Sat, Oct 15, 2005 - Page 10 News List

China losing its shine in manufacturing

NOT SO ROSY Surging costs for raw materials and labor are slackening the pace of foreign investment in China, as manufacturers look elsewhere for cheaper options

By Amber Chung  /  STAFF REPORTER

China isn't the dirt-cheap manufacturing base it used to be, a prominent economist said in a report released yesterday.

Morgan Stanley's chief Asian economist Andy Xie (謝國忠) said that China's rising labor costs, combined with soaring prices of raw material prices, have been pushing producers to rethink their massive investments in China.

"The cost pressure in China is motivating electronics manufacturers to search for cheaper production locations," Xie wrote.

That has caused the profitability of China's export sector to decline, and margins may continue to weaken, Xie warned.

China has recently suffered from sharp markups in the price of crude oil and steel.

Three factors have been boosting China's labor costs, Xie said. The cost of food, electricity, water and housing in China's coastal areas is on the rise, and wages may have to increase by a whopping 20 percent to 30 percent to cover the higher cost of living, he explained.

Second, the government has tightened its enforcement of labor regulations and has increased labor benefits. This has increased some businesses' labor costs by 40 percent.

Finally, the government's plan to improve working conditions and narrow the country's income gap could mean that labor compensation will rise in line with productivity in the future, the economist said.

As a result, the momentum of factory relocation from Asian economies, like Taiwan and Japan, as well as from European countries may ebb to a much slower pace in the future, Xie added.

In the first nine months of this year, actual foreign direct investment in China dropped 2.11 percent from a year ago to US$43.25 billion, the country's Ministry of Commerce said in a statement released yesterday.

Hong Kong, the British Virgin Islands, and Japan were the top three origins of foreign investment into China, while Taiwan was ranked seventh over the same period, the statement read.

"Operating costs in China are indeed surging," said Kung Ming-hsin (龔明鑫), an economist at the Taiwan Institute of Economic Research (TIER, 台經院).

Kung added that other factors were contributing to the trend. China's gradual pullback on incentives for foreign investment, stricter tax inspection of China-based Taiwanese companies, the planned equalization of tax rates for local and overseas investors and the country's possibly strengthening currency could all increase costs, Kung explained.

Investors should also take into account the risks brought by the country's non-transparent policy-making processes, he added.

These explained some China-based Taiwanese companies' decision to move back or to divert investments to other Asian countries like Vietnam, which are less likely than China to be subject to Western trade barriers, Kung said.

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