Saturday 15 March 2014

The China Wage Story

China is known as the world's manufacturing floor. It produces a whole range of goods for which it ships to the rest of the world. Many companies have set up or relocated their factories to China to take advantage of the large and cheap supply of land, labour and other resources. However, after several decades of explosive growth, China is no longer as cheap as before. The figure below shows the average annual wages in manufacturing from 2003 till 2013, as reported by the National Bureau of Statistics of China.

Annual Growth in China's Manufacturing Wages

In the 10 years from 2003 till 2013, the average annual wages in manufacturing have grown from RMB11,000 to RMB41,650. This represents a nearly 3-fold increase in annual wages over the same period or a Compounded Annual Growth Rate of 14.2%.

Companies with factories in China are feeling the heat of such rapid increases in annual wages. Many companies, including those with headquarters in Singapore, have experienced strong wage inflation that depresses their operating profits. If you read the financial statements of companies with factories in China and are listed on the Singapore Exchange, it is usually not difficult to find references to increases of wages.

On the other hand, the rapidly rising annual wages are a boon to Chinese consumer stocks. Companies that sell to the Chinese consumers tends to benefit from the increasing disposal income. For example, CapitaRetail China Trust recently reported a 3.5% rise in revenue in its latest financial report. Its tenants' sales increased by a greater 9.2% year-on-year. These are evidence that China is slowly shifting away from being a low-cost manufacturing plant to a consumer-oriented market. Investors should take heed of the above-mentioned shift in trends.

P.S. I am vested in CapitaRetail China Trust, CapitaMall Asia, Mapletree Greater China Commercial and a host of companies with exposure to the China market, e.g. China Aviation Oil, Midas, Valuetronics, Yangzijiang, etc.

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