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HKTDC Trade Quarterly Spotlights Impact of Soaring Prices
Renminbi Appreciation "Top of the List of Challenges Facing Hong Kong
Manufacturers Operating in the Mainland"

17 September 2008 - Soaring prices for fuel and raw materials, renminbi appreciation, labour shortages and rising production costs all pose great challenges to suppliers in Hong Kong and the Chinese mainland. To survive in these tough times, they must strengthen their competitive edge, says the latest issue of Hong Kong Trade Quarterly.

"Although the inflation trend of the Chinese mainland's consumer price index (CPI) has eased a bit recently, the cost of raw materials, fuel and energy continue to rise," said HKTDC Chief Economist Edward Leung. "The increase in the mainland's purchasing price index (PPI) for raw materials, fuel and power shot up to 15.3 per cent in August, compared to 11.9 per cent in May and 8.9 per cent at the beginning of the year, putting much pressure on Hong Kong manufacturers."

The appreciation of the renminbi, according to Mr Leung, "is top of the list of challenges facing Hong Kong manufacturers operating in the mainland. While most Hong Kong manufacturers still receive US dollar payments for their exports, the appreciation of the renminbi means that production costs settled in renminbi increase in terms of the US dollar, eating into their export margins," Mr Leung added.

Labour shortages and the increase in the official minimum wage levels in the Pearl River Delta (PRD) put extra burden on Hong Kong companies. From 2004 to 2006, the minimum wage of cities in Guangdong has risen between 12.1 per cent and 21.5 per cent. Since 1 April 2008, Guangdong's minimum wage has further increased by an average of 12.9 per cent.

The cost of fuel, electricity, metals and plastic all continue to rise, putting added pressure on Hong Kong manufacturers.

Given the shrinking profit margin of Hong Kong manufacturers in the PRD, overseas buyers are sharing more of the cost increases. According to the US Department of Labor, the average import price of goods from the Chinese mainland increased by 4.9 per cent in August 2008, compared with 2.4 per cent in December 2007. The rise, however, is still relatively lower than other major suppliers to the US market.

Despite the price increases, mainland products remain competitive in overseas markets. The market share of Chinese products for the first seven months of 2008 remained virtually unchanged from the same period last year, at about 19.4 per cent.

"The HKTDC's forecast for Hong Kong export growth this year remains at seven per cent," said Mr Leung.

Combating Surging Inflation in the Chinese Mainland

In the latest issue of Hong Kong Trade Quarterly, Wu Xiaoling, member of the Standing Committee and Deputy Director of the Financial and Economic Affairs Committee of China's National People's Congress, shares her insights on surging mainland inflation.

In her Trade Quarterly piece, "Whither the Chinese Economy," Ms Wu notes that the current mainland inflation is largely cost driven. She believes that cost-driven inflation can be eased by controlling the money supply and offers some specific suggestions:

1.     adjust the relative proportion of investment, consumption and net exports to reduce the mainland economy's reliance on external demand.
2.     adjust the pattern of distribution of national income; increase the incomes of both urban and rural residents, expand their spending power, reduce the economy's reliance on investment for growth and maintain growth within a range in which the environmental-bearing capacity is in line with energy resource constraints.

To achieve the above, price-setting mechanisms, especially those for setting prices of production factors, must be rationalised. This would allow the market to function properly in allocating resources and launch the economy in a direction of clean development through reduced energy and resource consumption. It would also allow farmers to reflect true production costs through the price of their products while increasing their incomes.

Hong Kong Trade Quarterly, published by the HKTDC Research Department, follows global trade trends and business developments relevant to the Hong Kong trading community.

Media enquiries
Please contact the HKTDC's Media and Public Affairs Department:
Katherine Chan   Tel: (852) 2584 4537     Email: katherine.cm.chan@tdc.org.hk

About the HKTDC
Established in 1966, the Hong Kong Trade Development Council (HKTDC) is the international marketing arm for Hong Kong-based traders, manufacturers and service providers. With more than 40 offices worldwide, including 11 in the Chinese mainland, the HKTDC promotes Hong Kong as a platform for doing business with China and Asia. The HKTDC also organises trade fairs and business missions to connect companies with opportunities in Hong Kong and the mainland, while providing information via trade publications, research reports and online. For more information, visit www.hktdc.com


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