KPMG Human Resources Consulting director Trevor McCormick said real labour costs in the mainland were higher than those of Southeast Asian countries, and the substantial devaluation of regional currencies was widening the gap. However, the quality of mainland labour was better.

Mr McCormick said salaries for mainland middle management and above had increased dramatically over the past few years as more companies sought to recruit locals to cover a lack of expatriates.

The soaring wages bills also were attributable to scarce supply of qualified local candidates and corporate localisation drives aimed at cutting high expat salary bills.

The percentage increase for salaries of mainland managers had doubled that of expatriates, but has eased from 25 per cent in 1996 to 20 per cent last year.

The falling trend in wage increases is expected to continue as figures are taken on a larger comparison base.

While the deepening of state-owned enterprise (SOE) reform was creating a growing army of unemployed, the demand for quality people to take up managerial positions far exceeded supply, Mr McCormick said.

The situation would remain so for some time as the mainland economy continued to grow.

A case in point is the accountancy profession. According to figures provided by benefits consultancy Watson Wyatt Hong Kong, an accountant in Beijing earns a yearly cash package of about US$5,549, lower than Indonesia, the Philippines, Thailand, Malaysia and South Korea, based on foreign exchange rates on June 30 last year.

However, a company in Indonesia or the Philippines will pay less for the position if the exchange rate on January 2 this year is used for the salary calculation. Andersen Consulting's China strategy group director Denis Fred Simon said: 'China may have appeared to be a base for cheap labour, but that has never really materialised in the sense that labour costs were higher from the beginning than most imagined, especially among multinational corporations [MNCs].' As Beijing carries out bolder SOE and social welfare reforms, which aim to hive off the social welfare burden from the state, it is companies that bear the extra costs.

Mr Simon said if welfare costs were included as part of the calculation of wages they could put on another 30 to 40 per cent on average - more in urban areas and less in the interior.

'This will hurt China's competitiveness somewhat, and the difference will necessarily have to be made up in improved productivity, less material waste and greater labour efficiency,' he said.

Mr Simon said Beijing should not burden enterprises or MNCs with the full load of worker welfare if the country wanted to remain competitive in attracting foreign investment.

Despite the growing concerns, the consultants are optimistic that the appeal of the enormous domestic market remains strong enough to attract foreign investors.

They say labour cost and quality are important, but their significance in influencing business decisions has been falling.

The proportion of the labour component in overall production costs is declining steadily for key manufactured products such as motor vehicles and electronics, reducing the importance of the issue for investors, especially MNCs, which primarily target the 1.2 billion-people market.

Watson Wyatt Hong Kong managing director Paula DeLisle said: 'China is far more attractive as an environment to sell as well as to manufacture.' She said even though wages were dropping in Southeast Asian countries in line with currency devaluations, they were no lower than in China.

As Beijing pushes its bid to enter the World Trade Organisation, the country will open more sectors for foreign participation and that should counter-balance increasing investment costs.

However, consultants caution that if Beijing fails to tackle the problems of rising unemployment due to the SOE reform and the rich-poor disparity, they will become key issues threatening the social stability that is essential for business to thrive.