We have heard a lot recently about how the prices of the goods leaving mainland factories are rising, and that after years of exporting deflation, the mainland is now exporting inflation to the rest of the world. Certainly there are a lot of pressures conspiring to push prices higher. As you know by now, unless you have been living under a stone for the last two years, raw material costs are rising. On the mainland, the average wholesale price of stainless steel has climbed 40 per cent over the last two years. Copper is up 20 per cent, glass 18 per cent, and plastics 16 per cent. Energy costs have also risen. Diesel prices, for example, have climbed 23 per cent over the same interval. Staff costs are rising, too. With higher food prices lifting living standards in the countryside, migrant workers are getting scarcer and pickier. As a result, factory wages in Guangdong have been rising at double-digit rates for each of the last two years. Mainland contract labour law, enacted this year, is likely to push employment costs up even further, while tighter health and safety and environmental standards are also adding to the burden. On top of all that, factories were hit hard when Beijing cut export subsidies last year. And finally, the yuan has continued to appreciate, pushing up the US dollar price of mainland goods. That all adds up to a lot of upward pressure on export prices, which is not expected to abate any time soon. 'This is not a temporary shift, this is for the long term,' says Alexandra Harney, author of a newly-published book on the mainland manufacturing sector entitled The China Price. Yet despite an abundance of anecdotes detailing price rises, solid evidence that mainland exporters are passing higher costs on to foreign customers are harder to come by. A glance at the trade price indices compiled by the United States Bureau of Labor Statistics shows that the price of imports from China (measured free on board in US dollars at the port of embarkation) has risen just 4 per cent over the last year. That might sound like cost pressure in action, but when you consider that the value of the US dollar declined by almost 10 per cent against the yuan over the same period, it is clear mainland exporters have not passed on their rising costs. In fact, as the chart below shows, although export prices may be up in US dollar terms, in yuan terms they have continued to fall. There are several possible explanations for this apparent paradox. Firstly, mainland exporters could have been forced to absorb cost increases and watch their margins get painfully squeezed. In that case companies will go out of business, and the survivors, equipped with stronger pricing power, will eventually pass on their higher costs. Secondly, exporters could have balked at the cost of implementing new regulations, which means they are simply lying about their wage, safety and environmental costs. Finally, companies could have responded to rising costs by making major gains in productivity - anecdotes tell of improvements of 20 per cent or more - which would help them maintain prices and margins in the face of rising costs. As ever, the real answer is probably a combination of all three.