US group: Inflation biggest concern in S China

AP News
Posted: Mar 01, 2011 3:48 AM

Inflation is one of the biggest concerns for foreign companies operating in booming southern China, according to an annual survey released Tuesday by a major U.S. business group.

Just over half of about 400 member companies polled by the American Chamber of Commerce in southern China reported that rising prices would have a negative impact on business this year.

The finding reflects growing concern about wages in the region, where tens thousands of manufacturers are dealing with higher wage bills because of a shortage of migrant workers as well as surging raw material costs.

"We need to be realistic to accept that costs of labor will go up as there's competition for labor. That's a fact of life," the group's president, Harley Seyedin, told reporters.

"People should be paid what they should get paid within a competitive atmosphere and the competitive atmosphere right now represents the fact that people need to get paid more and therefore the salaries have been rising," Seyedin said.

Respondents said they planned to invest about $8.6 billion this year, while they've budgeted $9.6 billion to invest over the next three years. Those amounts are about 8 percent lower than the survey found last year, but Seyedin said that companies had been in "heavy investment mode" the previous two years, spending money on new facilities. They are now investing to upgrade existing facilities and doing it more carefully, he said.

Many of the companies operating in southern China _ the country's traditional manufacturing hub _ have long employed legions of low-paid and low-skilled migrant workers from poorer rural provinces. But many are now finding it harder to attract and hold on to workers because there are more opportunities back home.

Local governments are also encouraging companies to move away from factories churning out clothing, toys and electronics for export in favor of higher value goods and services for sale within China. The government of Guangdong province, which is next door to Hong Kong, is using methods such as raising minimum wage levels, which is squeezing profit margins for companies and threatening less profitable ones with closure.

Highlighting that trend, survey results showed foreign companies are increasingly turning toward China's domestic market. Only about a quarter of companies polled exported their products to markets outside China, while the remaining three-quarters sold goods and services to the domestic market. In 2003, the situation was the exact opposite, Seyedin said.

About half of the companies surveyed were American, while the rest were from Japan, the European Union, from Hong Kong or mainland China and were involved in a wide range of industries, from manufacturing to legal services.

Other worries that topped the poll include uncertainty over Chinese government regulatory issues _ a long-running concern _ as well as growing competition from local businesses.

Businesses polled were split on the effect of a strengthening yuan, with about 40 percent saying it would have a positive effect on their operations while about the same amount said it would have a negative effect.

About 82 percent of companies polled said they were profitable, the highest level since the survey's inception in 2006. Roughly 95 percent of companies said they expected to be profitable in the next two years.