure 9). The average increase in minimum wages fell to 13% in 2014 from 22% in 2011, reflecting the higher base as well as slowing growth and lower inflation (Figure 10). We estimate that minimum wage hikes will average around 10-11% in 2015, higher than the 8.4% wage increase estimated by our survey respondents. This gap reflects the fact that officially mandated minimum wage levels have generally lagged the market rate, with many clients already paying more than the minimum wage to begin with. Only 7% of our respondents (versus 6% last year) said that minimum wage increases have had a “huge” impact on wage levels (Figure 7). Even so, 63% (versus 52% last year) said that regulatory wage hikes have forced them to raise wages more than they had planned. 30% (down from 42% last year) said they would have hiked wages anyway, regardless of minimum wage changes. We conclude that minimum wage hikes do have some impact on actual wages, especially for the least skilled part of the workforce. Feeling the PRD pulse Figure 5: Workforce utilisation level Figure 6: Have the average working hours of your factory % of respondents, this and previous surveys workers increased in the past 12 months? % of respondents 100% Up 20% 3% 90% Up 15% 11% 80% Up 10% 23% 70% 2015 2014 Up 5% 30% 60% Did not go up 33% 0% 10% 20% 30% 40% Source: Standard Chartered Research Source: Standard Chartered Research Figure 7: The impact of minimum wage hikes Figure 8: Have you negotiated wages in past six months? % of respondents, this and previous surveys % of respondents, from this and previous surveys Huge impact, would not have Yes hiked wages otherwise 2015 No, but I think I will 2015 Some impact, raised wages more than initially planned probably have to this year 2014 2014 No impact, will raise wages No , and I don’t think the same anyway I will this year 0% 20% 40% 60% 80% 0% 20% 40% 60% 80% Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 9
Special Report: PRD’s pain, China and ASEAN’s gain Pressure from collective wage bargaining has not let up this year. 23% of respondents say they have had formal wage negotiations with worker representatives in the past six months (Figure 8). This is similar to 24% in 2014, and up from 19% in 2013 and only 9% in 2012. Another 14% of respondents say they will likely have to negotiate wages sometime this year. Of the companies that have negotiated wages in the past six months, 55% were asked to hike wages by 5-10%, 41% by 10-20%, and the rest by more than 20%. We believe the authorities remain committed to promoting collective wage bargaining as a way to improve worker protection and calm labour tensions amid a slowing economy. Stricter worker-related social insurance requirements imposed by local governments continue to create an additional cost burden for manufacturers. 71% of our survey respondents said stricter worker insurance schemes had been put in place, similar to prior years’ readings (Figure 11). Payments to the ‘five insurances’ (health, pension, worker safety, maternity and housing) are equivalent to 40-50% of the wage bill if fully implemented, adding significant upward pressure in an already challenging cost environment. This is especially true given that wages account for a material 22% of respondents’ total cost base on average (Figure 12). Feeling the PRD pulse Figure 9: Minimum wages in selected provinces/cities Figure 10: Pace of minimum wage hikes has slowed Top-tier minimum wage levels, CNY Fewer provinces saw minimum wage hikes (%) 30 2,500 Number of provinces that adjusted minimum wage 2015 25 2,000 2014 Average minimum 20 wage increase 1,500 15 1,000 10 500 5 0 0 Shenzhen Shanghai Tianjin Beijing Hunan Hainan 2011 2012 2013 2014 Source: Standard Chartered Research Source: Standard Chartered Research Figure 11: Did the local government impose stricter social Figure 12: What share of your total costs are wages? insurance requirements last year? % of respondents % of respondents 80 2014 2013 2015 70 >50% 1% 60 40-50% 11% 50 40 20-30% 43% 30 20 10-20% 33% 10 0-10% 12% 0 Yes No Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 10
Special Report: PRD’s pain, China and ASEAN’s gain Productivity growth versus wage inflation Wages are clearly rising, but this does not necessarily have an inflationary impact on the economy if productivity growth matches wage growth. Only if wage growth significantly exceeds per-worker output does ‘wage inflation’ become a problem. Productivity growth justifies an equal rate of increase in wages to reward workers for the improvement in efficiency. Productivity growth appears to be rising and outpacing wage growth. In the absence of reliable official numbers, we gauge labour productivity growth by asking our respondents whether their per-worker output has increased more than wages (Figure 13). 67% of respondents agreed with this statement, up from 61% last year. While a still-material minority of respondents said productivity growth lagged wage growth, we expect any spillover from wage costs to prices of final goods to be limited and manageable. This adds conviction to our view that inflation is not a concern for China this year. We forecast 2015 CPI inflation at 1.6%, down from 2.0% in 2014. If anything, we see further downside risk to inflation in H1, creating room for further policy easing to support growth. Tackling labour challenges – Invest or relocate? Larger companies are more willing Labour shortages and wage pressures can be positive for an economy if they force Feeling the PRD pulse to invest in automation and relocate the right behavioural changes at the micro level. Companies that are willing to invest factories overseas in improving their cost structure and competitiveness can benefit from new opportunities. Investing more in automation and streamlining process is the preferred response to the labour shortage and wage pressures, cited by 45% of our PRD respondents. (Figure 14). This percentage increases to almost 70% for bigger companies, reflecting their greater ability to invest in process changes and benefit from economies of scale. Only 30% of our smallest respondents chose this option, preferring to “invest in more capital equipment” (36%, versus 24% for all respondents). Plans to relocate factories show a similar divergence across companies of different sizes. 20% of this year’s respondents said they plan to move capacity inland, down from 28% last year. Bigger companies generally favour this option more than smaller ones. Separately, 11% of respondents plan to move factories overseas (versus 13% last year), mostly larger companies. Figure 13: Has per-worker output risen more than wages? Figure 14: How do you respond to labour shortages? % of respondents % of respondents 2015 Invest more in automation/ Yes, a lot streamlining processes 2014 Invest more in capital equipment Yes, a bit Move capacity 2015 2014 inland 2013 No Move capacity out of China 0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% 60% 70% Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 11
Special Report: PRD’s pain, China and ASEAN’s gain Vietnam and Cambodia are the top two choices for those considering moving capacity overseas to cut costs (Figure 15), followed by Indonesia, Bangladesh and Sri Lanka. We believe these choices indicate that companies considering relocating from China are mostly low-end producers in the textiles and garments sector. For those preferring to move within China, the outer parts of Guangdong province, Hunan and Guangxi – all relatively close to the PRD – are the preferred destinations (Figure 16). This suggests that geographical familiarity and proximity to existing suppliers are key considerations, in addition to lower wages. The availability of infrastructure and skilled labour is also important. 45% of our respondents see material cost savings of 10-20% from initiatives to tackle labour shortages; 20% see savings of more than 20%. (For further analysis, see ‘ASEAN – The next PRD?’.) Figure 15: If you plan to move capacity out of China, to where? Number of respondents Feeling the PRD pulse Vietnam and Cambodia are the 25 favoured overseas destinations 20 15 10 5 0 Vietnam Cambodia Indonesia Bangladesh Sri Lanka Thailand India Philippines Source: Standard Chartered Research Figure 16: If you plan to move capacity elsewhere in China, to where? Number of respondents Those planning to relocate within Yunnan, Guizhou China prefer to stay close to the PRD Shaanxi, Gansu, Qinghai, Ningxia Henan, Hubei Chongqing, Sichuan Liaoning, Jilin, Heilongjiang Anhui, Fujian, Jiangxi Jiangsu, Zhejiang, Shandong Hunan, Guangxi Outer Guangdong 0 5 10 15 20 Source: Standard Chartered Research 5 May 2015 12
Special Report: PRD’s pain, China and ASEAN’s gain Beyond wages Margins set to narrow less in 2015 Rising wages are not the only The outlook for margins is slightly less challenging this year than in 2014, according challenge facing companies in the to our survey. Respondents expect margins to fall by an average of 0.4% this year, PRD versus -1.9% last year. On a same-company basis, 24% of respondents expect margins to improve this year, while 19% expect them to worsen (Figure 17). Utilisation ratio remains high Capacity utilisation still looks healthy. Close to 20% of respondents are operating at full capacity (down from 22% last year), while 63% are running at 80-90% (Figure 18). Only a dozen or so companies look more vulnerable on this measure, operating at 60% capacity – consistent with prior surveys’ findings. Credit conditions have gotten worse 35% of respondents reported that it is more difficult to borrow money now than at the same time in 2014, while only 7% said it has gotten easier (Figure 19). Conditions may have improved since our survey: Our proprietary Small and Medium Enterprise Confidence Index for China showed that credit availability improved in April following recent monetary policy easing. That said, real interest rates remain high relative to Feeling the PRD pulse historical levels, and deflationary pressure has also lifted real funding costs. Figure 17: Margin change, 2014 actual vs. 2015 estimate % of respondents; blue shading indicates those expecting positive margin changes this year than last year 2015 Down Down Down No Up 10% Up 20% Up 30% 30% 20% 10% change Down 30% 1.4% 0.3% 0.7% 1.7% 0.3% Down 20% 0.3% 4.4% 2.7% 0.7% 0.3% Down 10% 1.4% 10.5% 4.4% 6.1% 0.7% 2014 No change 0.3% 6.1% 25.5% 4.8% Up 10% 0.3% 2.7% 4.1% 14.6% 0.3% Up 20% 0.3% 1.4% 0.7% 0.3% 0.7% Up 30% 0.3% 0.7% 0.3% 0.3% Source: Standard Chartered Research Figure 18: Capacity utilisation levels Figure 19: How easy is it to borrow money, now vs. 2014? % of respondents % of respondents 100% Harder 90% 80% Same 70% Easier 60% 0% 10% 20% 30% 40% 50% 60% 70% 0% 10% 20% 30% 40% Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 13
Special Report: PRD’s pain, China and ASEAN’s gain Orders appear to be improving While orders have been weak over the past three months (38% of respondents said they had declined, versus 27% reporting an increase), an improvement is expected. More than 40% of respondents see better orders in the next three months, versus 25% expecting a decline (Figure 22). Orders fell 3% on average in the past three months, and are expected to improve by 1.6% over the next three months. Mixed outlook for key markets The US and Europe are the main overseas markets for the companies we surveyed (Figure 23). Sentiment towards key overseas markets is mixed (Figure 20), with 22% of respondents holding a positive view and 27% negative. Views on China are more cautious (18% positive, 37% negative – see Figure 21). Clients are turning bearish on the CNY Only 16% of respondents expect the Chinese yuan (CNY) to appreciate in 2015, down more than 97% in last year’s survey. The majority now expect the currency to depreciate. We present a detailed analysis of respondents’ views on the currency in ‘China through the PRD lens’. Feeling the PRD pulse Figure 20: What is your view on partner markets in 2015? Figure 21: What is your view on China in 2015? % of respondents % of respondents 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Negative Moderately Neutral Moderately Positive Negative Moderately Neutral Moderately Positive negative positive negative positive Source: Standard Chartered Research Source: Standard Chartered Research Figure 22: How is your orders situation? Figure 23: Where are your main business partners from? % of respondents % of respondents 45% +40% 40% +30% 35% +20% Next 3 months 30% +10% 25% No change -10% 20% -20% 15% Past 3 months -30% 10% -40% 5% Others 0% USA Europe Emerging Latin Middle Japan Africa Others 0% 10% 20% 30% 40% Asia America East Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 14
China through the PRD lens
Special Report: PRD’s pain, China and ASEAN’s gain China through the PRD lens Slowing growth is a headwind to the labour market Lan Shen +86 10 5918 8261 Maintaining a stable labour market and healthy income growth are priorities for Lan.Shen@sc.com Macro Research Beijing. Through the lens of our PRD survey, we get a glimpse of the broader picture Standard Chartered Bank (China) Limited for China as a whole. The survey results suggest that the labour market remains Betty Rui Wang +852 3983 8564 resilient – the majority of respondents indicated that it is almost as difficult to find Betty-Rui.Wang@sc.com Macro Research workers now as it was a year ago. This means there are unfilled jobs, supporting the Standard Chartered Bank (HK) Limited underlying trend of rising wages. Yet if growth stays weak for longer, the risk is that Tony Phoo +886 2 6603 2640 Tony.Phoo@sc.com the labour market will start to soften, pulling wages and consumption lower. This Macro Research adds conviction to our call that more policy easing is on the horizon. Also, short-term Standard Chartered Bank (Taiwan) Limited pain is a necessary part of China’s longer-term transformation as companies strive to Eddie Cheung +852 3983 8566 Eddie.Cheung@sc.com operate more efficiently and move up the value chain (more on this to follow). FICC Research Standard Chartered Bank (HK) Limited At the National People’s Congress (NPC) meeting in March 2015, Premier Li Keqiang set a GDP growth target of about 7% for 2015. He pledged action if growth Maintaining a healthy labour market risks falling below the target, cutting into jobs and income. The latest macroeconomic is a key policy priority for 2015 data suggests still-soft growth in H1-2015, with household consumption and investment data continuing to disappoint. GDP growth slowed further to 7.0% y/y in Q1-2015; this is likely to dent investment and consumer confidence, worsening the employment outlook. Slower economic growth is already having a negative effect on household income and consumption. According to official nationwide data, growth in urban households’ disposable income moderated to 6.3% y/y in real terms in Q4-2014 from 6.5% in Q3, and retail sales growth weakened to 11.7% y/y from 11.9%. Echoing this, average wage growth for urban and migrant workers moderated to about 10% in 2014 from 12% in 2012-13 (Figure 2) as slower growth eroded profit margins. Our survey also finds that profit margins are narrowing. The labour market still appears resilient for now, with the demand-to-supply ratio in China through the PRD lens the nationwide job market still above 1. However, this may not last for the following reasons: (1) services jobs started to decline in mid-2014, following the three-year contraction in manufacturing jobs, as reflected in the employment sub-index of the official PMI (Figure 1); and (2) our household confidence indicator, which is calculated as the ratio of demand to term deposits and tends to lead consumption and CPI inflation by about six to nine months, continues to decline. Figure 1: Labour market under pressure across the board Figure 2: Average wage growth has moderated Employment sub-index in manufacturing and service PMIs Average wages of urban and migrant workers, % y/y 56 25% Services Migrant workers 54 Urban workers 20% 52 50 15% 48 10% 46 Manufacturing 5% 44 42 0% Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Source: CEIC, Standard Chartered Research Source: CEIC, Standard Chartered Research 5 May 2015 16
Special Report: PRD’s pain, China and ASEAN’s gain Our SMEI echoes concerns about Our proprietary Small and Medium Enterprise Confidence Index (SMEI) for China emerging labour-market softness adds more colour to the picture of China’s labour market (see Economic Alert, 30 April 2015, ‘China – SME index moderates as expectations soften’). We surveyed more than 600 SMEs across regions of China about their production, sales, credit, investment and employment conditions, and measured the responses with diffusion indices. The latest SMEI survey shows that labour-market conditions continued to improve marginally in April after the employment sub-index fell to a record low of 50 in February (Figure 4). This suggests that hiring has picked up after the holiday season. The salary sub-index remained flat at 63.8 in April, reflecting still-high labour costs for SMEs. The employment expectations sub-index fell in April, indicating a slower pace of growth in hiring demand in the near future. By region, the performance of SMEs in southern and central-western China picked up strongly in April after bottoming in February (Figure 3), driven by accelerating production and investment; those in eastern and northern China lagged, possibly reflecting greater sensitivity to sluggish external demand and the reduction of overcapacity. We still see the risk of a possible slowdown in consumption along with the broader economic slowdown. The first wave of China’s economic slowdown was driven primarily by manufacturing and housing investment; we see a potential second wave driven by falling consumption if the labour market weakens further. Given Beijing’s low tolerance for a deteriorating labour market, we believe monetary policy – the most effective tool to boost short-term growth – will have to be eased further. We maintain our call that Beijing will cut the 1Y benchmark policy rate by another 25bps by end-June, and possibly cut the reserve requirement ratio (RRR) by another 50bps in H2-2015. China through the PRD lens Figure 3: SMEs in southern and central-western China Figure 4: Labour market recovers after bottoming in saw a rebound in April February, but outlook softens SMEI reading by region SME current performance sub-indices 65 68 Employment (current) Employment 64 (forward) South Salary Central-west 60 60 East 56 52 North 55 48 44 40 50 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 17
Special Report: PRD’s pain, China and ASEAN’s gain Transforming China’s manufacturing machine From manual to automation Rising operating costs are Both domestic and foreign manufacturers have long known that China’s low-wage consistent with China’s move up growth model was coming to an end. The results of our wage survey in the PRD – the value chain, and might reflect which can be seen as a microcosm of China – are consistent with this trend. Many the shrinking labour force and have argued that rising costs will put China at a disadvantage given its position as a improving productivity global manufacturing hub. We disagree. We see China undergoing a positive transition as it moves up the manufacturing value chain. The country’s shrinking labour force and other labour challenges can be seen as catalysts for improving labour productivity. 45% of our respondents say they Underlining China’s transition, manufacturers in the PRD are responding to labour will investment more in shortages by investing in automation and streamlining processes. This was cited as automation/streamlining process in the preferred response by 45% of our survey respondents, topping the list. The next response to the labour shortage most popular option, investing more in capital equipment, was chosen by only 24%, down from almost 60% in our 2013 and 2014 surveys. (The shift in preferences may be partly explained by the fact that ‘invest more in automation/streamlining processes’ was included as an option for the first time in this year’s survey.) The percentage of respondents preferring to move capacity inland or out of China declined and remained at a low level. We see the shift towards automation/streamlining processes as a positive response to the labour shortage. It may reflect the fact that companies in China are starting to produce more sophisticated and higher-end products. An important role of automation is to achieve accuracy and complexity in high-volume output at affordable cost (for example, in electrical and electronics production). It also reduces worker stress caused by repetitive, high-pressure work, and can replace humans with machines where working conditions are unsatisfactory. China is set to overtake the EU and North America by 2017 as the world’s biggest user of industrial robots, according to estimates from the International Federation of Robotics. China through the PRD lens Figure 5: China’s productivity still looks strong within Figure 6: China to become the biggest user of industrial Asia robots by 2017, overtaking the EU and North America Average annual ppt contribution to GDP growth from Estimated operational stock of industrial robots, ’000 units productivity (TFP), by decade 5 CN IN HK TW US KR SG JP 450 2017 4 400 350 3 300 2 250 1 2014 200 0 150 -1 100 -2 50 0 -3 China EU_5 North America 1981-1990 1991-2000 2001-2013 Source: Penn World Tables, Standard Chartered Research Source: IFR World Robotics 2014, Standard Chartered Research 5 May 2015 18
Special Report: PRD’s pain, China and ASEAN’s gain We see high potential for China’s Automation can also boost labour productivity and may partly explain China’s rising services sector and think this will wage trend. 67% of our survey respondents said their per-worker output has risen lead to healthier growth faster than wages, providing solid anecdotal proof of how productivity boosts wages. This trend, if it continues, will accelerate China’s income growth and sustain the consumption cycle. From lower-end to high-tech products China’s high-tech exports have One gauge of China’s move up the value chain is its share of high-tech exports. outpaced lower-end exports in the According to the World Bank, high-tech products are those with high R&D intensity, past decade including aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery. China’s high-tech exports have grown rapidly since 2004. They now account for 28-30% of China’s total exports, exceeding lower-end exports (for which we use garments, footwear and toys as a proxy) but still below the high-tech shares for Taiwan and Singapore. The y/y growth rate of value-added in China’s high-tech manufacturing industry has also started to rise in the past couple of years. The government has introduced a ‘made in China 2025’ campagin to encourage growth in sectors such as railways, machinery and communication equipment, aircraft and electronics. We expect China’s previous labour-intensive growth model to be gradually replaced by a new model in which creativity and technology will play a more important role. We are therefore not overly concerned about the potential shift of lower-end manufacturing from China to other regions. China’s rising labour costs are a result of improving productivity and the increasing complexity of the goods it produces, in our view. This reflects the country’s potential to move up the value chain, tackle industrial overcapacity, apply more rigid environmental standards, and transform its growth model from labour-intensive to technology-intensive. From manufacturing to services China has embarked on a shift from As China’s manufacturing industry moves up the value chain, its broad economic investment-driven growth to growth structure is also undergoing a transformation. China has started to shift from heavily China through the PRD lens driven by services and domestic investment-driven growth to a more balanced and sustainable growth model. To this demand end, developing the services sector is a priority for policy makers. Services’ share of China’s GDP has increased (48.2% as of 2014) and surpassed industry’s share in the past few years. However, it still lags the US and Japan, where services account for more than 70% of GDP. Figure 7: High-tech exports have a larger share than Figure 8: Value-added created in high-tech manufacturing lower-end exports industry is rising after fluctuating for years Share of total exports, % Value-added of industry, % y/y 40 25 35 High-tech 20 Special equipt 30 25 Pharmaceutical 15 20 Garment, footwear and Computer 15 toy 10 Food Textile 10 5 5 0 0 Jan-00 Feb-02 Mar-04 Apr-06 May-08 Jun-10 Jul-12 Aug-14 2008 2009 2010 2011 2012 2013 2014 Source: CEIC, Standard Chartered Research Source: CEIC, Standard Chartered Research 5 May 2015 19
Special Report: PRD’s pain, China and ASEAN’s gain We see a high possibility for the services sector to reach its potential and facilitate China’s economic rebalancing. The financial services sector is a key example of such potential. China’s population is the most unbanked in the world after India’s. China’s 57mn micro and SME companies contribute 60% of GDP, 50% of tax revenue and 80% of urban job opportunities – yet only 35% of them were financed by banks, according to a 2011 survey. China’s urbanisation progress will also create growth opportunities for services sectors. China targets increasing the ratio of urban residents to 60% by 2020 from 53.7% in 2013, according to the 2014-20 urbanisation plan released by the State Council. The government aims to improve the social service coverage ratio by 2020, covering the areas of education, job services, pension coverage and health care. Trends in FDI flows to China indicate a growing interest in the country’s services sector, which was previously more closed to private and foreign investors than the manufacturing sector. FDI in real estate, leasing and commercial services; wholesale and retail trade; and banking and insurance has risen as a share of total FDI inflows, while the share of manufacturing FDI inflows has declined. In 2013 and 2014, utilised FDI in these four service sectors grew 11% y/y on average, while headline FDI contracted. The services sector continues to attract new interest from foreign investors, even as some manufacturers exit the country. This supports our view that the slowdown in FDI into China’s manufacturing industry is natural for an economy that is rebalancing its growth model. China through the PRD lens Figure 9: Tertiary industry* has gradually surpassed Figure 10: Annual FDI utilised in China secondary industry as a major GDP component Share of total FDI, % Share of nominal GDP, % 50 35 60 Tertiary Industry Real estate 30 Manufacturing 50 45 (RHS) 25 40 40 20 35 Secondary 30 Industry 15 Leasing and Whole and 30 retail trade 20 10 commercial services 25 5 10 Banking and insurance 20 0 0 1988 1991 1994 1997 2000 2003 2006 2009 2012 2006 2007 2008 2009 2010 2011 2012 2013 2014 * China’s tertiary industry covers 14 sectors, including wholesale and retail services, Source: CEIC, Standard Chartered Research transport, storage and postal services, financial services, real estate services, etc. Source: CEIC, Standard Chartered Research 5 May 2015 20
Special Report: PRD’s pain, China and ASEAN’s gain Corporates face higher CNY volatility Our respondents generally see mild Our 2015 PRD survey results indicate a turn in client sentiment towards the Chinese CNY weakness against the USD, yuan (CNY) in 2015. A year ago, more than 97% of clients surveyed expected the which should positively impact their CNY to appreciate against the USD; now, only 16% expect appreciation, and the business majority expect depreciation. Only about 6% of respondents predict a major move (of more than 5%) in the CNY. The majority (just over 30%) of our 2015 respondents see the CNY weakening mildly by 0-3% by year-end. Perhaps not surprisingly, our clients see CNY depreciation in a positive light. More than 60% of respondents see CNY depreciation as having a positive impact on their business, likely reflecting the export- oriented nature of their businesses. Client conviction on the CNY has likely been shaken by the pick-up in CNY volatility since H2-2014. China’s subdued growth-inflation mix and prospective Fed tightening are also less supportive of CNY appreciation. Additionally, with the authorities now saying that the currency is at equilibrium value, a reduction in CNY appreciation expectations is natural. We have also observed a shift in corporate hedging behavior as a result of CNY volatility. Exporter hedging ratios have collapsed to multi-year lows, while importer hedging ratios have rebounded strongly, according to data from the State Administration for Foreign Exchange (SAFE) and merchandise trade flows. Based on a three-month observation window, importer hedging ratios now comfortably exceed those of exporters for the first time since late 2008/early 2009. This shift is likely to underpin support for USD-CNY until CNY appreciation expectations resume. We still expect the CNY to appreciate over the medium term, but at a much slower pace as the authorities shift to a trade-weighted index (TWI) focus in response to narrowing external balances, the stronger USD and more balanced FX flows onshore. China’s balance of payments is likely shifting to a ‘new normal’ in which financial account outflows offset current account surpluses. We see a very low probability of CNY devaluation against the USD, given the low marginal contribution of exports to China’s growth and the likely detrimental impact such a move would China through the PRD lens have on investor sentiment and CNY internationalisation. We forecast USD-CNY at 6.19 by end-2015. 5 May 2015 21
Special Report: PRD’s pain, China and ASEAN’s gain Figure 11: What is your outlook for the CNY against the Figure 12: What is your outlook for the CNY against the USD until the end of the year? USD until end-2015? % of respondents % of respondents 120% 35% 30% 100% 25% 80% 20% 60% 15% 10% 40% 2015 5% 20% 0% 2014 5% 0% material No material change Depreciate Appreciate change Source: Standard Chartered Research Source: Standard Chartered Research Figure 13: How would CNY depreciation affect your Figure 14: Importer hedge ratios comfortably exceed business? those for exporters for first time since 2008-09 % of respondents Rolling 3M ratio 70.00% Export-R 0.80 60.00% 0.75 0.70 50.00% 0.65 40.00% 0.60 0.55 30.00% 0.50 20.00% 0.45 Import-R 0.40 10.00% 0.35 China through the PRD lens 0.00% 0.30 It is bad It is good No change 2001 2003 2005 2007 2009 2011 2013 2015 Source: Standard Chartered Research Source: Standard Chartered Research 5 May 2015 22
Special Report: PRD’s pain, China and ASEAN’s gain ASEAN – The next PRD? ASEAN – The next PRD? 5 May 2015 23
Special Report: PRD’s pain, China and ASEAN’s gain ASEAN – The next PRD? Opportunities for ASEAN Chidu Narayanan +852 3983 8568 The PRD’s transformation is part of a broader change in growth dynamics in Chidambarathanu.Narayanan@sc.com Macro Research emerging Asia. As China’s manufacturing sector becomes saturated, ASEAN’s is Standard Chartered Bank (HK) Limited likely to grow. The 10 ASEAN countries have a combined GDP of over USD 2.4tn; Edward Lee +65 6596 8252 considered as a single bloc, it is the world’s eighth-largest economy and third-most Lee.Wee-Kok@sc.com Macro Research populous market (after China and India). ASEAN is likely to benefit from Standard Chartered Bank, Singapore Branch comparatively low wage costs and abundant labour supply over the next 20 years. Jeff Ng +65 6596 8075 Jeff.Ng@sc.com Macro Research Manufacturers shifting production to ASEAN are also positioning themselves to Standard Chartered Bank, Singapore Branch capture a share of the region’s growing consumer market, driven by high economic growth and a rising middle class. In addition, several ASEAN countries perform well in international rankings on business conditions. Given these advantages, we expect ASEAN to become a more important global exporter in the coming years. Vietnam is poised to be among the biggest beneficiaries of China’s move up the manufacturing value chain, in our view, as it combines these attributes with geographical proximity to China. Further infrastructure development across ASEAN is crucial to removing bottlenecks and attracting more FDI, in our view. ASEAN has natural advantages over the next 20 years ASEAN’s favourable demographics ASEAN is poised to benefit from the shift in investment from China as the latter loses will help to attract investment in the cost competitiveness and its labour supply tightens (see Figures 1 and 2). Most region’s new manufacturing centres ASEAN countries (with the exceptions of Singapore and Malaysia) have significantly lower manufacturing wages than China. While wage costs may still be competitive in some parts of China, particularly in the west, the shrinking labour force means that wages are likely to catch up quickly with those in eastern China. ASEAN also has a demographic edge. Its median age was about 27 years as of 2013, much younger than China’s estimated 32 years. ASEAN’s labour force will also continue to grow over the next few decades, expanding by 70mn workers between 2010 and 2030, according to UN projections. China’s labour force, in contrast, is expected to contract by almost 70mn. Within ASEAN, Indonesia and the Philippines are best positioned to reap the demographic dividend; this should help these economies achieve faster and more Figure 1: ASEAN has cost advantages Figure 2: ASEAN benefits from labour-force growth Monthly manufacturing wages, USD Average annual labour contributions to GDP growth vs. trend growth, ppt 1,600 2001-05 2006-10 2011-15P 2016-20P 2021-25P 2026-30P ASEAN – The next PRD? 1,400 8 7 1,200 6 Trend growth 1,000 5 800 4 3 600 2 400 1 0 200 -1 0 -2 SG CN MY TH PH ID VN LA KH MM ID PH MY TH SG CN Source: JETRO, Standard Chartered Research Source: IMF, Penn World Tables, Standard Chartered Research 5 May 2015 24
Special Report: PRD’s pain, China and ASEAN’s gain resilient growth. They also enjoy low levels of household leverage, rising urbanisation and a potential increase in productivity – positioning them to become regional economic powerhouses in the next few decades. Thailand and Singapore have less favourable demographics, with their median ages forecast at over 45 by 2045. Thailand’s labour force is expected to shrink by almost 5mn between 2010 and 2030 (source: UN data). ASEAN attracted more FDI than In addition to low costs and abundant labour supply, ASEAN boasts high growth and China in 2013 an attractive investment climate. Some ASEAN economies (particularly Singapore, Malaysia and Thailand) perform well in international rankings such as the World Bank’s Ease of Doing Business and the World Economic Forum’s Global Competitiveness Index (see Figure 3). The rest have potential to improve. ASEAN overtook China in terms of inward FDI in 2013. While this is mostly concentrated in Singapore, other ASEAN economies will likely command a bigger share of FDI in the coming years (see Figure 4). Most FDI goes into the manufacturing sector, reflecting the region’s positive attributes for investment in manufacturing facilities. Figure 3: World Bank Doing Business ranking, 2015 Table shows world rankings (1-189) in main index and selected sub-indices Ease of doing Dealing with Trading across Starting a business Getting electricity business construction permits barriers Singapore 1 6 2 11 1 Malaysia 18 13 28 27 11 Thailand 26 75 6 12 36 Vietnam 78 125 122 135 75 China 90 128 179 124 98 The Philippines 95 161 124 16 65 Brunei 101 179 53 42 46 Indonesia 114 155 153 78 62 Cambodia 135 184 183 139 124 Laos 148 154 107 128 156 Myanmar 177 189 130 121 103 Source: Doing Business (World Bank), Standard Chartered Research Figure 4: ASEAN is attracting more investment % of total FDI in ASEAN Laos 2013 Average (2005-12) Brunei Cambodia ASEAN – The next PRD? Myanmar Philippines Vietnam Malaysia Thailand Indonesia 51% Singapore ASEAN (% of Asia FDI) 48% ASEAN (% of global FDI) 0 5 10 15 20 25 30 35 Source: UNCTAD, Standard Chartered Research 5 May 2015 25
Special Report: PRD’s pain, China and ASEAN’s gain ASEAN will likely become a more important global exporter ASEAN has the potential to become Manufacturing capabilities vary across ASEAN. The CLMV region (Cambodia, Laos, an important global exporter Myanmar and Vietnam) and Indonesia provide low-cost production. The Philippines, Malaysia and Thailand have expertise in mixed manufacturing and electronics. Singapore has high value-added manufacturing expertise and strong intellectual property rights protection. To capitalise on its manufacturing capabilities, ASEAN needs to achieve better integration. In addition to infrastructure links, a common regional framework for investment regulations would make it much easier for companies to adopt a pan-ASEAN strategy with operations located across the region As FDI shifts towards ASEAN from China, ASEAN may catch up with China’s current status as the world’s top exporter (see Figure 5). ASEAN accounted for close to 7% of global exports in 2013, and this share has remained broadly stable for some time. China became the top global exporter in 2008-09 and currently accounts for close to 12% of global exports. Other major exporters – including the US, Germany and Japan – have seen their shares of global exports gradually decline in recent years. China’s experience demonstrates the importance of external trade in improving economic structure and propelling growth. While many factors have contributed to China’s outperformance in global trade, its strong openness to trade and investment is key, in our view. China created Special Economic Zones (SEZs) in Shenzhen and other regions as early as the 1980s. These were designated areas where foreign (and later domestic) companies could invest, benefiting from lower taxes, limited trade barriers and a supportive bureaucracy. Figure 5: ASEAN exporters may gain market share from China in the future % of global exports 14% 12% CN ASEAN – The next PRD? 10% US 8% DE 6% ASEAN 4% JP 2% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: WTO, Standard Chartered Research 5 May 2015 26
Special Report: PRD’s pain, China and ASEAN’s gain Infrastructure development is critical Without improving their infrastructure, ASEAN economies will have difficulty achieving their potential as an economic bloc comparable to China, in our view. The long-term shift in manufacturing requires both hard and soft infrastructure to succeed (see Figure 6). Infrastructure spending across Building hard infrastructure, removing bottlenecks and creating the right conditions to ASEAN has slowed in recent years encourage FDI are key, particularly for less developed economies. The Asian Development Bank estimates that ASEAN countries spend only 4% of GDP on infrastructure, down from an average of 6% from 1980-2009. Although there is no specific optimal level of infrastructure spending, we think 5-10% of GDP is conducive to higher long-term growth. Seamless transport infrastructure across ASEAN is needed in the longer term, although the important question of who will pay for infrastructure development remains. Plenty of improvement is needed at the country level before more complicated cross-border issues are addressed. Many countries in the region have room to raise their capital stock per worker to boost incomes. In all cases, infrastructure development is critical to future development. Figure 6: Infrastructure development attracts more FDI Value of FDI inflows (2011-13), USD bn, ranked by 3-year average 70 60 ASEAN – The next PRD? 50 40 30 3YA 20 2012 2013 10 2011 0 SG ID MY TH VN PH MM KH BN LA Source: UNCTAD World Investment Report, Standard Chartered Research 5 May 2015 27
Special Report: PRD’s pain, China and ASEAN’s gain Vietnam: Emerging alternative for low-cost manufacturing China is shifting away from a growth model based on low manufacturing wages, and is increasing automation as it moves up the value chain. This opens up opportunities for low-cost manufacturing regions like ASEAN, particularly the Mekong delta region. Several ASEAN countries have the right mix of a cheap and educated labour force, a large and growing working-age population, and an increasingly affluent middle class. We estimate that a Chinese manufacturing worker in the PRD region earns around USD 700 a month, while a similar worker in Vietnam earns only about USD 250 a month. We believe that Vietnam is poised to be among the biggest beneficiaries of China’s move up the manufacturing value chain. It combines all of these attributes with geographical proximity to China, allowing it to support and benefit from the transfer of trade routes. Over one-third of our respondents Vietnam is the most preferred destination for clients planning to move manufacturing out cited Vietnam as the top offshore of China, cited by more than one-third of these respondents (Figure 7). Lower wages, a destination for factory relocation young and educated workforce, and geographical proximity to China make Vietnam an attractive destination, particularly for more labour-intensive manufacturing segments. In addition, Vietnam’s fast-growing middle class and increasingly affluent population make it an attractive consumer market. In a survey we conducted last year, foreign companies located in Vietnam noted that the large size of the domestic market was a key reason for their decision to invest in the country (Figure 9). Figure 7: If you plan to move capacity out of China, to Figure 8: What are your cost savings from these actions? where? % of respondents % of respondents Vietnam 36% Move to Cambodia 20% Cambodia 25% Bangladesh 10% Move to Vietnam 19% Indonesia 10% Move capacity inland 17% India 5% Thailand 5% More capex 14% Sri Lanka 5% Invest in automation 12% Philippines 3% Source: Standard Chartered Research Source: Standard Chartered Research Figure 9: Why did you invest in Vietnam? Figure 10: Wages in Vietnam are much lower than in % of respondents, survey of foreign firms in Vietnam, 2014 Shenzhen (labour costs in various cities, USD per month) 700 ASEAN – The next PRD? Shenzhen Bangkok Ho Chi Minh Large domestic market 44% 600 Vientiane Phnom Penh Yangon Low operational cost 29% 500 Ample labour supply 18% 400 300 Good operating conditions 2% 200 Policy benefits 0% 100 Others 7% 0 Minimum wage Factory worker Clerical worker Source: Standard Chartered Research Source: JETRO, Standard Chartered Research 5 May 2015 28
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