special report - shop talk – china, asean and …...2016/07/19 · special report: shop talk –...

l Global Research l

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2016 https://research.sc.com

Chidu Narayanan +65 6596 7004

[email protected]

Economist, Asia

Standard Chartered Bank, Singapore Branch

Kelvin Lau +852 3983 8565

[email protected]

Senior Economist, HK

Standard Chartered Bank (HK) Limited

Tony Phoo +886 2 6603 2640

[email protected]

Senior Economist, NEA

Standard Chartered Bank (Taiwan) Limited

Edward Lee +65 6596 8252

[email protected]

Head, ASEAN Economic Research


Special Report

Shop Talk – China, ASEAN and robotics

Highlights

Our survey of 290 manufacturing companies in the Pearl River Delta

(PRD) reveals a persistent labour shortage in China. Corporates

expect an average wage increase of 7.7% in 2016, while margins

remain low. This, combined with external headwinds due to weak

global demand, presents a challenging outlook for manufacturers.

Rising wages reflect China’s improving productivity and the

increasing complexity of goods it produces.

One in two clients prefer investing more in automation and

streamlining processes to tackle labour shortages. Respondents are

also increasingly opting to relocate production: 30% want to move,

preferring inland China and offshore destinations in ASEAN, such as

Vietnam and Cambodia.

ASEAN – with its lower wages, abundant labour and rising middle-

class affluence – is well positioned to benefit from the PRD’s shift up

the value chain towards high-end manufacturing and services.

Investment in infrastructure and technology, along with a focus on

improving ease of doing business, will be the key for ASEAN to take

over from China as the world’s next manufacturing hub, in our view.

Embracing technology as a potential disruptor in improving

productivity would help keep the region ahead of the curve.

http://www.brainshark.com/standardcharter/vu?pi=zGLzTCHeIzS0jGz0&intk=897193860

Special Report: Shop Talk – China, ASEAN and robotics

19 July 2016 2

Contents

Overview 3

Key infographics 5

Feeling the PRD pulse 7

China through the PRD lens 8

The slow, painful economic transition continues 8

Gauging the challenges, starting with wages 9

Tackling the challenges, starting with the government 13

Asian manufacturers – A deep dive 20

How the manufacturers differ 21

Divergence in preferences due to structural dissimilarities 21

ASEAN – The next PRD? 27

ASEAN – Poised to benefit 28

Opportunities for ASEAN 28

ASEAN – Set to outperform in the next 20 years 32

Challenges – Technology could be a major disruptor 39

Vietnam – The emerging alternative for manufacturing 40

Global Research Team 43

Acknowledgements

We would like to acknowledge the contributions of Jonathan Koh to this report.


19 July 2016 3

Overv

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Overview Our annual Pearl River Delta (PRD) manufacturing surveys provide us with important

data points, particularly on trends in wages and the labour market, where reliable

official data is scarce. Almost 300 clients participated in our survey this year. Looking

through the PRD lens gives us unique insights into China’s cyclical slowdown and

structural transformation. The PRD is a microcosm of the abundant opportunities in

China, but also of the country’s challenges in transitioning to a more sustainable,

balanced economy. Meanwhile, ASEAN is set to gain from the PRD’s transformation.

80% of our respondents expect the labour shortage to be at least as bad as last

year, despite China’s slowing economy.

Wages are expected to rise 7.7% in 2016, showing little let up from last year’s

7.8%; this should continue to support consumption and help China avoid a

hard landing.

However, lingering high costs, weak orders, narrowing margins and widespread

pessimism mean tougher times ahead for an already over-leveraged China Inc,

keeping the recovery ‘L-shaped’ at best.

A weaker Chinese yuan (CNY) is having a mixed impact on PRD manufacturers,

but the government has stepped up policy support.

Corporates are responding to narrower margins: one in two clients prefer

automation and streamlining processes, spurring much-needed productivity

gains for the economy.

13% of respondents are considering the option of relocating overseas, up from

only 9% in 2013.

Over 50% of respondents see potential benefits from the ‘Belt and Road’ and

‘Made in China 2025’ initiatives.

Figure 1: Challenges for manufacturing companies emerge clearly when we look at the details

Industry Preferred response to labour shortage

Estimated wage rise for 2016 (%)

Wages as a share of

total costs (%)

Expected change in

orders over next 6 months (%)

Expected change in

margins in 2016 vs 2015 (%)

Semiconductor manufacturing equipment

Automation/Move out of China

6.0 20.8 -10.8 -7.9

Semiconductor fabrication More

capex/Automation 9.2 21.7 -11.0 -7.2

Electronics packaging assembly

More capex/Move inland

7.6 24.2 -9.8 -8.9

Component manufacturing Automation/More

capex/Move inland 9.4 22.7 -7.6 -5.5

Non-electronics manufacturing


6.4 21.9 -4.0 -4.0

All manufacturers 7.7 22.5 -7.6 -6.1

Red is high, green is low and yellow is moderate

Source: Standard Chartered Research

The PRD offers us unique insights

into China’s cyclical slowdown and

structural transformation

A focus on increasing productivity

to counter lingering high costs and

weak orders should support China’s

growth


19 July 2016 4

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China’s labour shortage and wage pressures affect both high-tech and low-tech

manufacturers. This year, we drill deeper into how manufacturers’ preferences are

affected by the industry they operate in.

Higher-end manufacturers are likely better placed to handle these pressures as

they focus on high productivity and more value-added activity; almost 75% of

high-end electronics manufacturers said that worker productivity had increased

faster than wages.

Higher-end manufacturers also favour capex investment as a way to address the

labour shortage; meanwhile, non-electronics corporates prefer to move out of

China, heavily favouring ASEAN as an attractive alternative production

destination.

All our respondents, across industries, expect margins and orders to reduce

this year.

ASEAN is set to become the world’s next manufacturing hub, in our view, as China

continues its transformation into a more services-oriented economy. ASEAN benefits

from an ample supply of cheap and good-quality labour. Furthermore, the region’s

high economic growth and rising middle class offer manufacturers opting to relocate

from the PRD an opportunity to capture a share of its large and growing

consumer market.

We believe Vietnam in particular is in a sweet spot to gain from this trend, given its

mix of a cheap and educated labour force, a large and growing working-age population

and an increasingly affluent middle class. Vietnam also enjoys geographical proximity

to China, and is likely the biggest beneficiary of regional trade pacts such as the

Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership

(RCEP).

While attractive in the short run, we believe manufacturing dependent on low-cost

labour is not sustainable without investment in infrastructure and technology. More

importantly, ASEAN countries need to focus on continued infrastructure investment

and the removal of bottlenecks to encourage foreign direct investment (FDI), in our

view. Technology could be the biggest disruptor for the region in low-cost

manufacturing, but also its greatest challenge to becoming the world’s manufacturing

hub. Low-skill, repetitive jobs, which are more likely to move to ASEAN, are also

prone to replacement by programmed machines and engineering advancements.

Automation and robotics will help drive China’s move up the manufacturing value

chain; we think ASEAN should learn from China’s experience and embrace this trend

sooner rather than later.

ASEAN, particularly Vietnam, is the

favoured destination to relocate

production out of China

Technology is likely to be the

biggest disruptor in low-cost

manufacturing


19 July 2016 5

Info

gra

ph

ics

Key infographics Figure 2: Almost 1 in 4 companies plan to increase wages more than in 2015; 58% plan to increase at the same pace

% of respondents; blue shading indicates faster expected wage growth this year versus 2015

2016

No

change Up 5% Up 10% Up 15% Up 20%

2015

No change 6.3% 3.5% 0.3% 1.0% 0.0%

Up 5% 3.8% 30.4% 8.7% 1.0% 0.3%

Up 10% 1.4% 4.5% 15.4% 5.9% 0.3%

Up 15% 1.0% 0.3% 2.8% 4.2% 1.0%

Up 20% 0.7% 1.0% 1.4% 1.4% 1.7%

Please refer to page 9, ‘Feeling the PRD pulse’, for a detailed discussion; Source: Standard Chartered Research

Figure 3: 22% of corporates expect margins to compress more in 2016 than in 2015; 58% expect similar compression

% of respondents; blue shading indicates those expecting better margin changes this year than last year

2016

Down 30% Down 20% Down 10% No change Up 10% Up 20% Up 30%

2015

Down 30% 5.2% 0.7% 0.0% 1.0% 0.0% 0.7% 0.3%

Down 20% 0.3% 5.9% 4.2% 1.4% 1.0% 0.3% 0.0%

Down 10% 0.3% 5.6% 24.4% 4.2% 2.1% 0.7% 0.0%

No change 0.0% 0.3% 6.6% 15.0% 2.1% 0.0% 0.0%

Up 10% 0.0% 1.0% 2.1% 4.5% 6.3% 0.7% 0.0%

Up 20% 0.0% 0.0% 0.0% 0.3% 1.0% 1.0% 0.0%

Up 30% 0.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.0%


Figure 4: Do you expect to benefit from the ‘Belt and Road’ initiative? (% of respondents)


Figure 5: Do you expect to benefit from the ‘Made in China 2025’ campaign? (% of respondents)


44%

22% 21% 14%

0% 10% 20% 30% 40% 50% 60%

No foreseeable benefit for now

Yes Yes, it should broaden our range of suppliers Yes, it should create new investment opportunities overseas

Yes, it should help boost demand from overseas

43%

29% 16% 12%

0% 10% 20% 30% 40% 50% 60%


Yes Yes, we should benefit from faster innovation, technology and IP development

Yes, we should benefit from policy support as we are in one of the priority sectors

Yes, we should benefit from rising domestic content of core components and materials


19 July 2016 6

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Wage growth, 2015 actual vs 2016 expectations

% of respondents; blue shading indicates faster expected wage growth this year vs 2015

Figure 1: Component manufacturers* Figure 2: Electronics packaging assembly*

2016

No


2015

No change 4.7% 0.0% 0.0% 3.1% 0.0%

Up 5% 4.7% 14.1% 9.4% 1.6% 0.0%

Up 10% 1.6% 3.1% 21.9% 7.8% 1.6%

Up 15% 0.0% 1.6% 4.7% 9.4% 0.0%

Up 20% 1.6% 1.6% 3.1% 1.6% 3.1%

2016

No


2015

No change 9.7% 3.2% 0.0% 1.6% 0.0%

Up 5% 4.8% 35.5% 6.5% 1.6% 0.0%

Up 10% 1.6% 0.0% 12.9% 8.1% 0.0%

Up 15% 0.0% 0.0% 1.6% 4.8% 1.6%

Up 20% 0.0% 1.6% 1.6% 1.6% 1.6%



Figure 3: Semiconductor fabrication* Figure 4: Semiconductor manufacturing*

2016

No


2015

No change 5.3% 5.3% 0.0% 0.0% 0.0%

Up 5% 0.0% 23.7% 13.2% 0.0% 2.6%

Up 10% 0.0% 5.3% 21.1% 7.9% 0.0%

Up 15% 0.0% 0.0% 2.6% 0.0% 2.6%

Up 20% 0.0% 0.0% 2.6% 5.3% 2.6%

2016

No

change Up 5% Up 10% Up 15%

2015

No change 8.3% 0.0% 0.0% 0.0%

Up 5% 4.2% 45.8% 8.3% 4.2%

Up 10% 4.2% 4.2% 8.3% 4.2%

Up 15% 4.2% 0.0% 0.0% 4.2%

Source: Standard Chartered Research Source: Standard Chartered Research

Figure 5: Non-electronics*

2016

No


2015

No change 5.3% 6.3% 1.1% 0.0% 0.0%

Up 5% 4.2% 37.9% 8.4% 0.0% 0.0%

Up 10% 1.1% 8.4% 12.6% 3.2% 0.0%

Up 15% 2.1% 0.0% 3.2% 2.1% 1.1%

Up 20% 1.1% 1.1% 0.0% 0.0% 1.1%


* Please refer to page 23, ‘Asian manufacturers – A deep dive’, for a detailed discussion.

Feeling the PRD pulse Kelvin Lau +852 3983 8565

[email protected]




[email protected]

Economist, Asia



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China through the PRD lens

The slow, painful economic transition continues

We conducted our seventh annual survey of PRD manufacturers between February

and March 2016, with responses from close to 290 Hong Kong-based and Taiwan-

based manufacturers operating in the PRD. Our clients tell us that

the labour shortage is marginally less severe, and that wage growth (and

expectations thereof) is relatively steady despite a slowing economy;

there is greater divergence in workforce utilisation among manufacturers, but

there are also more wage negotiations with workers;

pessimism is rising, while orders appear more difficult to come by; and

a weaker CNY is having a mixed impact on PRD manufacturers.

It is through the PRD lens that we get a glimpse into China’s ongoing economic

transition. Higher wages are an integral part of the country’s structural shift towards a

consumption-driven, services-oriented growth model. Wage increases can also be

justified and absorbed by productivity growth. The likelihood of nominal wages

increasing almost 8% on average this year – similar to last year – should, therefore,

be good news, although it comes at the expense of manufacturers.

Our survey shows that persistent wage pressure will likely further compress

manufacturers’ margins, explaining the increase in policy support to the struggling

corporate sector. Provinces have been allowed to hike minimum wages at a slower

rate and to lower social security payments by companies.

Respondents also generally expect to benefit from the ‘Belt and Road’ and ‘Made in

China 2025’ initiatives. Meanwhile, manufacturers who want to control costs continue

to favour investing in automation; a growing minority is looking to move capacity out

of China. We note here that our surveyed clients are likely among the more

successful PRD firms. This may skew the results somewhat; things probably look

bleaker beyond our sample. However, allowing weaker manufacturers to fail has

been, and will continue to be, a key part of China’s much-needed transformation.

Figure 1: Wages set to rise 7.7% in 2016 vs 7.8% in 2015

Actual and expected wage increase, % of respondents

Figure 2: Is labour shortage better or worse than before?

% of respondents


2015

2016

0% 10% 20% 30% 40% 50%

No change

Up 5%

Up 10%

Up 15%

Up 20%

Others

2015

2016

0% 10% 20% 30% 40% 50% 60%

Less difficult

Same

More difficult

PRD manufacturers reflect the

challenges China faces as its

economy transforms

PRD manufacturers reflect the

challenges China faces as its

economy transforms


19 July 2016 9

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Gauging the challenges, starting with wages

Wage expectations on a multi-year downtrend

On the face of it, wage growth pressure has barely eased despite a slowing

economy. Our respondents say they are raising (or planning to raise) wages by 7.7%

on average in 2016, close to last year’s 7.8% (Figure 1). This is, however, down from

increases of 8.1% in 2014 and 8.4% in 2013. Wage expectations are coming off at a

faster rate, with 2016 being the first time that current-year wage expectations are

lower than the prior year’s actual increase (Figure 3). This suggests increasingly

cautious sentiment among employers. On a same-company basis, 22% of

respondents plan to raise wages more than they did last year, down from 26% prior;

those who expect to raise them less stayed steady at 18% (Figure 4).

Using official CPI inflation as a deflator, real wage growth is around 5.6% in 2016,

down from 6.3% in 2015, 6.1% in 2014 and 5.8% in 2013. While not material enough

to undermine China’s pursuit of more consumption-driven growth, this does soften

the tone of an otherwise relatively steady headline wage growth story.

Diverse workforce utilisation amid a labour shortage

The PRD is still facing a labour shortage, which is keeping wages well supported.

27% of our respondents say the labour shortage has worsened in the past 12

months, versus 20% seeing less labour-market tightness. The 7ppt difference,

however, is smaller than last year’s 15ppt, indicating an easing trend (Figure 2).

Workforce utilisation shows a similar easing picture – 53% of respondents reported

operating at 80-90% of their workforce, a material drop from 63% last year (Figure 5).

In contrast, 18% of respondents are operating at 70% or less of their workforce, up

from 15% in 2015, and 13% in 2014. Interestingly, the proportion of those reporting

100% utilisation also rose, to 29% from 22% in 2015, either reflecting more nimble

manufacturers getting leaner amid challenging times or more competitive

manufacturers gaining market share at the expense of others. We think this is a sign of

success for China’s transformation strategy – stronger companies moving up the value

chain, despite the challenges of limiting the fallout of weaker companies folding as

a result.

Figure 3: Respondents expect milder wage growth

acceleration than in the previous year, for the first time

Actual and expected wage increase, this and past surveys

Figure 4: Wage growth, 2015 actual vs 2016 expectations

% of respondents; blue shading indicates faster expected

wage growth this year versus 2015

2016

No


2015

No change 6.3% 3.5% 0.3% 1.0% 0.0%

Up 5% 3.8% 30.4% 8.7% 1.0% 0.3%

Up 10% 1.4% 4.5% 15.4% 5.9% 0.3%

Up 15% 1.0% 0.3% 2.8% 4.2% 1.0%

Up 20% 0.7% 1.0% 1.4% 1.4% 1.7%


Current year expectation

Prior year actual

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

2013 2014 2015 2016

Wages are still rising, despite

easing expectations

The labour market is still tight;

strong companies are getting

stronger and more competitive


19 July 2016 10

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Our respondents see diverse productivity growth. Wage increases can be justified

and, more importantly, absorbed by productivity growth. In the absence of reliable

official numbers, we gauge labour productivity growth by asking our respondents

whether their per-worker output has increased more than wages (Figure 6). 62% of

respondents agreed with this statement, down from 67% last year. A material and

growing minority said productivity growth lagged wage growth. This reflects the

companies’ varying abilities in boosting productivity to absorb rising wage costs (see

‘Asian manufacturers – A deep dive’ for more details). On average, however,

productivity growth remains adequate to limit the spillover of wage costs to prices of

final goods.

A shrinking labour force poses long-term challenges

China’s labour shortage persists because of shrinking supply rather than strong

demand. The working-age population has been declining since 2012 and is likely to

keep falling in the coming decades, even with the recent relaxation of the one-child

policy (Figure 7). Various socioeconomic factors remain disincentives to having

multiple children, including the soaring financial and opportunity costs of raising

children, women’s growing role in the workforce and changing social expectations.

While having less excess supply of labour helps during a downturn, longer-term

challenges stemming from an ageing population loom. First, having fewer workers

Figure 5: Workforce utilisation level

% of respondents, this and previous surveys

Figure 6: Has per-worker output risen more than wages?

% of respondents, this and past surveys


Figure 7: Following Japan’s demographic footsteps

Working-age population (aged 15-64), mn persons

Figure 8: Old-age dependency has a long way to climb

Population aged 0-14 and 65+ per 100 population 15-64, ratio

Source: UN, Standard Chartered Research Source: UN, Standard Chartered Research

2014 2015

2016

0% 10% 20% 30% 40%

60%

70%

80%

90%

100%

2014

2015

2016

0% 10% 20% 30% 40% 50% 60%

No

Yes, a bit

Yes, a lot

China

Japan (RHS)

0

50

100

150

200

250

0

200

400

600

800

1,000

1,200

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

UN projection

Child dependency

ratio

Old-age dependency

ratio

Total dependency

ratio

0

10

20

30

40

50

60

70

80

90

100

1950 1965 1980 1995 2010 2025 2040 2055 2070 2085 2100

An ageing workforce is a small

short-term blessing and a big long-

term challenge


19 July 2016 11

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means lower long-term growth potential. Second, the economy needs to adapt to a

new paradigm, one that requires less unskilled labour but can provide enough skilled

jobs for the rising educated middle class. This adds urgency for China to pursue an

industrial upgrade to skill-based high-end manufacturing, as well as the transition to

modern services. Third, the social security burden (pensions, health care) that Beijing

needs to bear will increase along with the old-age dependency ratio (Figure 8). This

comes at a time when China is already taking on an inordinate amount of public debt

from the private sector.

The persistent margin squeeze and more

Wages on average account for more than 20% of our respondents’ total cost base

(Figure 10). A greater proportion of our respondents see a higher wage component

than in 2015. With wages still rising as the economy slows, margins are bound to

drop. Respondents expect margins to fall by an average 6.1% this year, from a drop

of 0.4% last year. On a same-company basis, only 19% of respondents expect the

change in margins to improve this year, while 22% expect margin changes to be

worse than in 2015 (Figure 9).

On the demand side, respondents expect orders to decline 7.6% on average in the next

six months (Figure 11). 58% of respondents see weaker orders in the next six months,

while 21% expect an improvement. This matches the widespread pessimism among

respondents on the 2016 outlook for China and key overseas markets (Figures 13

Figure 9: Margin change, 2015 actual vs 2016 estimate

% of respondents; blue shading indicates those expecting better margin changes this

year than last year

2016

Down 30%

Down 20%

Down 10%

No change

Up 10% Up 20% Up 30%

2015

Down 30% 5.2% 0.7% 0.0% 1.0% 0.0% 0.7% 0.3%

Down 20% 0.3% 5.9% 4.2% 1.4% 1.0% 0.3% 0.0%

Down 10% 0.3% 5.6% 24.4% 4.2% 2.1% 0.7% 0.0%

No change 0.0% 0.3% 6.6% 15.0% 2.1% 0.0% 0.0%

Up 10% 0.0% 1.0% 2.1% 4.5% 6.3% 0.7% 0.0%

Up 20% 0.0% 0.0% 0.0% 0.3% 1.0% 1.0% 0.0%

Up 30% 0.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.0%


Figure 10: What share of your total costs are wages?

% of respondents, this and previous survey

Figure 11: How do you see orders in the next six months?

% of respondents


12%

33%

43%

11%

1%

12%

29%

45%

13%

0-10%

10-20%

20-30%

40-50%

>50% 2016

2015

0% 10% 20% 30% 40%

Others

-40%

-30%

-20%

-10%

No change

+10%

+20%

+30%

No let-up in pressure on margins,

orders and funding costs

Corporates are pessimistic on the

2016 growth outlook for both China

and their partner countries


19 July 2016 12

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and 12, respectively). The US, Europe and Middle East are the main overseas markets

among those surveyed.

In terms of credit, 46% of respondents reported that it is more difficult to borrow

money now than in 2014, while only 8% said it has become easier (Figure 14). This

is disappointing, considering the multiple rounds of policy interest rate and reserve

requirement ratio (RRR) cuts since then. Monetary conditions were also kept

accommodative throughout 2015 and in Q1-2016. Presumably, a slowing economy

has turned banks more cautious on lending due to concerns over rising non-

performing loans. This finding also echoes our monthly tracker, which shows that

funding costs have stayed high for small and medium enterprises (SMEs). The

financing cost component of our proprietary SME Confidence Index has been

persistently below the 50 neutral mark since late 2014 (Figure 15).

In Q2-2016, we saw a slowdown in monetary and credit growth – reflecting a return

to prudence and a renewed commitment towards deleveraging – give way to fiscal

policy shouldering a larger easing burden.

Survey echoes likely ‘L-shaped’ growth

Our survey shows a reasonably stable labour market and healthy income growth, all

things considered. This keeps consumption supported and should help China avoid a

hard landing. However, a combination of lingering high wages and financing costs,

Figure 12: What is your view on partner markets in 2016?

% of respondents

Figure 13: What is your view on China in 2016?

% of respondents, this and the 2015 survey



Figure 14: How easy is it to borrow money now vs 2014?

% of respondents

Figure 15: SMEs’ financing costs remain elevated

Bank and non-bank financing cost components


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Negative Moderately negative

Neutral Moderately positive

Positive

2015

2016

0%

10%

20%

30%

40%

50%

Negative Moderately negative

Neutral Moderately positive

Positive

0% 10% 20% 30% 40% 50%

Easier

Same

Harder

Non-bank financing cost

index

Bank financing cost index

40

42

44

46

48

50

52

54

56

Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16

50 threshold


19 July 2016 13

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weak orders, narrowing margins and widespread pessimism means tougher times

still for an already over-leveraged China Inc. More defaults are likely on the horizon,

especially if China is serious about its economic transformation goals. Indulging in

the old habit of keeping zombie companies alive because of fallout fears would only

hurt the growth rate in the medium term.

Against this backdrop, the government’s growth target of above-6.5% for the next five

years looks ambitious in the absence of additional policy stimulus. There seems to be

policy space available for stimulus, but the leadership may not (and should not, in our

view) be seeking a strong economic rebound given the sluggish global recovery and

the need to cut capacity and deleverage domestically. An ‘L-shaped’ trajectory for

China in the coming years, therefore, sounds appropriate to us.

Tackling the challenges, starting with the government

Less of a push from minimum wage hikes

PRD manufacturers generally do not mind statutory minimum wage hikes in the

‘good times’; they tend to already pay above the minimum level and would hike

wages given a demand-driven shortage at any rate. In challenging times, however,

manufacturers become more sensitive – and vulnerable – to wage hikes. It is not

surprising, therefore, that 15% of our respondents said minimum wage increases

have had a ‘huge’ impact on wage levels, up from a mere 7% last year. Another 57%

said that regulatory wage hikes have forced them to raise wages more than they had

planned. 28% (down from 30% last year) said they would have hiked wages anyway,

regardless of minimum wage changes. Minimum wage hikes do appear to have a

growing impact on actual wages, especially for the least skilled part of the workforce,

as economic headwinds increase.

It is likely a relief to corporates that Beijing has taken a less assertive stance on

mandating wage increases in its 13th Five Year Plan (FYP, 2016-20), calling only for

‘rationally determined minimum wage rates’. This contrasts with the targeted

minimum wage increases of ‘at least 13% a year on average’ in the government’s

12th FYP (2011-15), during which the actual average increase was 13.1%. Starting

this year, provinces have also been allowed to hike minimum wages only once every

two to three years (from at least once every two years). So far this year, only seven

provinces have hiked minimum wages by an average of 11% (Figures 16 and 17),

versus last year’s average increase of 14.9% among 27 provinces. Chongqing hiked

wages the most this year (20%) because of its lower base and because it did not hike

in 2015 (unlike Shanghai and Tianjin, which tend to hike wages annually).

Figure 16: Minimum wages in selected provinces/cities

Top-tier minimum wage levels, CNY

Figure 17: Less urgency for provinces to hike minimum

wages

Source: Wen Wei Po, Standard Chartered Research Source: Sina Finance, Standard Chartered Research

2015 2016

0

500

1,000

1,500

2,000

2,500

Shanghai Tianjin Jiangsu Shandong Liaoning Chongqing Hainan

0

5

10

15

20

25

30

2011 2012 2013 2014 2015 2016YTD

Number of provinces that adjusted minimum wages

Average minimum wage

The government delivers policy

relief for corporates


19 July 2016 14

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Relieving the corporate cost burden while protecting workers

Statutory hikes are just one of the many drivers for higher wages. Pressure from

collective wage bargaining, for example, has increased of late. 54% of respondents

say they have had formal wage negotiations with worker representatives in the past

six months (Figure 18) – up from 23% in 2015 and 24% in 2014. The pressure is for

the authorities to keep promoting collective wage bargaining as a way to improve

worker protection and calm labour tensions amid a slowing economy; additional relief

for manufacturers will have to come from elsewhere. In addition to easier monetary

conditions and a lower corporate tax burden through VAT reform, the authorities

have also been lowering social security contributions that companies pay for their

workers. We note again that reducing the corporate cost burden while protecting

workers’ interests is a tough balancing act.

Our prior surveys showed a long-running trend of local governments putting more

pressure on companies to enrol migrant workers in social insurance schemes.

Nowadays, payments to the five insurance categories (endowment, medical,

unemployment, employment injury and maternity) and the housing provident fund

account for 40% of a company’s wage bill if fully implemented. Last year, the

authorities started to lower the contribution rates for unemployment (from a headline

3% to 2%), employment injury (from an average of 1% to 0.75%) and maternity (from

not more than 1% to 0.5%) insurance.

The State Council announced more recently that the above insurance payments will

be lowered further in the next two years starting from May 2016 (e.g., to 1.0-1.5% for

unemployment insurance, within which workers’ contribution should be no more than

0.5%). More importantly, the corporate contribution rate for workers’ endowment

insurance and housing provident fund will also be reduced in phases. Lower

contribution to worker endowment insurance, in particular, could provide the biggest

cost relief, as it starts at the highest level. Provinces with endowment insurance at

corporate contribution rates of more than 20% have to lower the rate to 20% in the

next two years. Those already at less than 20% and sitting on a certain minimum

endowment fund level can lower the rate to 19% in two years. A total of 21 provinces

meet these criteria, and 16 provinces had already made the cuts as of early July,

according to media reports. Mixed feelings towards CNY depreciation

There is a common perception that China needs (or has to accept) a much weaker

currency to help its struggling manufacturers and support growth. We asked our

respondents how the CNY’s roughly 6% depreciation against the USD since mid-

Figure 18: Have you negotiated wages in past 6 months?

% of respondents, from this and previous surveys

Figure 19: Impact of CNY depreciation on your business

% of respondents


2014

2015

0% 20% 40% 60% 80%

No , and I don’t think I will this year

No, but I think I will probably have to this year

Yes

2016

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Very negative Somewhat negative

No change Somewhat positive

Very positive

Social security payments will likely

be reduced in phases

CNY depreciation expectations

remain, but policy credibility is on

the rise


19 July 2016 15

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2015 impacts their business. 43% see a positive impact, versus 32% seeing a

negative impact (Figure 19). Presumably, not all respondents are pure exporters that

would benefit from a cheaper exchange rate; importers would probably see their

purchasing power eroded by a weaker CNY, while those sourcing and/or selling

domestically would be less exposed to the USD-CNY trend anyway.

This mixed impact on manufacturers is one of the key reasons we think CNY

depreciation is too blunt an economic relief tool. This is in addition to the well

demonstrated impact of weak market confidence in the CNY on driving capital

outflows. What Chinese manufacturers, much like global investors, need instead of a

weakening currency is a credible and transparent currency regime that promotes a

relative stable CNY over time, in our view. The good news is that markets have

reacted much more calmly to swings in USD-CNY spot and fixing in recent months

after a shaky start to the year. We think this reflects a better understanding of the

CNY FX policy and the daily CNY fixing mechanism, which makes USD-CNY more

responsive to broader USD moves and makes it move in a more predictable manner.

Despite being the worst-performing Asian currency since the UK voted to leave the

EU, the CNY’s drop against the USD has been modest compared with the declines in

many G10 and other emerging-market (EM) currencies. So far, the authorities appear

comfortable with allowing general USD strength to translate into higher USD-CNY

spot and fixing. This has, however, led to further weakening in the CNY basket level

to new lows – too much weakening could renew concerns about the credibility of the

new FX regime, in our view. For now, we see no signs of post-Brexit market panic;

the widening in the CNY-CNH basis has been limited. However, more upside risk to

USD-CNY in the short term amid choppy global sentiment remains a concern.

More than two-thirds of our respondents see the CNY depreciating further against the

USD before the year-end, versus 9% for those expecting appreciation, reflecting

even more pessimism compared with a year ago (Figure 20). The silver lining is that

expectations on the extent of further depreciation are largely modest – only 15% of

respondents see a depreciation of more than 5%.

Figure 20: What is your outlook for the CNY against the

USD until the end of the year?

% of respondents, surveys from 2014-16

Figure 21: What is your outlook for the CNY against the

USD until end-2016?

% of respondents


2014

2015

0%

20%

40%

60%

80%

100%

120%

No material change Depreciate Appreciate

2016

0%

5%

10%

15%

20%

25%

30%

35%

<-5% -3 to -5% 0 to -3% No material change

0 to 3% 3 to 5% >5%

More upside risks to USD-CNY in

the short term


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To invest or relocate, that is the question

PRD manufacturers are responding to the prevailing challenges. We have long

argued that a labour shortage and wage pressures can be positive for an economy if

they force the right behavioural changes at the micro level. Companies willing to

invest in improving their cost structure and competitiveness can benefit from new

opportunities. The economy in turn gets a much-needed productivity boost, and the

creation of high-end jobs helps absorb an increasingly educated workforce. It is,

therefore, encouraging to know that investing more in automation and streamlining

processes continues to be the preferred response to labour-shortage and wage

pressures, cited by 48% of our PRD survey respondents (Figure 22).

Our respondents are marginally less enthusiastic about investing more in capital

equipment and in moving capacity inland compared with a year ago. 17% said they

plan to move capacity inland, down from 20% last year and 28% in 2014. Outer

Guangdong gets the most votes as the preferred destination under this option,

reflecting respondents’ preference to stay close to their existing PRD operations

(Figure 25). When asked what the advantages are for moving to their choice of inland

provinces, ‘better labour supply’ comes out on top, reinforcing how the PRD’s

persistent labour shortage and wage increases continue to force the hand of

manufacturers (Figure 23). The fact that the second and third top choices are also

cost-related confirms the pressure on margins. The main concerns in moving

factories inland are under-development of transport and infrastructure, and poor

labour productivity and quality (Figure 26); the need for cost savings to be large

enough to offset potential loss in efficiency and other risks is probably the main

reason only a minority still favours moving inland.

Manufacturers who prefer to move production overseas are also a minority. 13% of

respondents chose this option, with Vietnam and Cambodia once again the most

favoured destinations as in prior years (Figure 24). We believe these choices indicate

that companies considering relocating from China are mostly low-end producers in

sectors such as textiles and garments. These top overseas destinations also happen

to offer the biggest advantage over the PRD in terms of better labour supply; in

contrast, their economic outlook, proximity to new buyers and potential free trade

agreement (FTA)-related benefits do not seem to be significant influences. Under-

developed transport and infrastructure are once again top concerns for Vietnam and

Cambodia, while uncertain political/social outlooks and undeveloped legal systems

Figure 22: How do you respond to labour shortages?


Figure 23: Advantages for relocating to choice destination

No. of respondents

* Not an answer option before 2015; Source: Standard Chartered Research Source: Standard Chartered Research

2013 2014

2015 2016

0% 10% 20% 30% 40% 50% 60% 70%

Move capacity out of China

Move capacity inland

Invest more in capital equipment

Invest more in automation/ streamlining processes*

0 10 20 30

Local housing policy

FTA-related benefits (e.g. TPP, RCEP)

Proximity to new buyers and customers

Better economic outlook

Other savings on non-wage business costs

Attractive tax incentives

Better labour supply (quantity/quality)

Moving overseas

Moving inland

Automation is the more common

corporate response; relocation has

been more prevalent among low-

end manufacturers

The need for cost savings to be

large enough to offset the potential

loss in efficiency and other risks is

probably the main reason only a

minority still favours moving inland


19 July 2016 17

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appear almost as worrying as poor labour quality and productivity (see ‘ASEAN –

The next PRD?; Opportunities for ASEAN’ for a more detailed analysis).

The CLMV region (Cambodia, Laos, Myanmar and Vietnam), being the up and

coming provider of low-cost production, is also the likely main beneficiary of China’s

‘Belt and Road’ initiative, and is eager for funding to upgrade its transport and power

infrastructure. As opposed to an FTA or multilateral investment treaty, the ‘Belt and

Road’ initiative is more of an encompassing mission statement that aims to boost

trade and investment growth through better infrastructure connectivity across Asia,

extending to the Middle East, Africa and Europe. The initiative has the potential to

channel China’s (and other countries’) savings and construction expertise to other

countries to resolve their infrastructure bottlenecks. Our respondents generally

expect ‘Belt and Road’ to benefit their business (56% of our sample), via higher

overseas demand, new investment opportunities or greater access to new suppliers

(Figure 28).

Figure 24: If you plan to move capacity out of China, to where?

Number of respondents

Vietnam and Cambodia are the

favoured overseas destinations


Figure 25: If you plan to move capacity elsewhere in China, to where?


Those planning to relocate within

China prefer to stay close to the

PRD


0

5

10

15

20

25

30

Vietnam Cambodia Myanmar Bangladesh Thailand India Philippines Indonesia Malaysia Sri Lanka

0 5 10 15

Outer Guangdong

Liaoning, Jilin, Heilongjiang

Chongqing, Sichuan

Hunan, Guangxi

Tianjin, Hebei, Shanxi

Jiangsu, Zhejiang, Shandong

Shaanxi, Gansu, Qinghai, Ningxia

Anhui, Fujian, Jiangxi

Yunnan, Guizhou

Henan, Hubei

Other places

A majority of the respondents see

benefits from the ‘Belt and Road’

initiative


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We asked our respondents how much they would save with the given cost-saving

options. Unsurprisingly, moving capacity to places like Vietnam and Cambodia saves

the most on wages: almost 40% of respondents planning a move see savings of 20%

or more, over twice as much (in terms of proportion of responses) as for other options

(Figure 27). Automation is the second-highest, with 19% respondents expecting

savings of 20% or more; however, automation also has a high proportion of low-

savings responses, indicating that its benefits go beyond just cost considerations. We

think the strong inclination to automate is an encouraging sign that China’s much

needed industrial upgrade is well underway.

Automation, robotics and ‘Made in China 2025’

China extended its leading position as the number one sales market for industrial

robots worldwide in 2015, increasing sales by 16% to 66,000 units, according to the

International Federation of Robotics (IFR). While undershooting IFR’s original

projection of 30% growth due to macro headwinds, China still materially outpaced the

8% increase in global sales. China is set to overtake the EU and North America by

2017-18 as the world’s biggest user of industrial robots in terms of operational stock,

according to the IFR. Furthermore, the rise of robotics is just part of China’s story of

rapid adoption of automation in manufacturing.

By boosting productivity, automation both explains and absorbs high wages; it is also

a reflection of the increasing complexity of the goods produced. China’s attempt to

move up the manufacturing value chain requires a great deal of automation, to

achieve accuracy and complexity in high-volume output at affordable costs (in

electrical and electronics production, for example). It also reduces worker stress

caused by repetitive, high-pressure work and can replace humans with machines

where working conditions are unsatisfactory.

China’s transition to high-end manufacturing would be even more remarkable in the

absence of the current economic headwinds, which are curtailing private investment

growth. Reflecting Beijing’s renewed fiscal push to stabilise growth, FAI by China’s

SOEs grew a staggering 23.3% y/y from January-May, while private investment

growth fell sharply to 3.9% y/y over the same period. The overbearing economic

presence of SOEs tends to crowd out private investment, an issue we think can only

be resolved via SOE reforms and banking-sector reforms. The good news is that

Beijing has identified SOE reform as a policy priority, issuing a long-awaited reform

blueprint in 2015. However, the chances of a quick boost to SOE efficiency or swift

deleveraging remain low, in our view. Better risk-based pricing of bank loans and a

fairer competitive environment are also crucial to boosting private investment.

Figure 26: Concerns on relocating to choice destination

No. of respondents

Figure 27: How much would your response save you?

Wage savings, %


0 5 10 15 20 25 30

Strong labour unions/labour laws

Underdeveloped legal system

Uncertain political/social outlook

Future high wage inflation

High non-wage business costs

Lack of proximity to suppliers

Poor labour quality and productivity

Underdeveloped transport/infra.

Moving overseas

Moving inland

0% 20% 40% 60% 80% 100%

Automation/streamlining

More capital investment


Move capacity overeseas

< 10% 10-20% 20-30% > 30%

Relocating overseas saves the most

on wages

A revival in private investment

should add impetus to promising

trends in automation and robotics


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The Chinese government introduced the ‘Made in China 2025’ campaign last year.

The initiative aims to take China’s manufacturing sector to a new level, mainly

through improving manufacturing innovation, fostering Chinese brands, enforcing

green manufacturing, promoting breakthroughs in 10 key sectors, and promoting

services-oriented manufacturing, among other objectives. The 10 key sectors are

new information technology, numerical control tools and robotics, aerospace

equipment, ocean engineering equipment and high-tech ships, railway equipment,

energy saving and new energy vehicles, power equipment, new materials, biological

medicine and medical devices, and agricultural machinery.

57% of our respondents see themselves benefiting from ‘Made in China 2025’. Of

this percentage, 29ppt expect to benefit from the rising domestic content of core

components and materials (Figure 29), 16ppt see benefits through faster innovation,

technology and intellectual property (IP) development, and 12ppt see gains from

operating in one of the priority sectors likely to receive policy support. China’s push

for an industrial upgrade should help partially cushion the negative impact of a further

exodus from low-end manufacturing. The key is to complement the ‘Made in China

2025’ campaign with initiatives encouraging other types of industrial upgrading

beyond the 10 priority sectors, say via more R&D spending, best-practice sharing,

and higher involvement of private investors and start-ups.

Figure 28: Do you expect to benefit from the ‘Belt and Road’ initiative?

(% of respondents)


Figure 29: Do you expect to benefit from the ‘Made in China 2025’ campaign? (% of respondents)


44%

22% 21% 14%

0% 10% 20% 30% 40% 50% 60%


Yes Yes, it should broaden our range of suppliers Yes, it should create new investment opportunities overseas


43%

29% 16% 12%

0% 10% 20% 30% 40% 50% 60%


Yes Yes, we should benefit from faster innovation, technology and IP development

Yes, we should benefit from policy support as we are in one of the priority sectors

Yes, we should benefit from rising domestic content of core components and materials

10 priority sectors are set to benefit

from the ‘Made in China 2025’

campaign

Asian manufacturers – A deep dive Chidu Narayanan +65 6596 7004

[email protected]

Economist, Asia


Kelvin Lau +852 3983 8565

[email protected]




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How the manufacturers differ

Divergence in preferences due to structural dissimilarities

Analysing the responses from an industry perspective enables us to drill deeper into

what drives our respondents’ choices, and provides insights into the key factors

driving the decision-making process in different industries. This year, our survey

respondents were split between low-end electronics manufacturing, high-end

electronics manufacturing and non-electronics manufacturing. Our respondents were

involved in semiconductor fabrication, component manufacturing, semiconductor-

manufacturing equipment and electronics packaging assembly; non-electronics

manufacturers were in garments, footwear and other accessories, and jewellery,

among others.

Wages still constitute a material proportion of manufacturers’ total costs. Our clients

estimate that total wages account for an average of 22.5% of their total costs, up

from 21.9% last year. This year, we obtained further insights into the cost structure of

manufacturers in different fields.

Figure 1: What share of your total costs are wages?

% of respondents


Figure 2: What is your expected wage increase?

% of respondents

Figure 3: Component manufacturing and fabrication see

biggest wage increases; expected wage increase for 2016


0% 10% 20% 30% 40% 50% 60%

0-10%

10-20%

20-30%

40-50%

>50% Non-electronics


Semiconductor fabrication


Component manufacturing

0%

10%

20%

30%

40%

50%

60%

70%

No change Up 5% Up 10% > 15%





Component manufacture

9.4%

9.2%

7.6%

6.4%

6.0%

7.7%

5% 6% 7% 8% 9% 10%

Component manufacture

Semi conductor fabrication




All manufacturers

This year, we dig deeper into key

factors driving decision making in

different industries

Wages make up an average of

22.5% of manufacturers’ total costs


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Firms involved in electronics packaging assembly reported that wages accounted for

an average 24.2% of their total costs, against 21.7% for fabrication and 20.8% for

semiconductor manufacturing. Non-electronics manufacturers said wages made up

only 21.9% of their total costs, again more than in more value-added electronics

manufacturing but, surprisingly, less than low-end electronics assembly.

Corporates involved in semiconductor fabrication and component manufacturing see

the highest increases in wages this year, of over 9% y/y. Those involved in

manufacturing of semiconductor equipment estimated lower increases, of around 6%

y/y. This alone, however, does not necessarily imply that firms reporting low wage

increases now generally have lower cost pressures – they may simply have been

ahead of the curve and increased wages in previous years in response to earlier

pressures. Another potential reason higher-end manufacturers see more wage

increases this year is that wage pressure on them has been delayed, as their labour

force is more skilled and likely at higher wage levels already. Future surveys and in-

depth conversations with clients should shed more light on our hypothesis.

Worker productivity also differed significantly between industries; almost 75% of

manufacturers in semiconductor fabrication said that per-worker output had risen faster

than wages, either slightly or significantly. In contrast, less than 50% of non-electronics

manufacturers saw worker productivity increase faster than wages. A more productive

Figure 4: Workforce utilisation level

% of respondents

Figure 5: Non-electronics manufacturers have a fuller

workforce, % of respondents


Figure 6: Has per-worker output risen more than wages?

% of respondents

Figure 7: What cost savings do you expect?

% of respondents


0% 10% 20% 30% 40% 50%

60%

70%

80%

90%

100%

Non-electronics manufacturing Semiconductor manufacturing equipment Electronics packaging assembly Semiconductor fabrication Component manufacturer

83% 84% 85% 86% 87% 88%

Component manufacturer





0% 20% 40% 60%

No

Yes, a bit

Yes, a lot

Semiconductor mftg equipment




Non-electronics

12.6%

14.0%

15.2%

21.1%

14.8%

0% 5% 10% 15% 20% 25%


Invest more in automation/streamlining processes



Total

Semiconductor fabricators expect

the highest wage increase in the

PRD in 2016, of 9%...

… and they also saw the biggest

increase in worker productivity


19 July 2016 23

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workforce, combined with higher margins, enables these manufacturers to better

absorb cost pressures, contributing to higher wage increases.

Average workforce utilisation among manufacturers in the PRD is over 86%, higher

than in previous years. The variation in workforce utilisation between manufacturers

in different industries is marginal; component manufacturers report the lowest-

capacity workforce, at 85%. At the other end of the spectrum, non-electronics

manufacturers report the highest utilisation rate, at 87.2%.

More manufacturers prefer moving out of China than in previous years

Our respondents agreed unanimously that streamlining their processes/investing in

automation was the most favourable workaround to tackle the rising labour shortage,

with almost one in two respondents choosing that option. After that, respondents

were split between investing in capex and moving operations to a different location.

Semiconductor equipment manufacturers and those involved in fabrication opted for

investing in capex, while other manufacturers preferred moving operations – either to

other parts of China, or out of China.

Figure 8: Component manufacturers – Wage growth, 2015

actual vs 2016 expectations


wage growth this year vs 2015

Figure 9: Electronics packaging assembly – Wage

growth, 2015 actual vs 2016 expectations



2016

No


2015

No change 4.7% 0.0% 0.0% 3.1% 0.0%

Up 5% 4.7% 14.1% 9.4% 1.6% 0.0%

Up 10% 1.6% 3.1% 21.9% 7.8% 1.6%

Up 15% 0.0% 1.6% 4.7% 9.4% 0.0%

Up 20% 1.6% 1.6% 3.1% 1.6% 3.1%

2016

No


2015

No change 9.7% 3.2% 0.0% 1.6% 0.0%

Up 5% 4.8% 35.5% 6.5% 1.6% 0.0%

Up 10% 1.6% 0.0% 12.9% 8.1% 0.0%

Up 15% 0.0% 0.0% 1.6% 4.8% 1.6%

Up 20% 0.0% 1.6% 1.6% 1.6% 1.6%



Figure 10: Semiconductor fabrication – Wage growth,

2015 actual vs 2016 expectations



Figure 11: Semiconductor manufacturing – Wage growth,

2015 actual vs 2016 expectations



2016

No


2015

No change 5.3% 5.3% 0.0% 0.0% 0.0%

Up 5% 0.0% 23.7% 13.2% 0.0% 2.6%

Up 10% 0.0% 5.3% 21.1% 7.9% 0.0%

Up 15% 0.0% 0.0% 2.6% 0.0% 2.6%

Up 20% 0.0% 0.0% 2.6% 5.3% 2.6%

2016

No

change Up 5% Up 10% Up 15%

2015

No change 8.3% 0.0% 0.0% 0.0%

Up 5% 4.2% 45.8% 8.3% 4.2%

Up 10% 4.2% 4.2% 8.3% 4.2%

Up 15% 4.2% 0.0% 0.0% 4.2%


Worker utilisation is similarly high

among all industries

Streamlining/automation is the

favoured workaround to tackle a

labour shortage


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Our survey respondents said moving manufacturing capacity overseas brought the

largest savings, of over 21% on average. The next biggest savings were from moving

inland, of c.15%. Investing in capex was expected to bring the least cost savings, of

only an estimated 12.6%; moving manufacturing clearly appeared to be more

attractive and more feasible for low-cost manufacturers.

Of the 57% of respondents who reported benefiting from the ‘Made in China 2025’

campaign, a majority were in the semiconductor fabrication and equipment

manufacturing business. Only around 20% of corporates in these industries saw no

foreseeable benefit from the campaign. Over 50% of manufacturers in semiconductor

fabrication expected to benefit from the rising domestic content of core components

and materials; one-third of component manufacturers expressed a similar sentiment.

Manufacturers involved in semiconductor fabrication or equipment manufacturing

also see more benefits from the ‘Belt and Road’ initiative; only 15% of corporates in

the former and just over 20% in the latter saw no benefit. However, a majority of non-

electronics manufacturers – over 60% – saw no foreseeable benefit either from

‘Made in China 2025’ or ‘Belt and Road’. 40% of corporates in electronics packaging

assembly also saw no foreseeable benefit from ‘Made in China 2025’, while almost

50% saw no benefit from ‘Belt and Road’.


% of respondents


Figure 13: Non-electronics – Wage growth, 2015 actual vs

2016 expectations



Figure 14: Is the labour shortage better or worse than

before?

% of respondents

2016

No


2015

No change 5.3% 6.3% 1.1% 0.0% 0.0%

Up 5% 4.2% 37.9% 8.4% 0.0% 0.0%

Up 10% 1.1% 8.4% 12.6% 3.2% 0.0%

Up 15% 2.1% 0.0% 3.2% 2.1% 1.1%

Up 20% 1.1% 1.1% 0.0% 0.0% 1.1%


0% 10% 20% 30% 40% 50% 60%




Invest more in automation/ streamlining processes

Non-electronics





0% 10% 20% 30% 40% 50% 60%





Non-electronics

More difficult

Less difficult

Moving overseas brought the

largest cost savings, of over 21%

More semiconductor fabricators see

benefits from ‘Belt and Road’; non-

electronics manufacturers foresee

no benefit


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Figure 15: Do you expect to benefit from the ‘Made in China 2025’ campaign?

% of respondents


Figure 16: High-end manufacturers see more benefits from ‘Belt and Road’ on

better overseas demand and opportunities, % of respondents


Figure 17: Varying challenges prompt different reactions from manufacturers

Industry Preferred

response to labour shortage

Estimated wage rise

for 2016 (%)

Wages as a share of total

costs (%)

Expected change in

orders over next 6

months (%)

Expected change in margins in

2016 vs 2015 (%)

Semiconductor manufacturing

equipment


6.0 20.8 -10.8 -7.9


More capex/Automation

9.2 21.7 -11.0 -7.2


More capex/Move inland

7.6 24.2 -9.8 -8.9


Automation/More capex/Move inland

9.4 22.7 -7.6 -5.5



6.4 21.9 -4.0 -4.0

All manufacturers 7.7 22.5 -7.6 -6.1

Red is high, green is low and yellow is moderate; Source: Standard Chartered Research

0% 10% 20% 30% 40% 50% 60% 70%


Yes, we should benefit from faster innovation, technology and IP

development

Yes, we should benefit from policy support as we are in one of the priority

sectors

Yes, we should benefit from rising domestic content of core components

and materials





Non-electronics

0% 10% 20% 30% 40% 50% 60% 70%


Yes, it should broaden our range of suppliers

Yes, it should create new investment opportunities overseas






Non-electronics


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Figure 18: Where are your major business partners?

% of respondents

Figure 19: How easy is it to borrow money, now vs 2014?

% of respondents


Figure 20: Impact of CNY depreciation on your business

% of respondents



% of respondents


% change from 2015


0% 10% 20% 30% 40% 50% 60%

China

USA

Europe

Emerging Asia

ASEAN




0% 20% 40% 60%

Easier

Same

Harder

Semiconductor fabrication Component manufacturer Semiconductor manufacturing equipment Electronics packaging assembly Non-electronics

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Component manufacture Electronics packaging assembly


Semiconductor fabrication Semiconductor manufacturing equipment

All manufacturers

Very negative Somewhat negative No change Somewhat positive Very positive

0%

5%

10%

15%

20%

25%

30%

35%

40%





Non-electronics

+30% +20% +10% no change

-10% -20% -30% -40%

-11.0%

-7.6%

-10.8%

-9.8%

-4.0%

-12%

-10%

-8%

-6%

-4%

-2%

0%





Non-electronics

ASEAN – The next PRD? Chidu Narayanan +65 6596 7004

[email protected]

Economist, Asia


Edward Lee +65 6596 8252

[email protected]



Tony Phoo +886 2 6603 2640

[email protected]



Kelvin Lau +852 3983 8565

[email protected]




19 July 2016 28

AS

EA

N –

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ASEAN – Poised to benefit

Opportunities for ASEAN

ASEAN is the preferred destination for manufacturing, outside China

Relocating capacity outside China as manufacturing becomes more expensive in the

PRD has become increasingly attractive over the years. While only 9% of clients

were keen on moving their operations out of China in 2013, over 13% of respondents

this year said they are keen on this option. The numbers seem low, partly because

the survey only includes respondents who still have operations in the PRD region;

manufacturers who have already moved their operating base outside the PRD, which

would have boosted the share, are excluded. Nevertheless, we expect the share of

corporates preferring to move out of China to increase along with rising wages in

China as the country moves up the manufacturing value chain and other countries

hone their manufacturing capabilities. Overall, the option to move capacity out of

China has been the only increasingly preferred option in the past few years.

ASEAN has consistently topped the list of preferred destinations among our clients

who have expressed keenness to move their manufacturing operations out of China.

Almost 80% of respondents preferred ASEAN as their manufacturing base, in line



Figure 2: If you plan to move capacity out of China, to

where?

% of respondents

* Not an answer option before 2015; Source: Standard Chartered Research Source: Standard Chartered Research

Figure 3: What are your cost savings from your potential

action?

% of respondents

Figure 4: What are your cost savings from moving out?

% of respondents


2013 2014

2015 2016

0% 20% 40% 60% 80%




Invest more in automation/ streamlining processes*

10%

5%

5%

10%

36%

2%

2%

3%

3%

5%

7%

25%

42%

Indonesia

Sri Lanka

Philippines

India

Thailand

Bangladesh

Cambodia

Vietnam

2016

2015

12%

14%

17%

19%

14%

13%

15%

21%

Invest in automation

More capex


Move out of China

2016

2015

23%

23%

31%

20%

19%

20%

23%

28%

19%

22%

India

Thailand

Bangladesh

Cambodia

Vietnam

2016

2015

One in seven manufacturers in

China prefer to move their

operations outside


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with responses in the past several years. As China’s manufacturing sector becomes

saturated, ASEAN’s is likely to grow. ASEAN is likely to benefit from comparatively

low wage costs and abundant labour supply in the next 20 years.

Within ASEAN, Vietnam and Cambodia consistently stand out as the destinations of

choice. 42% of respondents who prefer to move manufacturing out of China said they

would move to Vietnam, a significant increase from the already-high 36% in 2015;

25% chose Cambodia; 7% chose Bangladesh; and 3% India, a drop from 2015.

Respondents estimated that moving operations out of China would provide the most

cost savings of 21% of total costs, compared to 15% from moving to other parts of China

and 13% by investing in further capex. In particular, our respondents estimated that

Vietnam would provide an average cost reduction of 22%, higher than their estimate last

year. Moving to Cambodia was estimated to save 20% on labour costs. Moving to other

parts of Asia was also estimated to provide similar savings, ranging from 20-30% on

average; clients said Bangladesh would provide 27.5% savings, on average.

Equipment and non-electronics manufacturers keen on ASEAN

Semiconductor-equipment and non-electronics manufacturers among our survey

respondents favoured moving out of China (Figure 7). 18% of non-electronics

manufacturers saw moving out of China as attractive and 21% of semiconductor

equipment manufacturers preferred this option. This is in line with our expectation.

Non-electronics manufacturers – for whom wages make up a large chunk of total

costs – have been moving operations out of China to more low-cost places like

Vietnam, Bangladesh and Sri Lanka for a few years now.

The move by electronics manufacturers is more recent, as evidenced by the

increasing investment in the electronics manufacturing industry, primarily in Vietnam.

Several big global electronics manufacturers have announced substantial investment

in Vietnam. A significant portion of these investments are from the more advanced

nations in Northeast Asia. Our South Korean and Taiwanese clients have been

particularly keen on investing in Vietnam for a few quarters; we received similar

feedback during our recent trip to Vietnam with Taiwanese investors (see ‘Vietnam –

The emerging alternative for manufacturing’). South Korea and Taiwan are also

among the biggest sources of FDI inflows to Vietnam, accounting for almost 50% of

all inflows.

Figure 5: Advantages of relocating to choice destination

No. of respondents

Figure 6: Challenges of relocating to choice destination

No. of respondents


0 5 10 15

FTA-related benefits (e.g. TPP, RCEP)

Proximity to new buyers and customers

Better economic outlook

Other savings on non-wage business costs

Attractive tax incentives

Better labour supply (quantity/quality)

Vietnam

Cambodia

Myanmar

Bangladesh

Thailand

0 5 10 15

Wages are low now, but I am afraid of high wage inflation

Strong labour unions/ labour laws

Lack of proximity to suppliers

High non-wage business costs

Underdeveloped legal system/ particular application of law

Poor labour quality and productivity

Uncertain political/social outlook

Underdeveloped transport/infra.

Vietnam

Cambodia

Myanmar

Bangladesh

Thailand

Non-electronics manufacturers

prefer moving to ASEAN

Over two in five chose Vietnam as

their most preferred destination

Moving capacity overseas provides

the greatest cost savings

Manufacturing FDI in Vietnam

increasing as Northeast Asia

corporates move operations there


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The biggest attraction of moving production overseas, particularly to ASEAN, is the

availability of better labour supply, both in terms of quality and quantity. This was the

most-cited reason for moving out of China, to both the ASEAN region as a whole and

to Vietnam and Cambodia individually. In addition, our respondents cited attractive

tax incentives and other non-wage business cost savings – such as lower rents, land

acquisition costs and energy costs – as key positives.

Along with ample availability of cheap labour, ASEAN’s rising importance as a

demand destination is also a significant driver of investment in the region.

Manufacturers shifting production to ASEAN are positioning to capture a share of the

region’s growing consumer market, which is being driven by high economic growth

and a rising middle class. In addition to low operating and labour costs, the Mekong

region offers a large and growing consumer market. The 10 ASEAN countries have a

combined GDP of over USD 2.4tn; as a single bloc, ASEAN is the world’s eighth-

largest economy and third-most populous market (after China and India).

Vietnam’s affluent households – those with financial assets of USD 100,000 to USD

2mn – will be the third-fastest-growing demographic globally from 2014-20, according

to Economist Intelligence Unit (EIU) projections. The EIU estimates that the country’s

affluent households will grow at a CAGR of 34.9% in 2014-20, ranking just behind

India and Indonesia. Rising household wealth is expected to boost demand for

better-quality goods and services, making Vietnam more attractive to investors.

Furthermore, the perceived benefits from Vietnam’s involvement in several regional

trade deals, including the Trans-Pacific Partnership (TPP) and the Regional

Comprehensive Economic Partnership (RCEP), are an added incentive driving

investment in the country, according to our clients. Vietnam’s involvement in trade

deals was cited as the third-strongest reason for wanting to move there, while it was

a relatively minor reason for moving to other parts of ASEAN. We forecast another

spurt of increased investment in Vietnam as details of the TPP and the RCEP are

ratified (see ‘ASEAN – The next PRD’ and ‘Vietnam – The emerging alternative for

manufacturing’ for more details).

Figure 7: Equipment and non-electronics manufacturers keen on ASEAN

How do you respond to labour shortages? % of respondents


0% 10% 20% 30% 40% 50%





Non-electronics

More capex



Vietnam’s involvement in regional

trade pacts is an added incentive,

according to our clients

ASEAN’s growing young and

affluent population makes it an

attractive demand destination

Vietnam’s affluent households are

estimated to be the third-fastest

growing in the world


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Infrastructure investment is crucial to facilitate further capital inflows

On the flip side, the region’s lack of well-developed infrastructure remains a major

hurdle for companies to move to ASEAN. One in four respondents keen on moving

out of China cited this as a major concern. Poor infrastructure is also likely to be a

key reason for several corporates not considering ‘moving out of China’ as a viable

option; this option might gain traction if infrastructure investment increases. We

maintain that infrastructure development is critical for the region; without strong

infrastructure, ASEAN economies will find it difficult to achieve their potential as an

economic bloc comparable to China, in our view. The long-term shift in

manufacturing requires both hard and soft infrastructure in order to succeed.

Seamless transport infrastructure across ASEAN, in particular, is needed longer-

term, although the important question of who will pay for infrastructure development

remains. Vietnam has focused on the public-private partnership (PPP) model to

develop infrastructure; its success could see the model replicated in the rest of

ASEAN, particularly in the Mekong Delta region. We believe the ASEAN

governments’ increased focus on infrastructure investment will make the region more

attractive, with early movers standing to gain significantly.

Figure 8: Moving capacity is attractive for firms trading

with US, EU; Where are your major business partners? No. of

respondents

Figure 9: Where are your major business partners?

No. of respondents


Figure 10: Firms that find borrowing harder prefer to

move out; How easy is it to borrow money, now vs 2014?;

no. of respondents

Figure 11: How easy is it to borrow money, now vs 2014?

No. of respondents


0 10 20 30 40

China

USA

Europe

Emerging Asia

ASEAN

Other Move capacity out of China



0 5 10 15

China

USA

Europe

Emerging Asia

ASEAN

Other Bangladesh

Myanmar

Cambodia

Vietnam

0 5 10 15 20 25 30 35

Easier

Same

Harder




Vietnam

Cambodia Myanmar Bangladesh

Thailand

0 5 10 15 20

Easier

Same

Harder

Thailand

Bangladesh

Myanmar

Cambodia

Vietnam

Further infrastructure development

in ASEAN is crucial to removing

bottlenecks and attracting more FDI


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ASEAN – Set to outperform in the next 20 years

ASEAN countries are likely to become more attractive as they continue to invest in

infrastructure, both physical and in terms of ease of doing business. Several ASEAN

countries already perform well in the international rankings on business conditions.

Given these advantages, we expect ASEAN to become a more important global

exporter in the coming years. We believe Vietnam, in particular, is poised to become

among the biggest beneficiaries of China’s move up the manufacturing value chain,

as it combines the key attributes of ample availability of cheap labour and a growing

affluent population with geographical proximity to China. Further infrastructure

development across ASEAN is crucial to removing bottlenecks and attracting more

FDI, in our view.

Building hard infrastructure, removing bottlenecks and creating the right conditions to

encourage FDI are important objectives, particularly for less-developed economies.

The Asian Development Bank (ADB) estimates that ASEAN countries spent only 4%

of GDP on infrastructure as of 2014, down from an average of 6% from 1980-2009.

Although there is no specific optimal level of infrastructure spending, we think 5-10%

of GDP is conducive to higher long-term growth.

Figure 12: World Bank Doing Business rankings, 2016

Table shows world rankings (1-189) in main index and selected sub-indices

Ease of doing business

Starting a business Dealing with

construction permits Getting electricity

Trading across borders

Singapore 1 10 1 6 41

Malaysia 18 14 15 13 49

Thailand 49 96 39 11 56

Brunei 84 74 21 68 121

China 84 136 176 92 96

Vietnam 90 119 12 108 99

The Philippines 103 165 99 19 95

Indonesia 109 173 107 46 105

Cambodia 127 180 181 145 98

Laos 134 153 42 158 108

Myanmar 167 160 74 148 140

Source: Doing Business (World Bank), Standard Chartered Research

Figure 13: ASEAN is attracting more investment

% of total FDI in ASEAN

Source: UNCTAD, Standard Chartered Research

0 5 10 15 20 25 30 35

ASEAN (% of Global FDI)

ASEAN (% of Asia FDI)

Singapore

Indonesia

Thailand

Malaysia

Vietnam

Philippines

Cambodia

Myanmar

Laos

Brunei 2014 Average (2004 - 2013)

51% 50%

ASEAN’s favourable demographics

should help attract investment in its

new manufacturing centres

Infrastructure spending across

ASEAN has slowed in recent years


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As FDI shifts to ASEAN from China, ASEAN may catch up with China’s current status

as the world’s top exporter (Figure 15). ASEAN accounted for close to 7% of global

exports in 2013, and this share has remained broadly stable for some time. China

became the top global exporter in 2008-09 and currently accounts for close to 12% of

global exports. Other major exporters – including the US, Germany and Japan –

have seen their share of global exports decline gradually in recent years.

ASEAN is positioned to benefit from the shift in investment from China as the latter

loses cost competitiveness and its labour supply tightens (Figures 16 and 17). Most

ASEAN countries (with the exceptions of Singapore and Malaysia) have significantly

lower manufacturing wages than China. While wage costs may remain competitive in

some parts of China, particularly in western China, the shrinking labour force means

that wages are likely to catch up quickly with those in eastern China.

In addition to low costs and abundant labour supply, ASEAN boasts high growth, a

young workforce and an attractive investment climate. Some ASEAN economies

Figure 14: Infrastructure development attracts more FDI

Value of FDI inflows (2012-14), USD bn, ranked by 3-year average

Source: UNCTAD World Investment Report, Standard Chartered Research

Figure 15: ASEAN exporters may gain market share from China in the future

% of global exports

Source: WTO, Standard Chartered Research

2012 2013

2014

3YA

0

10

20

30

40

50

60

70

80

SG ID TH MY VN PH KH BN MM LA

ASEAN

US

CN

JP

DE

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ASEAN’s favourable demographics

will help to attract investment in the

region’s new manufacturing centres

ASEAN is likely to receive more FDI,

even outside of Singapore


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(particularly Singapore, Malaysia and Thailand) perform well in international rankings,

such as the World Bank’s Ease of Doing Business and the World Economic Forum’s

Global Competitiveness Index (Figures 12 and 31). The rest have potential to improve.

ASEAN overtook China in terms of inward FDI in 2013. While this is mostly

concentrated in Singapore, other ASEAN economies will likely command a bigger

share of FDI in the coming years (Figure 13). Most FDI goes into the manufacturing

sector, reflecting the region’s positive attributes for investment in manufacturing

facilities (Figure 18).

Figure 16: ASEAN has cost advantages

Monthly manufacturing wages, USD

Figure 17: ASEAN benefits from labour-force growth

Average annual labour contributions to GDP growth vs. trend

growth, ppt

Source: JETRO, Standard Chartered Research Source: IMF, Penn World Tables, Standard Chartered Research

Figure 18: Manufacturing sector is the main beneficiary of FDI in ASEAN

% of FDI

Agriculture Mining Manufacturing Utilities Construction Services

Vietnam Neg.* Neg. 67 12 Neg. 16

Indonesia 8 14 39 10 Neg. 26

Malaysia Neg. 30 40 Neg. Neg. 38

Thailand Neg. Neg. 55 Neg. Neg. 40

Philippines Neg. Neg. 42 Neg. 6 49

Myanmar Neg. Neg 17 70 6 6

Singapore Neg. Neg. 15 Neg. 5 80

*Neg. = negligible (less than 5%); Source: Official websites, Standard Chartered Research

Figure 19: FDI to Vietnam from Northeast Asia has

increased in recent years (USD mn)

Figure 20: Vietnam’s large working-age population is a

key advantage (working-age population, mn)

Source: CEIC, Standard Chartered Research Source: UNHP, Standard Chartered Research

0

200

400

600

800

1,000

1,200

1,400

1,600

SG CN MY TH PH ID VN LA KH MM

Trend growth

-2

-1

0

1

2

3

4

5

6

7

8

ID PH MY TH SG CN

2001-05 2006-10 2011-15P 2016-20P 2021-25P 2026-30P

Top 5 as share of total

(RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2006 2008 2010 2012 2014 2016

South Korea Singapore Taiwan Japan Hong Kong

Thailand

Cambodia

Lao PDR

Myanmar

Vietnam

0

10

20

30

40

50

60

70

80

1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050


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ASEAN also has a demographic advantage. The median age of the region’s

population was about 27 years as of 2013, much younger than China’s estimated 32

years. ASEAN’s labour force should continue to grow in the next few decades,

expanding by 70mn workers from 2010-30, according to UN projections. China’s

labour force, in contrast, is expected to contract by almost 70mn.

Regional trade deals to cement ASEAN’s role as a key global player

Manufacturing capabilities vary across ASEAN currently. The CLMV region and

Indonesia provide low-cost production. Malaysia, Thailand and the Philippines have

expertise in mixed manufacturing and electronics. Singapore has high value-added

manufacturing expertise and strong intellectual property rights protection. To

capitalise on its manufacturing capabilities, ASEAN needs to achieve better

integration. In addition to infrastructure links, a common regional framework for

investment regulations would make it much easier for companies to adopt a pan-

ASEAN strategy, with operations located across the region. Regional trade deals like

the TPP and the RCEP open up significant new markets for ASEAN. The emergence

of the ASEAN Economic Community (AEC) should help cement ties between the

local economies and better integrate the regional output.

The AEC is based on four pillars: single market and production base, competitive

economic region, equitable economic development, and integration into the global

economy. ASEAN has been relatively successful in pursuing Pillar 4, which is to

integrate the region into the global economy. ASEAN has multiple FTAs and is a key

cog in global supply chains. Continued integration via AEC initiatives, the RCEP and

the TPP should continue to reinforce ASEAN as an important trade partner within the

global trade environment.

Figure 21: Major FTAs in negotiations

*Are in both TPP and RCEP negotiations; Source: Standard Chartered Research

AUSTRALIA

NEW ZEALAND

CHINA

CANADA

USA

PERU

CHILE

SOUTHKOREA

JAPAN

PHILIPPINES

MYANMAR

INDONESIA

MALAYSIA*

VIETNAM*

THAILAND

LAOSINDIA

CAMBODIA

SINGAPORE*BRUNEI*

ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN)

TRANS PACIFIC PARTNERSHIP (TPP)

REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP (RCEP)

ASEAN has the potential to become

an important global exporter


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Much focus is centred on the TPP, a mega regional FTA negotiated between 12

countries, of which four are from ASEAN. The 12 countries include Australia, Brunei,

Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Japan, Singapore, the US and

Vietnam. They account for about 40% of global GDP and about one-third of global

trade. The TPP was signed by all 12 countries in February 2016 but will only be

enforced after ratification by all the partners.

Within the TPP partners, Vietnam could be the biggest beneficiary. According to the

World Bank, the TPP could boost Vietnam’s GDP by 10ppt by 2030, the biggest gain

among all members. Vietnam should benefit from lower tariffs and non-tariff

measures, and the migration of supply chains, as companies that sought to benefit

from TPP arrangements will need to adhere to stringent rules of origin requirement.

TPP members currently account for c.35% of Vietnam’s export destinations.

Including countries that do not currently have either FTAs or Comprehensive

Economic Partnerships (CEPs) with Vietnam, the TPP could double Vietnam’s trade

reach in terms of GDP. The effect is largely due to the US being a part of the TPP.

Figure 22: International reach if the RCEP is concluded

By FTA members’ population, GDP, and trade (in multiples of own country population, GDP and trade, respectively)

Source: CEIC, Standard Chartered Research

Figure 23: International reach if the TPP is concluded

By FTA members’ population, GDP, and trade (in multiples of own country population, GDP and trade respectively)


4.6

0

100

200

300

400

500

600

700

SG MY TH VN PH ID ASEAN

8.0

0

20

40

60

80

100

120

140

VN PH SG MY TH ID ASEAN

3.3

0

10

20

30

40

50

60

70

80

90

PH VN ID TH MY SG ASEAN

5.4

0

20

40

60

80

100

120

140

160

SG MY VN ASEAN-4

33.7

0

20

40

60

80

100

120

140

160

180

VN SG MY ASEAN-4

5.6

0

5

10

15

20

25

30

35

40

VN MY SG ASEAN-4

The TPP could raise Vietnam’s GDP

by 10ppt by 2030, the biggest gain

among all members


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Figure 24: Significant growth in the urban population

Mn

Figure 25: Rise in ASEAN’s urban population to dwarf

current populations of major cities (mn)

Source: IMF, Standard Chartered Research Source: World Bank, Standard Chartered Research

Figure 26: ASEAN is a key cog in the global supply chain

ASEAN-6 exports to the world; % share of total

Figure 27: ASEAN is providing more end demand

ASEAN-6 imports from the world; % share of total

Source: UNCOMTRADE, Standard Chartered Research Source: UNCOMTRADE , Standard Chartered Research

Figure 28: Indonesia and the Philippines are likely to see the largest increases in working-age population (mn)

Source: UNHNP, Standard Chartered Research

301

371

0.1 0.6 1.0 1.2 4.8 4.8 7.2 7.5

9.2

33.2

200

220

240

260

280

300

320

340

360

380

400

2015

BN

SG

KH

LA

MY

MM

TH

PH

VN

ID

2025

+69mn 78.9mn

0

10

20

30

40

50

60

70

80

90

Incr. in ASEAN urban

population - 2020

Shanghai Delhi Tokyo London New York

Total = 67.9mn

Total = 25.9mn

Capital goods

Consumption goods

Intermediate goods

58

60

62

64

66

68

70

72

10

12

14

16

18

20

22

1998 2000 2002 2004 2006 2008 2010 2012 2014

Capital goods

Consumption goods

Intermediate goods (RHS)

68

70

72

74

76

78

8

10

12

14

16

18

20

1998 2000 2002 2004 2006 2008 2010 2012 2014

0

50

100

150

200

250

300

350

0

20

40

60

80

100

120

2010

2030

2050

2010

2030

2050

2010

2030

2050

2010

2030

2050

2010

2030

2050

2010

2030

2050

2010

2030

2050

2010

2030

2050

2010

2030

2050

Indonesia Malaysia Philippines Singapore Thailand Cambodia Lao PDR Myanmar Vietnam

60+ 15-60 0-14 60+ (RHS) 15-60 (RHS) 0-14 (RHS)


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Figure 29: Vietnam is a clear outperformer within ASEAN

% share of total ASEAN-6 exports to the world

Source: UNCOMTRADE, Standard Chartered Research

Figure 30: Singapore and Malaysia have the highest infrastructure scores; Myanmar, Cambodia and Laos the lowest

Scores on a scale of 1 to 10; calculated using international and local data

Source: Global Competitiveness Report, UN, CEIC, Standard Chartered Research

Acronyms stand for: Urbanisation (UBN), transport (TPT), electricity access (ELA), telecommunications (TCN), investments (INV), and institutions (INS)

Figure 31: Global Competitiveness Index, 2014-2015

Scores are on a scale of 1 to 7; economies ranked according to overall score

Overall score Institutions score Infrastructure

score Overall rank in 2014-15 (1-144)

Overall rank in 2013-14 (1-148)

Singapore 5.65 5.98 6.54 2 2

Malaysia 5.16 5.11 5.46 20 24

Brunei 4.95* 4.96* 4.29* - 26

Thailand 4.66 3.66 4.58 31 37

Indonesia 4.57 4.11 4.37 34 38

The Philippines 4.40 3.86 3.49 52 59

Vietnam 4.23 3.51 3.74 68 70

Laos 3.91 3.92 3.38 93 81

Cambodia 3.89 3.25 3.05 95 88

Myanmar 3.24 2.80 2.05 134 139

Note: Brunei numbers from 2013-2014 Report; Source: The Global Competitiveness Report 2014-2015 (World Economic Forum), Standard Chartered Research

ID

MY

PH

SG

TH

VN

0

10

20

30

40

50

60

70

80

90

100

1998 2000 2002 2004 2006 2008 2010 2012 2014

ID MY PH SG TH VN

MY

MM

TH 0

5

10 UBN

TPT

ELA

TCN

INV

INS

KH

LA

VN

0

5

10 UBN

TPT

ELA

TCN

INV

INS BN

ID

PH

SG

0

5

10 UBN

TPT

ELA

TCN

INV

INS

Island & archipelago economies Mekong Delta Region and peninsular economies


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Challenges – Technology could be a major disruptor

Focus on low-cost labour is not a sustainable way forward

The availability of cheap and plentiful labour is the biggest reason firms are motivated

to move to ASEAN. This is not sustainable, however, as labour is not likely to remain

cheap in these countries forever. An even bigger threat comes from the increasing

use of technology in manufacturing. Almost 50% of our respondents already choose

investment in automation as their preferred way to tackle the rising labour shortage.

Technology is set to become a major disruptor in manufacturing, in our view.

Mundane and repetitive jobs, particularly in low-skill manufacturing, are prone to

replacement by programmed machines and engineering advancements. The

International Labour Organisation1 estimates that 86% of all current jobs in Vietnam

in textiles, clothing and footwear are at high risk of being replaced by automation; this

is slightly lower than 88% for Cambodia, but higher than 64% for Indonesia.

While the risk of a mass migration of manufacturing back to the West is not

immediate, manufacturing firms have already started moderate ‘re-shoring’. ASEAN

countries should learn from China’s experience and prepare to face these challenges

sooner rather than later. A focus on skill-building and technical competency, and

creating a highly proficient labour force is critical. Investment in higher education and

value-added vocational training is also essential longer-term. As the role of

technology in manufacturing increases, highly skilled workers will be in increasing

demand; nations that focus on skill-building today will reap the benefits in the not-too-

distant future.

1 International Labour Organization – ASEAN in transformation – How technology is changing jobs and enterprises, July 2016

Figure 32: China’s productivity looks strong within Asia

Average annual ppt contribution to GDP growth from

productivity (TFP), by decade

Figure 33: China to become the biggest user of industrial

robots by 2017, overtaking the EU and North America

Estimated operational stock of industrial robots, ’000 units

Source: Penn World Tables, Standard Chartered Research

Source: IFR World Robotics 2014, Standard Chartered Research

-3

-2

-1

0

1

2

3

4

5

1981-1990 1991-2000 2001-2013

CN IN HK TW US KR SG JP

2014

2018

0

100

200

300

400

500

600

700

China EU_5 North America

Reliance on cheap labour to attract

firms is not sustainable

Technology is likely to be the

biggest disruptor in low-cost

manufacturing

ASEAN should embrace technology

in manufacturing sooner than later


19 July 2016 40

AS

EA

N –

Th

e n

ext

PR

D?

Vietnam – The emerging alternative for manufacturing

On-the-ground views – Positive affirmation from Taiwan manufacturers

Taiwan corporates appear generally positive about Vietnam’s growth prospects, we

learned during our recent visit to eight Taiwan manufacturers with production facilities

in the Binh Duong and Dong Nai provinces near Ho Chi-Minh City (HCMC). We

visited mainly export contract manufacturers of international brands in household

furniture, footwear, textiles and garments, chemical materials, travellers’ bags, and

screws and fasteners. All eight producers indicated that they had either increased

investment in the past year and/or planned to further expand production capacity in

the next 12 months, as they expected revenues and/or margins to improve in the

next few years.

Our Taiwan clients’ optimism over Vietnam’s outlook is consistent with the latest

results of our 2016 PRD manufacturers’ survey. More than 45% of Taiwan

manufacturers we polled are generally optimistic on ASEAN’s outlook, three times

the 15% who were not optimistic. Importantly, Vietnam stood out as the top choice of

destination to move production capacity out of China; this is unsurprising, as Vietnam

has seen a surge in FDI from Taiwan in recent years.

Total approved FDI from Taiwan rose to USD 1.2bn in 2015, twice the USD 646mn

recorded in 2014, according to Ministry of Economic Affairs (MOEA) data.

Significantly, however, nearly 70% of Taiwan’s approved FDI to Vietnam (i.e., USD

5bn) occurred over 2011-15. Vietnam also accounted for almost one-third of

Taiwan’s approved FDI in Asia, excluding China – almost twice the 17% recorded

during 2000-10 – indicating that Vietnam has been a major recipient of Taiwan FDI in

the past five years.

FDI data from Vietnam supports our finding that Taiwan manufacturers are

increasing investment allocation to Vietnam. Based on data for H1-2016, Taiwan is

the third-largest source of FDI in Vietnam. South Korea tops the table, accounting for

almost 42% of total registered FDI in Vietnam in H1-2016. Importantly, FDI from

Taiwan has been rising steadily in the past few years, and should continue to

increase further in the next few years.

Figure 34: Taiwan moves up the ranks on FDI in Vietnam

Registered capital; % of total

Taiwan is now the third-largest FDI

source for Vietnam


0

5

10

15

20

25

30

35

40

45

South Korea Singapore Taiwan Japan Hong Kong China Malaysia

2012-2014 2015 H1-2016

We visited contract manufacturers

in Vietnam along with our

Taiwanese clients

Taiwanese manufacturers optimistic

on Vietnam outweigh those who are

not by 3-to-1

Taiwan FDI in Vietnam doubled y/y

in 2015

One-third of Taiwan’s approved FDI

in Asia ex-China is in Vietnam


19 July 2016 41

AS

EA

N –

Th

e n

ext P

RD

?

Taiwan investors continue to be attracted to Vietnam due to its relatively low wages

and ample labour supply. The average monthly wage for production workers in Binh

Duong province is USD 200-300, significantly below the average USD 700-800

earned by their mainland China counterparts. Furthermore, our clients mentioned

that the recent rapid gains in the average monthly wages of production workers – by

10-15% per year – is also partly offset by improving productivity. This suggests that

Vietnam will likely attract many low-cost, labour-intensive Taiwan export

manufacturers seeking a low-cost manufacturing base outside mainland China.

This corresponds with our 2016 PRD manufacturers’ survey, in which 21 of 34

Taiwan manufacturers polled indicated total wage-cost savings of over 10% through

relocation overseas. Our Taiwan sample also has a larger share of non-technology

corporates (22 out of 34) – 64% of the total, against 33% of the total survey

population. This indicates a stronger desire among low-cost, labour-intensive Taiwan

producers to move out of China.

Vietnam’s continuing efforts to actively participate in and integrate into global/regional

trade is also a major lure for many Taiwan corporates looking to invest there. Indeed,

all our eight Taiwan clients indicated varying degrees of tariffs and/or duty-free

advantages for exports to the EU due to the Generalised System of Preferences

(GSP). This is likely to be further enhanced by Vietnam’s membership of the TPP.

Coupled with the continued clustering of key supply chains, several of our Taiwan

clients – especially in garments and textiles, and footwear – believe Vietnam will be a

choice destination for many Taiwan export manufacturers seeking an alternative

production base outside China. Our Taiwan clients’ optimism over Vietnam also

reflects doubts among Taiwan investors about the potential benefits from China’s

recent ‘Belt and Road’ and ‘Made in China 2025’ policy initiatives, according to the

results of our 2016 PRD manufacturers’ survey (Figure 36).

There are also some concerns…

Vietnam will have to further upgrade its infrastructure if the economy is to continue to

benefit from rising FDI and surging external trade. Nearly all our Taiwan clients

mentioned that handling capacity at major cargo terminal remains adequate. Their

main concerns were increasingly common congestion at the terminals and a longer

custom clearance period in peak seasons and around major public holidays, causing

Figure 35: Taiwan investors generally expect over 10%

wage savings through relocation


Figure 36: Taiwan clients are less positive on China’s

‘Belt and Road’ and ‘Made in China 2025’ initiatives



0 5 10 15 20

Wage savings less than 10%

Wage savings between 10% and

20%

Wage savings between 20% and

30%

Wage savings greater than 30%

0

5

10

15

20

25


Yes, it should broaden our range

of suppliers

Yes, it should create new investment

opportunities overseas

Yes, it should help boost demand from

overseas

Belt and Road

Made in China 2025

Vietnam will likely attract many low-

cost, labour-intensive Taiwan

export manufacturers


19 July 2016 42

AS

EA

N –

Th

e n

ext

PR

D?

disruptions to production schedules and/or delayed shipments.

Vietnam’s 3,400km-long coastline and location in the South China Sea – one of the

world’s busiest maritime routes – increase its attractiveness. The country has

developed several ports in HCMC, Haiphong and Danang. Investment in developing

sea ports, while forthcoming, has been dispersed across multiple locations without a

focus on developing a single port to world-class standards. Nevertheless, the port in

HCMC ranks among the top 25 in the world.

The clustering of supply chains in key industrial parks and nearby areas is beginning

to result in constraints on some key resources. For example, our Taiwan clients

located in Dong Nai province mentioned that it is less easy to find workers than

previously. The growing number of foreign investors with major international brand

names has attracted a large number of workers living nearby and driven up monthly

wages. As a result, many smaller and less-established producers are forced to look

further out to meet hiring demand, resulting in higher recruitment expenses and

maintenance costs, as they have to keep up with the market’s ‘going rates’.

Rapidly increasing wages, albeit currently low, were also highlighted as a general

concern. According to our clients, wages have been rising by about 10-15% per year.

Wages in Vietnam remain manageable currently, compared with regional

competitors. An average manufacturing worker in Vietnam earns about USD 185 per

month, according to a Japan External Trade Organisation (JETRO) 2015 survey.

This puts Vietnam roughly in the middle of the regional wage spectrum. Wages

increased by about 10% in 2015, broadly in line with our clients’ feedback of 10-15%.

Clients are not yet overly concerned about the level of wages, suggesting that it is

still profitable to be based in the country. However, Vietnam will also need to

eventually move up the value chain to justify higher wages. Using Malaysia as a

guide and assuming wages in Vietnam and Malaysia rise about 10% and 5% per

year, respectively, Vietnam will reach Malaysia’s wage levels in about 11-12 years.

Figure 37: Wages in Vietnam are manageable but rising rapidly

Labour costs in various cities, USD per month

Source: JETRO, Standard Chartered Research

0

100

200

300

400

500

600

700

800

900

Manufacturing - Worker Non-manufacturing - Staff

Bangladesh Sri Lanka Cambodia Laos Vietnam

India Indonesia Philippines Malaysia Thailand

Vietnam’s long coastline increase

its attractiveness

Clients are not overly concerned

about rising wages in Vietnam, as

they remain among the region’s

lowest


19 July 2016 43

Global Research Team

Management Team

Dave Murray, CFA +65 6645 6358

Head, Global Research

[email protected]


Marios Maratheftis +971 4508 3311

Chief Economist

[email protected]

Standard Chartered Bank

Thematic Research

Madhur Jha +44 20 7885 6530

Senior Economist, Thematic Research

[email protected]


Enam Ahmed +44 0207 885 7735

Senior Economist, Thematic Research

[email protected]


Samantha Amerasinghe +44 20 7885 6625

Economist, Thematic Research

[email protected]


Global Macro Strategy

Eric Robertsen +65 6596 8950

Head, Global Macro Strategy and FX Research

[email protected]


Mayank Mishra +65 6596 7466

Macro Strategist

[email protected]


Becky Liu +852 3983 8563

Head, China Macro Strategy

[email protected]


Economic Research

Africa Asia

Razia Khan +44 20 7885 6914

Chief Economist, Africa

[email protected]


Victor Lopes +44 20 7885 2110

Senior Economist, Africa

[email protected]


Sarah Baynton-Glen +44 20 7885 2330

Economist, Africa

[email protected]


Edward Cheng +44 20 7885 5284

Economist, Africa

[email protected]


Emmanuel Kwapong +44 20 7885 5840

Economist, Africa

[email protected]


David Mann +65 6596 8649

Chief Economist, Asia

[email protected]


Southeast Asia

Edward Lee Wee Kok +65 6596 8252


[email protected]



Economist, Asia

[email protected]


Usara Wilaipich +662 724 8878

Senior Economist, Thailand

[email protected]

Standard Chartered Bank (Thai) Public Company Limited

Aldian Taloputra +62 21 2555 0596

Senior Economist, Indonesia

[email protected]

Standard Chartered Bank, Indonesia Branch

Jonathan Koh +65 6596 1262

ASEAN Economist

[email protected]


South Asia

Anubhuti Sahay +91 22 6115 8840

Head, South Asia Economic Research

[email protected]

Standard Chartered Bank, India

Saurav Anand +91 22 6115 8845

Economist, South Asia

[email protected]


Kanika Pasricha +91 22 6115 8820

Economist, India

[email protected]


Greater China

Shuang Ding +852 3983 8549

Head, Greater China Economic Research

[email protected]


Kelvin Lau +852 3983 8565


[email protected]


Betty Rui Wang +852 3983 8564

Economist, NEA

[email protected]


Se Yan +86 10 5918 8302

Senior Economist, China

[email protected]

Standard Chartered Bank (China) Limited

Lan Shen +86 10 5918 8261

Economist, China

[email protected]


Tony Phoo +886 2 6603 2640


[email protected]


Korea

Chong Hoon Park +82 2 3702 5011

Head, Korea Economic Research

[email protected]

Standard Chartered Bank Korea Limited

Kathleen B. Oh +82 2 3702 5072

Economist, Korea

[email protected]

Standard Chartered Bank Korea Limited

The Americas

Mike Moran +1 212 667 0294

Head, Economic Research, The Americas

[email protected]

Standard Chartered Bank NY Branch

Thomas Costerg +1 212 667 0468

Senior Economist, US

[email protected]


Italo Lombardi +1 212 667 0564

Senior Economist, Latam

[email protected]


Europe Middle East and North Africa

Sarah Hewin +44 20 7885 6251

Chief Economist, Europe

[email protected]


Achilleas Chrysostomou +44 20 7885 6437

Economist, Europe

[email protected]


Dima Jardaneh +971 4 508 3591

Head of Economic Research, MENA

[email protected]


Carla Slim +971 4 508 3738

Economist, MENA

[email protected]


Bilal Khan +92 21 3245 7839

Senior Economist, MENAP

[email protected]

Standard Chartered Bank (Pakistan) Limited

Philippe Dauba-Pantanacce +44 20 7885 7277

Senior Economist, Global Political Analyst

[email protected]


mailto:[email protected]


19 July 2016 44

FICC Research

Rates Research Credit Research FX Research

Kaushik Rudra +65 6596 8260

Head, Rates & Credit Research

[email protected]


Nagaraj Kulkarni +65 6596 6738

Senior Asia Rates Strategist

[email protected]


Arup Ghosh +65 6596 4620

Senior Asia Rates Strategist

[email protected]


Lawrence Lai +65 6596 8261

Asia Rates Strategist

[email protected]


John Davies +44 20 7885 7640

US Rates Strategist

[email protected]


Samir Gadio +44 20 7885 8618

Head, Africa Strategy

[email protected]


Eva Murigu +25 42 0329 4004

Africa Strategist

[email protected]

Standard Chartered Investment Services Kenya Limited

Kaushik Rudra +65 6596 8260

Head, Rates & Credit Research

[email protected]


Shankar Narayanaswamy +65 6596 8249

Head, Credit Strategy & Financials

[email protected]


Bharat Shettigar +65 6596 8251

Head, Asia Ex-China Corporate Credit Research

[email protected]


Jaiparan Khurana +65 6596 7251

Sovereign Strategist

[email protected]


Simrin Sandhu +65 6596 6281

Senior Credit Analyst, Financials & Head, ME Credit Research

[email protected]


Nikolai Jenkins, CFA +65 6596 8259

Credit Analyst, Financials

[email protected]


Zhi Wei Feng +65 6596 8248

Head, China Corporate Credit Research

[email protected]


Melinda Kohar +65 6596 9543

Credit Strategist

[email protected]


Eric Robertsen +65 6596 8950

Head, Global Macro Strategy and FX Research

[email protected]


Robert Minikin +44 20 7885 8674

Head, Asian FX Strategy

[email protected]


Eimear Daly +44 20 7885 6162

G10 FX Strategist

[email protected]


Nick Verdi +1 646 845 1279

Senior FX Strategist

[email protected]


Devesh Divya +65 6596 8608

Asia FX Strategist

[email protected]


Eddie Cheung +852 3983 8566

Asia FX Strategist

[email protected]


Lemon Zhang +65 659 69498

[email protected]

Analyst, FX Research / Global Macro Strategy


Commodities Research

Paul Horsnell +44 20 7885 6913

Head, Commodities Research

[email protected]


Nicholas Snowdon +44 20 7885 2276

Metals Analyst

[email protected]


Suki Cooper +1 212 667 0319

[email protected]

Precious Metals Analyst


Priya Balchandani +65 6596 8254

Energy Analyst

[email protected]


Judy Zhu +86 21 6168 5016

Metals Analyst

[email protected]



19 July 2016 45

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19 July 2016 46

Disclosures appendix

Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Global Disclaimer: Standard Chartered Bank and/or its affiliates (“SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document (including market data or statistical information). The information in this document, current at the date of publication, is provided for information and discussion purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. SCB does not represent or warrant that this information is accurate or complete. While reasonable care has been taken in preparing this document and data obtained from sources believed to be reliable, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. This document does not purport to contain all the information an investor may require and the contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained in this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update on a reasonable basis the information and opinions contained herein, we are under no obligation to do so and there may be regulatory, compliance or other reasons that prevent us from doing so. Accordingly, information may be available to us which is not reflected in this document, and we may have acted upon or used the information prior to or immediately following its publication. SCB is acting on a principal-to-principal basis and not acting as your advisor, agent or in any fiduciary capacity to you. SCB is not a legal, regulatory, business, investment, financial and accounting and/or tax adviser, and is not purporting to provide any such advice. Independent legal, regulatory, business, investment, financial and accounting and/or tax advice should be sought for any such queries in respect of any investment. SCB and/or its affiliates may have a position in any of the securities, instruments or currencies mentioned in this document. SCB and/or its affiliates or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document and on the SCB Research website or have a material interest in any such securities or related investments, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments and may have received compensation for these services. 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United Kingdom and European Economic Area: SCB is authorised in the United Kingdom by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This communication is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia: The Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered Business Number (ARBN: 097571778). Australian investors should note that this communication was prepared for “wholesale clients” only and is not directed at persons who are “retail clients” as those terms are defined in sections 761G and 761GA of the Corporations Act 2001 (Cth). Bangladesh: This research has not been produced in Bangladesh. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED IN BANGLADESH AND MAY NOT BE OFFERED OR SOLD IN BANGLADESH WITHOUT PRIOR APPROVAL OF THE REGULATORY AUTHORITIES IN BANGLADESH. Any subsequent action(s) of the Recipient of these research reports in this area should be subject to compliance with all relevant law & regulations of Bangladesh; specially the prevailing foreign exchange control regulations. Botswana: This document is being distributed in Botswana by, and is attributable to, Standard Chartered Bank Botswana Limited which is a financial institution licensed under the Section 6 of the Banking Act CAP 46.04 and is listed in the Botswana Stock Exchange. Brazil: SCB disclosures pursuant to the Securities Exchange Commission of Brazil (“CVM”) Instruction 483/10: This research has not been produced in Brazil. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL AND MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS AND IN COMPLIANCE WITH THE SECURITIES LAWS OF BRAZIL. China: This document is being distributed in China by, and is attributable to, Standard Chartered Bank (China) Limited which is mainly regulated by China Banking Regulatory Commission (CBRC), State Administration of Foreign Exchange (SAFE), and People’s Bank of China (PBoC). Germany: In Germany, this document is being distributed by Standard Chartered Bank Germany Branch which is also regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Hong Kong: This document (except any part advising on or facilitating any decision on futures contracts trading) is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited 渣打銀行（香港）有限公司 which is regulated by the Hong Kong Monetary Authority. Insofar as this document advises on or facilitates any decision on futures contracts trading,

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mailto:[email protected]


19 July 2016 47

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David Mann Chief Economist, Asia

Document is released at

08:54 GMT 19 July 2016

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