Rising Labor Costs won't Deter Investors

The rising labor costs in China will not deter foreign investors because policies to boost domestic consumption provide a new reason for them to seek profits in the world's third-largest economy, a senior trade official said Thursday.

Lu Kejian, head of the Asia department at the Commerce Ministry, said China still enjoys a competitive advantage over its neighbors, despite a series of recent strikes that has led investors to worry about rising wages in the world's largest exporting nation.

Even before the unrest, which has forced production halts at Honda Motor, sewing machine maker Brother Industries and other companies, many Chinese cities had already raised their minimum wages this year by as much as 20 percent.

But Lu told a news conference that he expected China to remain the top choice for investment and production sourcing for many foreign firms.

"With the improvement in our policies and investment environment, the trend will not change," he said.

China's efforts to spur growth in its less-developed central and western regions as well as consumption subsidies in rural areas will help to ensure that the country remains a very attractive market for foreign firms, Lu added.

Former Morgan Stanley economist Andy Xie also said Thursday that a doubling of China's manufacturing wages during the next five years won't deter foreign investment because Asian rivals such as India and Indonesia lack comparable infrastructure.

"One probably shouldn't overreact to the wage increases," said Christina Chung, senior portfolio manager at RCM. "The adjustments to labor costs are a 'catch up' because wages were frozen during the global financial crisis."

Boosting salaries will help China increase domestic consumption and move the economy away from a reliance on exports for growth, analysts say.

Rapid wage gains will push up inflation and the government may need to cool the economy by increasing borrowing costs, said Xie, who correctly predicted in April 2007 that China's equities would tumble.