Rising wages hit firms' profits in China's 'Sock City'

Wages at Chen Fengying's sock factory in Zhuji, Zhejiang province, have soared almost sixfold in seven years. The 20 per cent increase she expects next year may doom her seven-year-old company as profit and revenue fall.

"If things go on like this, we'll just close down," Chen said. "Many factories have already died."

Zhuji is dubbed China's Sock City and produces 17 billion pairs a year, more than 35 per cent of global production.

The plight of Chen's Zhejiang Zhuji Luyi Knitwear highlights the clash between government policies to encourage rapid wage growth and those to spur private enterprise.

While both were possible as the mainland's low-cost manufacturing engine surged, a loss of competitiveness and the slowest economic expansion in a generation are squeezing profitability for credit-constrained small and medium-sized companies.

Salary increases would slow as a result, hindering the rebalance away from investment-led growth, said Andrew Polk, a Beijing-based economist with the Conference Board.