Even with Rising Labor Costs China Still Preferred Destination

China World Trade Center

Despite several factors in the Chinese economy which point to a slowing of development, a full three quarters of European investors will continue to make China a top destination for their money, according to the European Chamber of Commerce’s annual business survey which was released on May 29th.

The top risks for investors in the China market were seen as the slowing down of the economy there as well as increased labor costs for companies.

The president of the COC, Davide Cucino explained:

"A previously reliable stream of foreign direct investment (FDI) may slow and planned investments may be shifted to other emerging markets if reform continues to stall and costs rise."

Of the 557 investors taking the survey, 63 percent cited increased labor costs as a prominent concern, with a special worry about the Pearl River Delta in South China.

European companies are more often using cost reduction as a primary strategy for increasing competitiveness. The survey showed that a larger number of companies are trying to cut costs instead of increasing income.

The director of the Research Center of Transnational Corporations at the Chinese Academy of International Trade and Economic Cooperation, Wang Zhile explained that it was normal for companies concerned with cost to relocate their enterprises to the lower-wage locales in places like Southeast Asia.

“However, even for cost-oriented companies, a better price-performance ratio is more important than lower labor costs. Given China's labor productivity, rising wages are still acceptable," commented Wang.

Chinese Business Travel Taking Off

As China’s economy continues to expand one trend that is taking shape is the phenomenal growth of the business travel sector. While internal business travel is certainly growing, the true head turner for the international community is the outbound travel spending which is expected to grow by 27% in 2013.

Overall business travel spending will see a 17% increase in 2012 to $202 billion. The forecast for 2013 is even higher with projected increase of 21% for a total of $245 billion in revenue. China has not been lazy keeping up with this growing demand either, expanding their travel infrastructure over the past ten years to keep up with the growing demand. The past decade has seen China’s four largest airports all doubling in size and there are already plans in the works to build more than 100 new hotels within the next ten years. More than 100 new airports will also be constructed over the next decade.

For the moment China ranks second only to the United States in its business travel market, but most of the indicators predict that China will overtake the US as the largest business travel market by the time 2015 goes out.

As one analyst commented:

“With China on a robust upward trajectory in business travel spending, they are quickly becoming a world leader in the business travel market. For this reason, we believe it is a most opportune time to have undertaken our first Business Travel Outlook for the country. China's phenomenal economic growth over the last decade has been mirrored in business travel which is now a key contributor to, and benefactor from, the country’s expansion.

"We forecast significant increases in business travel by Chinese citizens over the next two years with at least two-thirds of the growth being real increases in trips and spending as opposed to rising travel prices. This should also be accompanied by GDP growth rates of 8-9 percent a year.”

China Considering Opening Up to Hedge Funds

In an announcement that could send shock waves around China and beyond, the China Securities Regulatory Commission (CSRC) has recently said that it is considering allowing hedge funds to have direct access to the Chinese market.  Up until now, they have not allowed hedge funds access, and the move could certainly have an impact on companies like NYGG with Benjamin Wey.

The CSRC is currently drafting proposals that could lead the way for investors to get a license to trade stocks. This would give them a Qualified Foreign Institutional Investor (QFII). At the moment, to qualify as a QFII is quite difficult, requiring US $5 billion in assets under management – in addition to requiring the company to have been in business for a minimum of five years.  The regulator is now considering reducing the minimum requirement for assets under management.

As one Singapore-based hedge fund employee said, "Allowing hedge funds to operate in China would fit in with the regulator's push to clean up the financial industry, make it more professional and allow greater freedom for the flow of cash in and out of China. China is the world's second biggest economy and lots of companies want to list there so any hedge fund would love direct access to this market. It could spawn a new hedge fund community given China's exciting potential."

China's PMI Up for Fifth Straight Month

China’s latest figures, released on Tuesday indicate that the Chinese manufacturing sector, as measured by the Purchasing Managers Index (PMI) rose for the fifth consecutive month in April, 2012.

The PMI rose by 0.2 percentage points in April compared to March, to 53.3 percent, according to the China Federation of Logistics and Purchasing (CFLP.)

China's PMI Going Up

"The continuous rebound of PMI shows that China's economic growth is in a stable and upbeat condition," CFLP vice chairman Cai Jin said.

At the moment the CFLP uses a sample of 820 companies across the country to determine the PMI for the manufacturing sector, but there are plans to expand the sample size to as many as 3,000 firms, according to a statement made by the National Bureau of Statistics and the CFLP. No timetable for the change has been specified.