One major factor is the presence of migrant workers. In China, about 120 million farmers once worked at factories and construction sites in urban areas, sustaining the nation's economic growth.

Over the past three or four years, however, the number of migrant workers has decreased, resulting in increases in labor costs at a record high pace.

Last year, the average salary for workers throughout the country increased by 14.1 percent compared with 2004.

This year, many local governments are raising the minimum wages of workers, set independently by localities. The move is in line with a policy set out by the administration of President Hu Jintao to protect the poor.

The local government of Shanghai, where the average salary is the highest in the country, decided to boost the minimum wage by about 9 percent. Major cities such as Guangzhou, Beijing, Tianjin and Dalian, where many foreign companies have their Chinese bases, have decided to introduce double-digit increases in the minimum wage. The decline in the portion of migrant workers in the labor force is partly due to economic reasons, including an increase in farming income and increased job opportunities in provincial regions.

In addition to the economic factors, demographic changes in the country, in particular the decline in the number of young people in farming villages, are affecting the labor supply. The labor shortage in the relatively developed coastal regions, including Guangdong Province, has started to spread inland.

Under the circumstances, local governments of major cities are growing more concerned. Hikes in the minimum wage have started to take on a tinge of competition to secure sufficient numbers of workers.

If labor costs continue to climb in China, foreign companies doing business there may have to revise their management strategies.

Furthermore, China is reviewing its policy of giving favorable treatment to foreign companies.

One major issue is whether to unify corporate income tax, which is similar to Japan's corporate tax, as the rates for foreign and domestic companies differ. China has given a preferential tax rate to foreign firms in an attempt to procure funds from overseas as it has suffered from a shortage of capital.

While the tax levied on domestic companies is about 33 percent, foreign companies pay less than 15 percent.

However, with competition between domestic and foreign firms intensifying, criticism has increased over the preferential treatment given to foreign firms in China.

As debate on whether to abolish favored treatment for foreign companies continues, the State Development and Reform Commission recently announced unification of corporate income tax rates. The commission manages China's economic policies.

At the same time, the commission said it would shift its policy of luring foreign companies from "quantity" to "quality." To enhance its international competitive edge, China will probably become more selective toward foreign businesses, giving priority to foreign companies in high-technology industries.

If the new policies are put into effect, the investment environment will be greatly affected. For foreign firms, China's attraction as a target for investment will inevitably decline.

However, compared with other Asian countries, China still holds economic advantages. Increases in labor and other costs will promote advancement of domestic markets and industrial structures.

Both positive and negative aspects of the increased costs in doing business in China must be thoroughly examined.

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