Mar. 18 2011 – 11:33 am | 1,059 views | 1 recommendation | 0 comments

By RUSSELL FLANNERY

Higher wages are a double-edged sword for companies doing business in China. On one hand, they raise costs; on the other, they help to increase consumer demand.  Either way, they aren’t poised to slow anytime soon, according to a senior economist.

An average annual 14% rise in wages in the country during the past decade is likely to “maintain the same pace for the next 5-10 years,” Baizhu Chen said at a speech at the Shanghai Foreign Correspondents Club today. That means average labor costs paid by businesses in China could rise “three or four times,” in the next decade, Chen said.

 Chen is an economist at the University of Southern California and also the academic director of a joint EMBA program in Shanghai between USC and Shanghai’s Jiao Tong University. Wages will likely continue upward in part because of government efforts to boost living standards for low-income families, and strong overall economic growth in China, he said.

 Companies trying to cope with rising wages may find less relief than they imagine by moving away from pricey big cities such as Shanghai because wages are heading up nationwide, Chen said.  Yet moving inland can help a company get closer to domestic market, and take advantage of government investment incentives, he said.

If the prospect of higher wages in local currency isn’t challenging enough, companies may face another source of pressure in the years ahead:  the rise in China’s currency.  Chen expects the renminbi to annually appreciate by “about 3% or above for the coming years.”