Since the provisions of the labour contract law were implemented in Jan 2008, (which strengthened the protection of workers ' rights and benefits) mainland enterprises are now facing new challenges. Foxconn Technology Group and Honda Motor Company Ltd in Guangzhou have raised workers salaries to nearly 122% and 34% respectively. The wage hike trend has now spread from the Pearl River Delta to the Yangtze River Delta areas. Investors worry whether the trend will slow down the economic growth in China, or it will help to promote domestic consumption?

After the Chinese reformation, a huge supply of cheap labour became available and China became the "world factory" and went on to create an economic miracle. However, the ‘low-end’ labour model has now come to an end and China has paid a price for its rapid economic growth.

The Mainland's recent ‘labour-movement’ incidents are the by-products of the uneven economic development and social changes that have taken place over the years. Although domestic incomes have increased, the rate at which they are increasing is much lower than the average annual GDP growth rate this has led to a decrease in the income ratio in relation to GDP.

According to the National Bureau of Statistics, labour income as a percentage of GDP in 1996 was 53.4%, by 2009 this had significantly reduced to 37.7% in 2009. This has not only limited the growth in domestic consumption but also led to a huge financial gap between the rich and the poor, such changes may lead to social instability.

As a result of the one child policy, the new labour force is comprised of workers who are the only child in the family. This generation tend to be more independent, and have higher expectations with regard to wages and benefits. As a consequence, they may ‘burn out’ from work and other related pressures as we have witnessed with the Foxconn tragedy over and over again.

What effect will the demand for increasing wages (that is sweeping across the nation) have on China? The major concern is that foreign companies will seek cheaper labour markets elsewhere and this will have a negative impact on the economy. In fact, labour costs in China are now higher than the wages of Vietnam, India and other Asian counties which are only about RMB 500-600 per month, far below China's current minimum wage.

Although the substantial salary increases will affect a companies’ profit margin, other factors need to be considered such as efficiency, infrastructure, logistics, tax rates and working conditions. The Chinese still retain certain advantages in these areas, and part of these costs can be passed on to consumers. Therefore, in the long term while some foreign companies may move out of the low end labour model, in the short term the number withdrawing should be minimal.

While China's manufacturing industry has been working on low value-added projects, this labour market change may now give enterprises an opportunity to optimize their industrial structures and move to high-value development in order to increase their profitability and to speed up the economic transformation.

The Central Government has been implementing policies to increase consumer demand, these will help to stimulate the domestic consumption instead of relying heavily on foreign capital, investment and a strong export sector to stimulate the economy. However, due to the lower income of the general public, this stimulus has created a bottleneck, as the increase in consumption is minimal. China has approximately 2.2 million workers, if wages will be increased by RMB 500 per month in the next few years, the potential consumption will be near RMB 100 billion.

However, a further wage rise may push up the inflation. The price index in May is 3.1%, which is higher than the 3% target of Central government so with stronger purchasing power, the inflation rate in the long run may increase.

In fact, a rising tide has gradually spread from manufacturing to services, Shenyang KFC has increased its wage bill by 28.5% for about 2,350 employees, raising wages from RMB 700 to RMB 900. Fourteen provinces and cities, including Jiangsu, Guangdong, Shanghai and Shenzhen, have increased the minimum wage by more than 10%. In some regions the increase is 20% or more.

The gap between the rich and the poor has become a social problem. The Gini coefficient which measures the inequality of income is about 0.5, while the accepted level is 0.4. With the "one child policy”, the labour force will reach a peak in the next few years and due to the decreasing labour supply in the future, wages will be pushed up.

It is expected that adjusting wage disparity will be one of the key focal areas in China’s 12th Five Year Plan (2011-2015). The Central government will implement different policies, including reducing monopoly based model, raising the minimum wage and improving the tax mechanism to ease social conflict, so that people can share the fruits of economic growth.

“It was the best of times. It was the worst of times”, the end of cheap labour will bring in another opportunity to China. With the increase in wages, China will find other ways to attract foreign investors. A rise in wages will help to alleviate social conflict, stimulate domestic consumption and speed up the industrial optimization structure.

According to the statistics of MPFA as of March 31, 2010, the net asset value of MPF is HKD 3,173 billion, of which 44.3% are ‘Mixed Funds’ (also known as Lifestyle Funds) valued at HKD 1,408 Billion.

Investors often believe that choosing a mixed fund will be good stable choice for the long term, however, during the financial tsunami in 2008, these funds also recorded substantial losses; people then realized the importance of active management. Due to limitations under the MPFA regulations, the Life-Style Fund managers do not have flexibility in the ratio of bonds to shares. Using HSBC’s balanced fund as an example, their stock range is 55-85% and for bonds 15-45%, which means that even if the Fund Manager believes there will be correction in the market; they still have to hold at least 55% of equities in the portfolio.

If you do not want to select the Life-Style Fund, is there any other alternative? We recommend members using the Equity and Bond Funds, to establish their own MPF portfolio for a better return. Using HSBC as an example, members can choose either the HSBC Super Trust Plus Balanced fund, or choose their own bond and equity ratios, to build a balanced portfolio. If you had followed this approach and allocated 55% to the HSBC Hong Kong and Chinese Equity Fund and 45% to the Guaranteed Fund (in which 95% of are bonds and cash). From 2001 till the end of May 2010, the cumulative return on the HSBC SuperTrust Plus Balanced Fund was 30.2%, while the latter return is 55.2%. Using the period of 2005 to the end of May 2010, the difference is more significant. The former return is 17.3%, while the latter return is 45.5%.

Thus, members can make use of the Equity Funds and Bond Funds, to get a better return. The reason behind the significant difference in returns is because the Life-Style Funds have set foot in North America and Europe, over the years, the return in these regions has underperformed the Hong Kong Equity Fund, the return in the Life-Style Funds is therefore lower. All in all, members should consider their risk tolerance level, and make use of the fund choices in Equity, Bonds and Conservative Funds, to adjust the equity/bond ratio in order to obtain better returns.

MPFA is currently working with the service providers in regards of developing a standard form to facilitate members in switching after the implementation of the semi-member choice. The mandatory contribution account will be listed out when it first launched, and the preserved account and the existing voluntary contribution from both the employers and employees will be included in the form in the nearest future. MPFA implies that the standardized transfer form is still under discussion at the moment.

By the end of April 2010, there are a total of 27,795 registered MPF intermediaries; Under Secretary for Financial Services and the Treasury Bureau Ms. Julia Leung indicated that the Government will strengthen the supervision on intermediaries. All intermediaries should be registered with the MPFA and comply with the relevant codes of conduct. Also, guidelines are made for regulating the trustee and the intermediaries, and will enhance the intermediary training requirements.

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