China exports inflation (2)

china%20wages.jpg

I noted back in February that China is no longer exporting price deflation, and is instead causing global prices for commodities and manufactured goods to rise. A reader has now kindly sent me an interesting report from Credit Suisse, commenting on the potential inflationary impact of new labour laws in China. This is particularly important for the chemical industry, given the volume of foreign investment that has taken place in China.

It features the above chart, showing how wages have increased by 70% since 2004. And its analysis claims that the new Labour Contract Law, in operation since January, will increase manufacturing costs by a further 15%-20%. CS argue that this under-reported measure raises China’s labour rights to international standards, requiring extra pay for overtime, employer contributions to social and pension funds, and severance pay.

CS note that the new law is part of a package of measures aimed at stimulating domestic demand and reducing export-dependency. VAT export rebates were lowered three times in 2007, whilst corporate tax rates for Foreign Direct Investors are being raised from 15% to 25%. They argue that as well as increasing global inflation, the new measures ‘will also affect margins of many listed foreign companies using China as a production base’.

Please contact me at phodges@internationalechem.com if you would like a copy of the report.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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One Response to China exports inflation (2)

  1. Chong-Min-Lee 6 May, 2008 at 4:03 pm #

    I feel like watching “Chemical Olympics” (who can earn big money using Olympics in China) ahead of real two Olympis in Sep and Oct in China in our pigment industry where more than 70% are sourcing from China orgin.

    We are also have production base in China but feel like New regualtions inclduing Labour law is more strict in foreign based company than state-owned Chinese companies. Maybe they want to weed-out small and medium sized chemcial companies in China at the excuse of Olympics. Time only can tell…

    First VAT refund reduction and cancel and this actually benefit too much for time being for foreign companies who are mostly engaged in processing trade (import without import duty and VAT for processing export)but later this so called “previllage” will be banned until end of 2008 due to series of banning outwrad processing trade in our industry. For some comapanies, this is life and death to compete pure local stated baked chinese companies…

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