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China’s rapid economic growth in the decade to 2010 was boosted by the success of its manufacturing sector and significant Foreign Direct Investment (FDI) inflows.
Cheap labour costs have been one of the major pulls for investors but costs have been rising in recent years, posing challenges for China’s competitiveness. However, the country retains several advantages which will continue to make it attractive for doing business.
One of China’s biggest attractions for investors has traditionally been its cheap labour costs and ability to provide economies of scale. However, labour costs have been rising owing to several factors. The trend has become more apparent since 2008 when the government introduced new labour legislation in a bid to protect workers through enforcing contracts, job security and minimum wage compliance.
However, workers have also been demanding higher wages amid rising inflation, with labour disputes in 2010 resulting in pay rises and increases in minimum wages. Inflation affects consumers by reducing their purchasing power and squeezing disposable incomes. Annual inflation in February 2011 was at 4.9% and inflationary pressures are set to continue in 2011 with record world food prices, as well as oil price spikes following the unrest in the Middle East and North Africa.
Furthermore, China suffers from a skills shortage for highly skilled workers, which has exacerbated the problem and is pushing wage demands up. There has also been a slowdown in rural to urban migration as rural workers find more opportunities closer to home. As a result of a combination of these factors, labour costs have risen across China. The average wage per hour in manufacturing, for example, increased from US$1.0 in 2005 to US$2.4 in 2010.
The biggest implication of higher labour costs will be in terms of China’s perceived competitiveness: