Rising Wages, Uncertainty Over Economic Reforms Dampen Investor Confidence In China

Rising labor costs, falling earnings and uncertainty over the pace of economic reforms are undermining foreign investors’ confidence in the Chinese economy, a survey said.

A study by the European Union Chamber of Commerce in China has found that European companies are less optimistic about profits in China as rising wage costs are beginning to hurt profit margins, the South China Morning Post reported.

Only 44 percent of the companies surveyed said their mainland earnings have improved, compared to the 64 percent that reported a rise in earnings last year.

Low costs of operation and a huge human resource pool have been the chief attractions for foreign firms to invest in China. However, in the last few years, a steady increase in wages have pushed up cost of manufacturing and operations in the country.

According to data from the National Bureau of Statistics, 25 provinces in the country have raised the minimum wage by an average of 20.2 per cent, the report said. This is now reflected in in the earnings of the companies, already struggling from low domestic and foreign demand.

The number of companies that reported a drop in earnings rose to 21 percent from 14 percent last year, the survey found, noting that less than a third of the companies remain optimistic about their profits in China, compared to half of the companies surveyed in 2008.

"The most notable factor negatively affecting net profit margins is rising labor costs, but slower economic growth in both China and Europe, as well as increased competition, also had notable effects," the chamber said, in a statement.

A separate study by consulting firm AlixPartners in April echoed similar sentiments stating that the world's second largest economy is set to lose its allure as a low-cost manufacturing hub in the next five years.

The study estimated that the cost of outsourcing manufacturing to China will equal the cost of manufacturing in the U.S. by 2015.

European companies have been urging the Chinese government to open up key sectors -- now off-limits to overseas investors -- and to treat foreign and domestic enterprises equally.

"Despite the increasing rhetoric from senior Chinese leaders that efforts will be undertaken to transform and level the regulatory environment through allowing greater play to market forces, European companies have so far perceived few concrete changes," Davide Cucino, the chamber's president, told the South China Morning Post. He urged "meaningful changes" to be "swiftly implemented."

But despite the challenges, the survey said that there will not be a mass exodus of manufacturing companies from China, as the country's domestic market is still growing at about 8 percent a year.

Only 10 per cent of the 550 European companies covered by the survey said they were considering shifting investments outside China, down from 22 per cent last year.