New Chinese policies may have positive effect on raw material costs
Chinese companies may soon see their raw materials costs drop. According to a report released today by Susquehanna Financial, policy changes enacted in China, effective this month, may cause raw material costs to drop, but might also place upward pressure on labor costs.
Among the policy initiatives the investment bank cites are China’s new labor contract law, lowered import taxes on 45 categories of imported goods, as part of the WTO concessions, and a mandate by the All-China Federation of Trade Unions for 80% of China’s foreign-funded and private enterprises to form trade unions by the end of 2008.
“We view the timing of these events as a one-two punch aimed to raise real wages of Chinese workers, while minimizing the impact to economic growth and unemployment rate by bringing down raw material costs in key industries,” Susquehanna Financial analyst Adele Mao wrote in a research note.
The policies could affect mainland China-based companies in both the near-term and long-term by causing gradual increases in labor costs, while causing raw material costs to fall.
Among the small-cap companies Susquehanna has a “positive” rating on, and for which the policies will probably cause a decrease in raw material costs, but increase in labor costs, include China Fire & Security Group, Inc. (Nasdaq: CFSG), FalconStor Software, Inc. (Nasdaq: FALC) and Comtech Group, Inc. (Nasdaq: COGO).
