July 2010
Quarterly Issue No: 3/2010

NEWSLETTER

This Newsletter is distributed quarterly, free-of-charge, to clients of International Business Center (IBC), and to other parties that have requested it. It is essentially newsworthy items regarding trade in Hong Kong and China, as well as IBC specific news.

CONTENTS

News from IBC
Competitive China
Charging His Customers By The Clock
Now You’re Talking!
Nation To Take Lead In Utilizing Green Technology
And Now The Good News

 

NEWS FROM IBC

Hong Kong Holidays

Public holidays this quarter are:

01 July   Hong Kong Special Administrative Region Establishment Day
23 September    The day following Chinese Mid-Autumn Festival

 

IBC Announcement

  • Our new IBC Business Center website (www.ibchk.com) is in the process of renovation at the moment. The fresh and new face of our website will be seen in July. 
  • IBC Certified Public Accountants Limited's new website (www.ibccpa.com) has just been launched.
  • IBC has set up another new company – IBC Real Estate Limited to provide professional real estate agency services focused on new development and secondary market residential and commercial properties in Hong Kong. Working hand-in-hand with IBC Real Estate Limited, we have also formed IBC Mortgage Limited to provide high quality mortgage choices and solutions to our clients.
  • As usual, Teresa will have various business trips in the coming quarter.

 

Trade shows in Hong Kong in 1st quarter 2010

Events     Date
- HKTDC Summer Sourcing Show for Gifts, Houseware & Toys 5 – 8 July 2010
- HKTDC Hong Kong Fashion Week for Spring/Summer   5 – 8 July 2010
- HKTDC Hong Kong Book Fair  21 – 27 July 2010
- Hong Kong Tea Fair  12 – 14 Aug 2010
- International Conference & Exhibition of the Modernization of Chinese Medicine & Health Products      12 – 16 Aug 2010
- HKTDC Food Expo  12 – 16 Aug 2010
- HKTDC Watch & Clock Fair    6 – 10 Sept 2010

 

Competitive China

Hong Kong manufacturers operating on the Chinese mainland are facing price pressure on several fronts, including rising wages, rapid increases in raw material and energy prices, inflation and renewed pressure for the renminbi to appreciate.

“These are eating into already thin profit-margins,” said Pansy Yau, Deputy Chief Economist of the Hong Kong Trade Development Council (HKTDC). “Nevertheless, the mainland’s share of manufactured exports in world trade continues to increase, from 4.7 per cent in 2000 to 12.7 per cent in 2008. This shows that the mainland’s competitiveness as a production base is not due to price alone.”

Ms Yau said that while buyers were sourcing more goods from such emerging production bases as Bangladesh, Cambodia, India, Indonesia and Vietnam – where labour costs are lower – the trend does not pose a significant threat to mainland exports.

“China’s well-established industrial clusters, highly efficient and skilled labour force and infrastructure systems are able to offset the disadvantage of rising costs,” she said.


Despite cheaper labour costs elsewhere in the region, Chinese mainland manufacturing bases continue to be ranked as more competitive than other supply regions in Asia (Photo: EPN)

Labour Matters

An HKTDC study found that because of increased export orders, more than half of the Hong Kong manufacturers operating in the Pearl River Delta (PRD) experienced a labour shortage in the first half of 2010. To retain skilled labour, wage levels in the PRD rose by an average of about 17 per cent over the last six months, a rise in total production costs of four per cent to six per cent.

Retail prices of gasoline and diesel fuel, meanwhile, also increased, jumping 4.1 per cent and 4.5 per cent respectively in April. Those figures were up 28.7 per cent and 29.5 per cent respectively from the end of 2008.

Further indications came from the mainland’s Producer Price Index (PPI), which saw a reversal of a declining trend last December, surging to 6.8 per cent in April. In addition, the Economist Commodity-Price Index revealed that general metal prices at the end of April were up by more than 120 per cent compared to their lowest levels at the end of February 2009. Prices of copper, aluminium alloy, cotton and pulp also increased.

The HKTDC survey also found that the local content, or portion of production costs settled in renminbi, has jumped from an average of 30 per cent a few years ago to 48.9 per cent for Hong Kong companies producing on the mainland. A revaluation of the Chinese currency would pose a major challenge for them.

Ms Yau said that while the market expects only a gradual renminbi appreciation of three per cent to five per cent in the coming year, the marked increase in local content means that even a five per cent rise in the currency’s value against the US dollar would translate into a 2.5 per cent rise in production costs.

Some Hong Kong manufacturers were able to pass rising production costs on to overseas buyers, the study found. The mainland’s export price index, after declining throughout 2008, recorded a positive increase in March this year. The decline of US import prices from the mainland has also slowed sharply in recent months.


HKTDC Deputy Chief Economist Pansy Yau forecasts that a five per cent rise in the renminbi’s value against the US dollar would translate into a 2.5 per cent rise in production cost

Asian Production Bases

Chinese competitiveness is also reflected in a separate HKTDC study, which compared mainland suppliers to those elsewhere in Asia. The study examined how emerging Asian production bases are supplementing the mainland in terms of supplying labour-intensive goods, and how the region is evolving into a network of suppliers.

Rising mainland production costs have prompted overseas buyers to rethink their sourcing strategy and consider the purchase of more labour-intensive goods from Asian suppliers with lower labour costs. For instance, Vietnam exports mostly garments, furniture and footwear to the United States, making up 63 per cent of all US imports from Vietnam last year. More than 90 per cent of US imports from Cambodia and Bangladesh were garments.


The trend towards sourcing more labour-intensive goods from such countries as Vietnam does not pose a significant threat to mainland exports

But while exports from some emerging Asian production bases are growing, their relative share in world trade lags far behind that of the mainland. Vietnam’s exports to the US and the European Union, for example, grew 18.8 per cent and 9.3 per cent respectively between 2006 and 2009, but its share in those markets was still only 0.9 per cent.

Surging mainland production costs have also forced manufacturers to restructure their production arrangements to take advantage of relatively low labour costs in the mainland’s inland regions, and in other Asian countries, to produce mass-market and lower-priced items. Production of higher value-added and more sophisticated items, however, remains in the PRD region.

Beyond Price

The mainland’s competitiveness as a production base remains strong despite the rise in production costs, according to HKTDC Senior Economist Billy Wong. “The average output per mainland worker is significantly higher than that of Vietnam, Bangladesh and Cambodia,” he said.

Mainland manufacturers also benefit from well-developed industrial clusters, where upstream supplies can easily be sourced and essential services such as freight forwarding and lab-testing are also available, he added. “This not only boosts efficiency, but shortens delivery lead time.”

Mr Wong noted that garment and shoe manufacturers in Vietnam import most of their raw materials from the mainland. Vietnam’s rising garment exports, thus, in a sense, benefit mainland textile exports to Vietnam. He said mainland upstream production also works with other emerging Asian production bases that have low-cost labour, forming a network of production for overseas markets.

© Hong Kong Trade Development Council 

 

Charging His Customers By The Clock

BEIJING - Everyone knows time is money, but few Chinese people will probably claim to know it better than Qian Wei.Qian, 27, is the founder of what is being touted as the first website in China that allows people to trade their time online.


Qian Wei's website is being touted as the first one in the country that allows people to trade time online. [China Daily]

Qian started his own website, www.goooose.com, last November. Similar to online auction and shopping portal eBay, Qian's site allows buyers and sellers to trade on the Internet - with time as the commodity.

"Everyone's time has a price. So there should be a market for it," Qian said.

The time provided by sellers on his site is used for services such as sharing experiences with buyers on subjects ranging from acing exams, teaching languages and wealth management.

Qian has his eye on the "potential value" of his trading platform.

"It will create more need for information sharing, just like what Facebook did when social networking was not so popular."
After registering an account on Qian's website, users can check the information posted by individual sellers. Generally, service and prices per hour will be listed in the description posted by sellers.

Once users decide to buy "items", Qian said they will be given a few minutes to ask related questions to verify sellers.

Buyers will pay for the time they purchase online via payment service Alipay.

In most cases, people sell their time for 100 yuan ($14.6) to 200 yuan per hour, Qian said.

More than 10,000 people are using his website, Qian said. The portal hosts up to four transactions a day and recently decided to stop collecting commissions from sellers after a successful transaction.

"The most popular services are career consulting and professional training, " Qian said.

"We are planning to invite some celebrities to sell their time on our website, so that we can introduce paid listings and advertisements when the website gets famous."

Qian cited US investment guru Warren Buffett as a celebrity who seemed to enjoy "selling his time".

Buffett, one of the most successful investors and one of the richest men in the world, has been putting his lunchtime on auction once a year since 2000. The winner pays millions of dollars to have dinner with Buffett and the money goes to charity.

"The first time I came up with the idea of goooose, I was inspired by the Buffett lunch," Qian said.

Last May, Qian was still an employee of a Hong Kong-based corporate foundation. Despite drawing a generous salary, he never stopped yearning for his own business.

"I took the job in the corporate foundation to prepare for my own business, because I could meet people, study various industries and observe how capital works," Qian said.

In Hong Kong, Qian met Guo Xulin, who was then working for a US finance company. Both got along well and Guo is now a partner of Qian's website.

"I told many friends that I wanted to start a company, but none showed as much interest as Qian," Guo said. Guo and Qian discussed their business for four months and they targeted the Internet.

"We both have a banking background. We know the Internet will be a good investment if you have limited funds and do not want to take too much risk," Guo said.

The duo considered a few business ideas like group procurement and online auditions, but gave them up later because they thought the development of the website would be limited.
Then they remembered the Buffett lunch.

"You won't believe how excited I was about the idea," Qian said.

"If we succeed, time trading will bring about a bunch of new businesses."

Guo and Qian sold the idea to a friend. The three collected 400,000 yuan ($58,600) and started the website in May 2009.

In the following six months, Qian quit his job and jumped into designing the website.

"From fixing prices to ensuring the quality of service, I thought over every detail and adapted it again and again," Qian said.

"I could start the website smoothly thanks to several things I did previously," he said.

In 2000, Qian, then 17, studied banking at the elite Peking University. Somehow, he spent most of his time playing computer games and chatting online.

"I had never used the computer before and I knew that the Internet held huge potential when I was sharing photos, chatting with friends and doing online research. It changes people's lifestyles," Qian said.

"Of course, I did not think much into it at that time."

Then Qian forgot about the Internet and headed for investment banks.

"At that time, anyone who enter an investment bank would become the superstar among classmates. I decided to chase after that trend," Qian said.

He spent two more years in the university to learn about security investments.

He even invited 10 academics and bankers to give lectures to the students preparing to join investment banks. Five years later, someone Qian met in the group attracted 1 million yuan of investment for his new website.

In September 2006, while most had not yet started job-hunting, Qian got an offer from an investment bank in China. But he quit after two months.

"A perfect job should give me spiritual fulfillment, not only money," he said.

"I spent two years to get the position that turned out to be a mistake and I could not figure out what I liked," he said.

In November 2008, with advice from his parents, Qian took a job offer from a company under the Ministry of Commerce.

But three months later, he quit again to start an investment company with four friends.

"My second resignation sparked bitter quarrels between my parents and I," Qian said.

"It was one of the toughest conflicts I ever experienced."

Qian grew up in a well-off family in Chuzhou, Anhui province.

He always did his parents proud because of good grades. He never met with any major setbacks as a child.

However, Qian found himself looking for work again one year later, because his investment company collapsed.

"You have to be prudent when you are choosing partners," Qian said.

"That is what I learnt from my first company - you have to be sure your partners are in the same camp with you for the long term."

For a whole month, Qian felt he was at the lowest point in his life. He started reading books that covered subjects besides finance and economics.

"I read arts, history and philosophy, because I wanted to know why I felt so bad. I did not like every job I had," he said.

"I quarreled with my parents and I said mean things to my father, regretting them later. Why would I do that?" Qian asked himself.

He did not expect to use the pointers he picked up in his self-study to help him design a website of his own that sells time.

Qian now believes in the words of US IT icon Steve Jobs: "You can't connect the dots looking forward; you can only connect them looking backwards."

Sources: China Daily

 

Now You’re Talking!

Chris Lonsdale’s language-teaching tool, Kungfu English, is an innovative software programme designed specifically for mobile devices. By using your iPhone during downtime, he says, a Chinese English-language student can go from a zero base to effective communication within six months.

The programme is the latest language-learning breakthrough from Mr Lonsdale’s company, The Third Ear, established in Hong Kong in 2007. But its origins date back decades, says the New Zealand-born entrepreneur, who moved to Asia in 1981 and has run an eponymous consultancy business since 1995.

The executive coach and linguist realised that Chinese people who have studied English for 10 years might be able to read and write the language, yet still don’t know how to speak it. It wasn’t the case for Mr Lonsdale, who became fluent in Mandarin within six months of arriving on the Chinese mainland, and fluent in Cantonese after only four months in Hong Kong.
Chris Lonsdale, founder, The Third Ear

Physical Response

People assumed he’s a naturally gifted linguist, but Mr Lonsdale insists there’s a more scientific explanation. “I struggled with French at school – I was in the bottom third of the class,” he says. But when he went to Tahiti as an exchange student, he picked up far more French than he had ever learned in class.

Later, having graduated with a psychology degree, he made the connection between that experience and total physical response, a method to enhance language-learning by physical, concrete interaction. Just as infants learn to communicate by watching their parents’ faces, and the deaf can interpret sign language, Mr Lonsdale reasoned that the human brain is biologically programmed to acquire any language on earth.

“In 2005, after a couple of decades of hearing ‘you’re talented,’ I sat down and wrote The Third Ear – You Can Learn Any Language,” Mr Lonsdale says.
The first in his book series (now in print and online versions) was followed by The Third Ear’s Rhythmic CD series in Mandarin, Cantonese, Japanese, Korean and Spanish.

iPhone App Launch

The Kungfu English iPhone app has found a ready market on the Chinese mainland

In late 2009, the company joined the mobile revolution by launching Kungfu English, an application (app) for iPhone and iPod Touch handsets. Word has since spread, with many of the top mainland multinational corporations equipping their workforce with the product, including Kraft, Danone, Agilent, Coca-Cola University, Bayer and Yum, which owns KFC and Pizza Hut.

“Even Apple Computer is about to start using the Kungfu English app,” says Mr Lonsdale. “Not bad for a little business with a new idea.”

After living in Hong Kong for 27 years, Mr Lonsdale knew the city was the perfect place to launch his venture.

“Hong Kong is a place where nobody bothers you – you can get on with what you want to do,” he says. “And there is a positive energy here: people want you to be successful.”

He describes Hong Kong’s tax regime as “rational and reasonable,” saying this is immensely attractive for business. “It is a great hub for operating throughout all of China and Southeast Asia,” he adds.

Recipe for Success

Mr Lonsdale believes Hong Kong’s dynamism brought his ideas to fruition. “I don’t think I could have done this anywhere else in the world.”

Why? Firstly, he rates access to lots of resources, including multilingual staff. There is a real need here, too, Mr Lonsdale continues.

“Since Hong Kong is a small market, you can test products at minimal cost. And we can access even cheaper labour across the border to do some of the grunt work.”

It is easy to set up a business in Hong Kong, and access to international information is freely available, he adds. “You are prepared to take a risk here, where maybe you wouldn’t anywhere else.”

A home-grown Hong Kong company, The Third Ear has started to get the world talking. About 350 million Chinese are currently learning English, either at school or in outside classes, and Mr Lonsdale says his Kungfu English app is the cheapest – and, he believes, most effective – learning method. By the end of this year, or early 2011, a complementary app, teaching Mandarin and Cantonese to native English speakers, should also be available.

Ten years from now, Mr Lonsdale predicts every person on the planet will be able to speak three languages – thanks largely to one man’s idea, and the city that made it happen.

© Hong Kong Trade Development Council 

 

Nation To Take Lead In Utilizing Green Technology

BEIJING — China has taken a leading role in utilizing many green technologies and is expected to be a major market for carbon capture and storage technologies, said industry leaders.

Both research institutes and companies have shown great enthusiasm for the technology, but commercialization will take time due to high costs and safety issues, said analysts.

"Carbon capture and storage (CCS) is a tough issue but there's an opportunity. If it can make sense in any place, China can take the leadership," Christoph Frei, secretary-general of World Energy Council, told China Daily.

China has outperformed in many aspects of renewable energies and pulled down the price of new energy, particularly in the solar energy sector, Frei said.

"China will become a major market for carbon capture," Philippe Joubert, Alstom Power president, told China Daily in a recent interview.

The cost of CCS would decline "very quickly" if all countries invested, said Joubert. The French power generation equipment company plans to provide CCS solutions commercially in 2015.

A pilot program may be announced in the next two years on a partnership with local Chinese utilities, said Philippe Paelinck, director of carbon dioxide systems business development at Alstom.

The components of its future CCS projects in China, such as boilers, will be locally produced in China to cater to local conditions and lower cost, he said.

Some State-owned enterprises, such as Shenhua Energy Co and China Huaneng Group, have started CCS pilot projects in cities including Beijing and Shanghai.

"Both companies and research institutes are enthusiastically involved in CCS," said Chen Wenying, a professor at Tsinghua University.

All three major CCS technologies, post-combustion capture, oxy-firing and pre-combustion, plus some more advanced technologies, are in their experimental stages at Tsinghua.

The demonstration projects mainly use domestically developed technologies. In a future joint demonstration project with the European Union, some technology transfers may be involved, industry analysts said.

"China is not lagging behind in some core technologies, but compared with international peers, little effort has been made on storage site studies and crisis management," Chen said.

China may levy a carbon tax during the 12th Five-Year Plan (2011-15), which may encourage coal-fired power plants to adopt new technologies such as CCS to mitigate carbon emissions, analysts said.

Due to its high cost and unresolved safety issues, it's unlikely that CCS will be commercialized in China soon. It's not economically feasible for coal-fired plants to adopt the technology on a larger scale, Chen said.

The tax would be as high as several dollars per ton, but it costs at least $30 per ton to capture carbon dioxide based on current technologies, without calculating transportation and storage costs.

It's also a problem how to apply the technology in a power plant which generates millions of tons of carbon dioxide annually, she said. Storing the carbon dioxide will become as very big challenge as volumes become larger, said analysts.

The risk exists that the carbon dioxide could leak back into the atmosphere exist, said Liu Shuang, climate and energy project director of Greenpeace China.

However, China is very likely to need CCS in the next 20 or 40 years to address climate change, as the scale of the renewable energies would be limited, so China should catch up in the initial period, Chen said.

Sources: China Daily

 

And Now The Good News

Outperforming expectations, Hong Kong’s total export figures surged 25 per cent between January and April, making it the strongest expansion in more than 20 years. So look out for good news by year’s end, spurred by that trade impetus, with Hong Kong’s total exports set to finish with a commendable rebound from 2009. But it will also be worth keeping an eye on some difficult issues, including niggling worries over the ultimate recovery in Europe – particularly of the Eurozone – and protectionist sentiment in countries still struggling with large unemployment problems. There is also the matter of sky-high production costs on the Chinese mainland.

Still, the world’s trade environment is improving quite sharply, prompting the International Monetary Fund (IMF) to revise its 2010 forecast for economic growth upward twice since the beginning of the year. The IMF now projects global GDP growth to hit 4.2 per cent this year, compared to the 0.6 per cent contraction in 2009.

Looking ahead, Hong Kong exports should continue to recover alongside the rejuvenated global trade for the rest of 2010. Hong Kong’s total exports are projected to rise by 12 per cent in 2010, up from the original forecast of five per cent.

Hong Kong’s total exports are forecast to rise by 12 per cent in 2010, up from the original forecast of five per cent (Photo: EPN)

Brighter World Prospects

In the developed world, massive policy support has fueled growth, largely restoring financial stability in spite of jitters triggered by fiscal and sovereign debt problems of some Eurozone members.

Better financial market performances, coupled with brightening consumer and business sentiment, have led to increased consumption and restocking by retailers and importers. The pick-up in demand has been fairly broad-based, as wealthy consumers have started to buy more expensive products, though “value for money” remains the shoppers’ tenet.

New trends, such as the rise in the popularity of 3D technology, will drive growth

Economic recovery in the emerging world has been sturdier, helped by various expansionary policies, solid economic fundamentals, a strong rebound in exports, inflows of excessive international liquidity and rallies in asset prices in some places. Moreover, import demand has strengthened. Led by the mainland, there has been conspicuous consumption in developing Asia, and surging exports have whetted an appetite for industrial inputs for export production.

As for products, discretionary items have seen a stronger rebound. The global electronics cycle has shown stirring signs of recovery amid the release of pent-up consumer demand, successive launches of new models and a quicker pace of computer upgrades. This cyclical upturn has given a boost to Hong Kong exports, since electronics – including finished products and components and parts –account for approximately 55 per cent of the total. (see sidebar)

But apart from new digital gadgets, consumer demand has centred on low- to medium-priced items in the toys, clothing, watches and jewellery segments, notwithstanding tentative signs of a reviving luxury business, notably in developing Asia.

Fickle Economic Environment

Despite an improving global trade environment, risks and challenges abound. Crafting timely and well-coordinated policy responses in light of the fickle economic environment is a difficult task, especially for major economies.

The absence or premature withdrawal of the appropriate policy support, for instance, may bring about another global downturn. In the Eurozone, rising worry over sovereign debt and persistent scepticism about concerted financial support from Eurozone members could yet derail the nascent economic recovery in the European Union and, in turn, affect other parts of the world.
For Hong Kong suppliers, mounting protectionism is a major threat to the medium-term outlook. Protectionist sentiment in overseas markets is intensifying, as developed economies experience slow growth and high joblessness.

The United States, for instance, is hardening its stance towards the mainland, and currency issues are expected to play a more visible role over the medium term. If the renminbi appreciates against the US dollar, it will blunt the price competitiveness of Hong Kong products.

Given the continued rise in the local content of Hong Kong companies producing on the mainland, such an adverse impact will be higher than before.

The average local content was about 30 per cent in 2006, but that has now risen to about 49 per cent. That means that a one percent appreciation of the renminbi would roughly translate into a 0.5 per cent increase in production costs against the previous 0.3 per cent.

Rising raw material prices create another problem for Hong Kong exporters. While prices of oil and other commodities are likely to stabilise, the price volatility of raw materials will continue to be a cause for concern.

Meanwhile, labour shortages in the Pearl River Delta are proving the biggest challenge for Hong Kong manufacturers. Although the situation has improved, employers are being forced to raise wages to recruit and retain workers. Higher wages and labour shortages will likely remain the trend over the medium term.

In contrast to most emerging economies, a resurgence in many developed economies will likely remain tempered. While developed economies are generally on the mend, domestic demand should be held back by higher savings and worsening fiscal problems, and they are required to expand exports in a bid to sustain the recovery momentum.

In the face of lukewarm demand from developed markets, emerging economies, particularly developing Asia, spearheaded by the mainland, will have to resort to domestic demand to accelerate growth.

US Leads Recovery Stakes

Among the major developed economies, the US recovery should continue to show the greatest momentum. Huge monetary and fiscal support, along with various government initiatives, are leading to financial stability and rallies in asset prices, contributing, in turn, to improved consumer and business sentiment.

In light of high joblessness and sluggish property values, however, the tempo of economic recovery will likely be constrained. The EU is expected to stay on a slower recovery track, impeded by general high unemployment and persistent property sector weakness in some member states. Moreover, lingering fiscal and sovereign-debt problems of several Eurozone members, not least Greece, will remain a threat. While bail-out support for Greece and the rescue package for the EU’s sovereign debtors will likely limit the “contagion effect” on the rest of the region, fiscal tightening and a weak euro will cast a pall over medium-term prospects.


Pent-up consumer demand and new product launches have spurred a strong recovery in the electronics sector

China Lynchpin

Over the medium term, developing Asia is expected to remain the most dynamic growth driver of all regional markets. In addition to rejuvenating exports to overseas markets, robust intra-regional trade, primarily driven by solid demand from the mainland, should inject much-needed vitality into Asian growth.

The mainland is adjusting its macro-economic policies to maintain solid medium-term growth, while preventing overheating and asset bubbles.

Against this backdrop, moves to adjust the economic structure, notably to compensate for over-investment and boost domestic demand, will be in place.

Government policies aside, consumer spending will be flanked by resilient employment and wage growth, due in part to the spillover from export recovery as global demand continues to recuperate.

Robust consumption should spawn enormous demand for a wide array of consumer products, including luxury goods. Meanwhile, mainland exports are expected to stimulate an appetite for materials and semi-manufactures.

Overall, Hong Kong exports should continue to recover through the rest of 2010, although the pace of expansion could well moderate from the spectacular growth of the first few months.

© Hong Kong Trade Development Council 

 

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