Blog - Scandic Sourcing

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freepik china flag It is time to get into compliance with your labor practices in China.

When the 2008 labor law was published it was as usual in China not fully enforced. Now, 9 years later the message from the PRC Ministry of Human Resources and Social Security (“MOHRSS”) is to get in line or get in trouble.

These Measures are set to take effect on January 1, 2017 and will apply to all China employers, domestic and foreign. So if you have employees or an operation in China and you have not already done so, now is the time to check that you are in full compliance.

Your local labor authorities will have the task to investigate all employers and rate them on an scale which will decide further inspection frequency.

Important criteria includes if there is an HR manual in the company defining its internal labor rules, labor contracts in place with 100% of the employees, compliance with rules on working times, overtime, female workers, underage workers and employer contributes all mandatory social insurances.

For serious violations the employer’s name, punishment and the name of its legal representative will be made public and also shared with governmental departments. China’s local human resources and social security bureaus will be responsible for clarifying and implementing these rules.

“ There are so many changes to the rules all the times that we recommend to do at least a yearly review of the HR manual. And if you don’t have an HR manual in place it is urgent to prepare one”, says Per Linden, CEO of Scandic Sourcing.

“Even if foreign companies generally comply better than many Chinese companies we can expect WOFE’s to get special scrutiny”, continues Mr. Linden.

Scandic Sourcing assist foreign companies with market entry, company formation, accounting, help to set up HR systems and act as outsourced HR directors.

From 2017 around 6 000 European companies will be required to report their code of conduct activities. This includes how they work with suppliers in China and other low cost countries.

The new EU requirements about companies sustainability reporting were adopted in 2014 but are now taking effect. It affects EU companies with more than 500 employees but some countries have set lower limits. One of those countries is Sweden where the limit is 250 employees.

Environmental matters, social and employee related matters, safety, respect for human rights, anti-corruption and bribery should be covered. The reporting should include a description of internal policies including due diligence processes and also the outcome of these policies. Further the reporting should include the risks related to the matters described above and how the company manage these risks. Non-financial key performance indicators relevant for each company´s business should also be presented in the reporting.

“Few European companies have a good grasp of the actual situation at their suppliers in China and lack knowledge about the regulatory and practical environment”, says Per Linden, CEO of Scandic Sourcing in Shanghai.

Scandic Sourcing has worked for over 10 years on site in China and Asia with supplier audit programs and have developed methodology to work with continuous improvement programs for foreign companies suppliers in Asia. The Scandic Supplier Code of conduct program won the 2012 Swedish Chamber of Commerce innovation price. With new focus on sustainability reporting in Europe this becomes even more important.

Also see: Invitation to Scandic Sourcing's Spring 2017 Trip to China - New EU sustainability directive and Suppliers in China

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As the Chinese stock market went plummeting in a 23% fall during the first week of trading in January of this year, doubts have been raised about the state of the Chinese economy and what broader implications a general slowdown might have. After giving a brief overview of the current situation, Scandic Sourcing talks to renowned financial journalist Roger Aitken to get a grip on where the Chinese economy is heading.

Stock market chaos

The Shanghai composite index is down almost 40% since its June 2014 high, and growth is continuing to decline especially in the manufacturing sector. Beijing’s unpredictable response to the issues are sometimes contributing factors to the fall such as the use of circuit breakers which shut down trading once the market had fallen below 5%. This new practice caused even more panic and was quickly suspended.

The January crash came after a weak year of 2015 that saw the lowest growth numbers in a quarter century, halting at 6.8% after a slow last quarter with especially poor growth in the industrial sector. This ties in to the broader story of China’s ambition to transition from a manufacturing driven economy to a consumption driven one. Thus, large parts of the Chinese service sector is growing, while traditional industrial sectors continue to decline.

What exactly is 'Smurfing'?

The shaky economy has also triggered a mass exodus of capital last year which continues in 2016 as well. Chinese citizens are not entirely free to take capital out of the country, though many are trying to do so illegally. Currently, the cap is set to $50 000/year. This is overcome by a procedure known as “Smurfing”, where wealthy Chinese employ the services of relatives to help them get money out of China. One woman, using than 140 relatives and friends was able to convert $7 million from renminbi into dollars. Over the last year, companies and individuals moved nearly $1 trillion from China which has continued to lessen confidence in the Chinese economy.

The Chinese central bank is fighting the pressure by selling dollars from its currency reserves and purchasing renminbi. China's foreign currency reserves is taking a toll, sinking by $108 billion in December and an additional $99 billion in January, to $3.23 trillion down from $4 trillion a year and a half ago.

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To straighten out where things are headed and what implications China’s economic turmoil might have for the world at large, Scandic Sourcing talks to financial journalist Roger Aitken, former Financial Times staff writer in London who writes on markets, exchanges, trading and IT. Currently he contributes to Forbes and other titles.

Image credits: Jason Spoor, White Fox Studios.

If China’s economy keeps stumbling, is there a risk for a domino effect a causing global recession?

"There has been a slowdown in China that's been going on for five years now and the realization is starting to dawn in certain quarters that there is a real risk of a Chinese credit crisis.

Clearly, there could be risk of a domino effect causing a global recession. And, perhaps eyebrows should be raised over China’s debt-to-GDP ratio that recently stood at around 228% on an absolute level - both public and private debt - according to sources including the World Bank, central banks and Oxford Economics.

Put in context, South Korea ranked in second place with 222% debt-to-GDP, Taiwan was third (174%), Malaysia fourth (169%), Thailand in fifth (154%) and Brazil in sixth spot (129%). And capital outflows from China have been rising too.

But the more important test is the five-year percentage change in the same debt-to-GDP. This is due to the fact that a rapid increase in leverage is an important indicator of future stress in the financial system. For China this stands at 47% and heads Thailand and Brazil in joint second place on 27%.

Economists and policy makers have agreed that China should rebalance its economy, with less dependence on investment and export growth and greater importance for consumer spending. But this will take time and along the way there will no doubt be a few shocks to the global economy and world stock markets going forward.

The industrial sectors with the largest excess capacity were rarely addressed by the Chinese authorities, as local governments had major economic interests in those sectors. Overcapacity became even more significant in industries such as steel and aluminium, and in parts of the housing market.

It’s far too premature to predict the decline of China’s manufacturing industry. A more likely scenario is that industry will adapt and move higher up the value chain, especially with ‘Innovation’ being one of five key areas under the nation’s Thirteenth 5-year Plan that runs from 2016 to 2020.

But as Peter Sengelmann, Senior Portfolio Manager, Emerging Market & Asian Debt (Local Currency & Local Bonds) of Dutch-headquartered NN Investment Partners that managed assets of some €187 billion ($204bn), pointed out late this February: “China is moving at incredible speed, but will slow or accelerate its progress to suit its needs.” (AUM figure cited above was at 31 December 2015).

He contended further: “Much to the chagrin of the rest of the world, the seemingly arbitrary decisions coming from Beijing create uncertainty, but the master plan remains in place with China’s sights set on the end goal.”

It seems like the extreme stock market turmoil has not caused any great harm to China’s economy and the individual Chinese saver. How come?

Despite shares on the Chinese equities markets tanking by around 6% back on 26 January 2016 to reach a then 14-month low, what should be realised is that the stock market in China is not necessarily reflective of the health of the broader economy.

This is due to the fact that many of its biggest enterprises remain in state control and the vast bulk of trading on the Shanghai and Shenzhen stock exchanges is by individual investors. Fundamentally this is the difference between the China and Western economies.

In fact, China’s stock market is small relative to its economy compared to the relationship between exchanges and economies in developed markets. Still, it’s worth noting that the Shanghai Composite index, which closed at just over 2,895 points on 7 March 2016, is down 18.02% year to date (YTD) with the one-year return being -9.06%. This puts the index back where it was in mid-December 2014, but 44% lower than the 5,166 peak set in June last year. So, a big correction and we are not out of the woods yet.

The Chinese authorities have been instituting a multitude of reform changes and in a simultaneous manner - in terms of the country’s economy, stock market and other areas. These measures have been slow and uneven as well as complex. And, it should therefore come as no surprise that they move forward in fits and starts.

The country is now embarking on its Thirteenth 5-year Plan (2016-2020), which spans five pillars. As well as ‘Innovation’ measures already mentioned (i.e. moving up the value chain), the latest plan covers ‘Balancing’ (bridging welfare gaps between cities and the countryside), ‘Opening Up’ (i.e. deeper participation in supranational power structures and more international co-operation), ‘Greening’ (developing environmental technology industry), and ‘Sharing’ (encouraging the people to share the fruits of economic growth).

China’s lower economic growth rate is reflective of the structural readjustments occurring in the economy as it becomes more domestic driven and less reliant on exports. Above all, the overwhelming policy objective is maintaining stability and supporting sustainable growth.

On the savings front, the average Chinese household stashes away c.30% of its disposable income - one of the highest rates in the world. That sounds positive on the surface and handy for rainy days. But with this situation it’s hard to see how consumption will be boosted unless the hooked Chinese savers reassess their approach.

That, said consumption accounts for just over a third (c.35% of GDP). By comparison the average savings rate for US households was recently put at around 5%-6% of income, in a country where and consumption accounts for c.75% the economy.

Specifically, China’s reforms and initiatives include the liberalisation of the currency, the Renminbi (Yuan), and the opening up of the capital account; greater international involvement in geopolitical matters; domestic financial reforms (e.g. interest rates, local government financing); the ‘One Belt, One Road’ initiative to boost overland and maritime trade routes to central Asia; and, the creation of the Asian Infrastructure Investment Bank. The latter aims to expand China’s global influence.

As previously stated though there will be jitters along the way and for the simple reason: change, which equals uncertainty that spooks markets. China is evolving and the world is not ready for it. This is especially so when the country is not fully open about its intentions. Add to that some critics argue that Beijing’s lack of transparency arises from the fact that it does not know where it wants to go.

Furthermore, figures released early this March showed that Chinese exports recorded their worst showing in six years. Data for February 2016 revealed that the nation’s exports witnessed a 24.5% decline over a year earlier, and imports declined by around 14%.

This export slump again underscores the huge challenges that China’s export-driven model is facing and how domestic demand needs to grow to take up the slack in order to maintain the growth momentum.

Should this not happen, China’s growth is likely to slow considerably and be below the 6.5% target set by the government at the start of this March. So, despite a plethora of reform measures initiated don’t discount more volatility on the markets going forward.

Scandic Sourcing has developed a new Procurement Solution on a subscription basis. For a monthly sum, your company gets a package of procurement and supplier management services to ensure that your supply chain in China runs safely and without interruptions.

Scandic Sourcing evaluates your supplier pool to identify potential risks and prevent interruptions in your supply chain. We make sure to communicate directly with the factory owners or the management to circumvent costly middlemen and third-party agents. We can communicate directly with all layers of the suppliers organisation to get you the best price and conditions and build transparent and long-term relations with the suppliers in the process to ensure favorable working conditions.

We also handle quote requests and organise the bidding process for new orders. We also do continous research to keep you updated on the cost structure for your industry in China, including raw material /material costs and market price.

Scandic Sourcing can be the partner in China you can trust; it doesn’t only save you regular trips to China or having to station employees here, but also makes sure your supply chain is managed cost-efficiently and that it is stable and risk free. The subscription service also includes reduced rates on our regular services such as supplier searches, field audits and supplier code of conduct programs.