By Karen E. Thuermer, AJOT Despite figures released by the U.S. government on August 5 that indicate a slow recovery based on continuing low unemployment, the view from Hong Kong is that the exportation of retail goods from China is improving. “We definitely see a rebound,” says Louis Ho, Regional Director of the Americas in the New York City office of the Hong Kong Trade Development Council (HKTDC). Ho attributes this rebound to pent-up demand in the United States for retail products and the fact U.S. consumers look for value. The segments Ho particularly sees doing well are electronics, jewelry, footwear, consumer electronic-related semiconductors, watches and clocks, electrical circuits and apparatus, electrical machinery, and computers. “Many of these goods are transshipped through the Port of Hong Kong,” Ho says. These exports are important to Hong Kong, although 85 percent of its GDP today is derived from services such as banks, law offices, regional headquarters, and logistics operations. “The majority of consumer products today are manufactured in Mainland China in the Pearl River Delta (PRD) by Hong Kong companies,” Ho comments. Contract manufacturers in the PRD make the majority of the products. Many of their customers are for brand name companies that are well known in the United States. Manufacturing Pressures Meanwhile, manufacturers in Mainland China are facing increasing price cost pressures. Minimal wages in China are under pressure and rising, and the cost of materials is increasing. As Ho puts it, most manufactures of consumer goods are fearful of “Wal-mart-style pricing” since this puts pressure on all aspects of manufacturing. “We are seeing this pertaining predominating to the Pearl River where most Hong Kong investments are made,” Ho says. Rising material prices and increasing labor costs in the Pearl River Delta (PRD) present the biggest challenge to Hong Kong manufacturers. Workers left or made redundant during the global recession are reluctant to return to the PRD, given rising employment opportunities in the inland provinces and other industry or service sectors. HKTDC points out that although the situation has improved lately, employers have been forced to raise wages in order to recruit and retain workers. Consequently, it contends that higher wages and labor shortages will likely remain irreversible over the medium term. “While wage and materials costs are going up, these companies find they cannot increase their prices to buyers,” Ho says. “That’s because buyers cannot pass these higher prices on to consumers.” Sourcing Shifts There are additional reasons why manufacturers are looking to the hinterlands of China for manufacturing opportunities. China is currently undergoing massive infrastructures improvements to bring that nation on par with other developed nations. Plans call for building an 8,100-mile network of high speed rail lines connecting the country’s principal cities by 2012. The project is the core of a larger network of some 16,000 miles of high speed rail lines to be placed in service by 2020. China is developing an extensive highway system. In January, government officials indicated that China now has nearly 40,400 miles of highways, giving it the second largest highway network in the world after the United States. Even the ancient Silk Road in Xinjiang Province is being rejuvenated. By 2015, Xinjiang will have six new airports, bringing its total to 22. Authorities are also in talks with overseas counterparts to launch new flight routes linking Urumqi, Xinjiang’s capital, to Istanbul, Dubai, Samarkand in Uzbekistan, Yekaterinburg in Russia, and Tbilisi in Georgia. On the ground, its rail network will be increased from around 2,236 miles to more than 7,456 miles by 2020, an investment of 310 billion yuan, estimates the Ministry of Railways. Lines linking Xinjiang with Pakistan, Uzbekistan, and Kyrgyzstan are also in the plan. Another