By Li Zuojun, Research Institute of Resources and Environment Policies of DRC

Research Report No 74, 2012

Since the implementation of reform and opening-up policy, the "low cost competitive advantage" has always been a powerful weapon for Chinese products to have a place in the international market. However, the Chinese economy has entered the "high cost era" without notice. The costs on factors of production start to go high in an all-round way. The costs on energy conservation and emissions reduction have increased and the transaction costs are also witnessing an increase. These circumstances have posed a huge challenge for the economic growth in China. The major issue facing China is to have a better understanding of the changing environment of economic growth and actively meet the challenge of the "high cost era".

I. Chinese Economy Has Quietly Entered the "High Cost Era"

1. The costs on factors of production are going high in an all-round way

First, the land costs are rising. Recently, with the rapid advancement of industrialization and urbanization, the amount of arable land is continuously diminishing from 130.04 million hectares in 2001 to 121.72 million hectares in 2010. Its share in the total areas reduced from 13.54% to 12.68%¹. Given the current situation of the severe shortage of land, China has established a strict land administration system. However, with the rapid economic growth there is an increasingly large demand for construction land in various aspects. The relations between supply and demand of land are becoming much more intense due to the soaring land prices. According to the survey results on key regions and major cities in China made by the Chinese Cities Land Price Dynamic Monitoring System, the land prices are continuing its rapid ascent in recent years. The overall price level of land rose from 1,212 yuan in the first quarter in 2005 to 3,049 yuan per square meter in the last quarter in 2011. The price levels of land in commercial, residential, and industrial use went up respectively from 2,006 yuan per square meter, 1,184 yuan per square meter, and 482 yuan per square meter, in the first quarter of 2005 to 5,654 yuan per square meter, 4,518 yuan per square meter, and 652 yuan per square meter in the last quarter of 2005. The land prices in most of these fields had increased by two to three fold.

Second, the raw materials costs are boosting up. Recently, with the rapid development of processing manufacturing in China, the demands for raw materials are growing constantly and their prices have been increasing. The purchasing price index of raw materials shows that except for that in 2002 and 2009, it sustained the pace of growth and increased every year compared to those during the same period in the previous years between 2001 and 2010. Among these, the purchasing price indices of raw materials of ferrous and nonferrous metal materials grew at a remarkable pace. The former went up by 20.4% and 18.4% than those in the previous years respectively in 2004 and 2008. The latter increased by 20.1%, 30.8%, and 22.2% than those in the previous years respectively in 2004, 2006, and 2010.

The Purchasing Price Index of Raw Materials from 2001 to 2010

(Take the year-on-year data as 100)

Time	Ferrous metal materials	Nonferrous metal materials	chemical raw materials	Wood and pulp	Building materials	agricultural and sideline products	Textile raw materials
2001	100.5	95.6	98.4	100.4	98.6	101.2	99.7
2002	98.2	96.5	97.5	98.7	98.2	95.7	97.1
2003	107.9	105.3	102.9	100.3	99.7	106.7	101.4
2004	120.4	120.1	108.9	102.8	105.1	114.2	104.7
2005	107.5	114	108.3	103.5	103.1	101.7	102.4
2006	98.3	130.8	102.1	102.6	101.9	104.3	102.9
2007	105.4	111.6	103.6	102.7	103	106.1	101.4
2008	118.4	98.6	105.2	105.2	109.5	107.5	103.1
2009	86.3	81.1	91.3	95.8	101.1	97	98.8
2010	106.6	122.2	107	103	103.8	110.4	106.7

Third, the energy costs are on the rise. The international oil prices soared from 30 dollars per barrel in 2004 to 120 dollars per barrel in 2011. Since 2011, the trend of national coal prices has shown high fluctuations. Under the combined influences of multiple factors, the power generation coal market in local areas continued to remain constrained in April and May in 2011. In June and August, the market prices began falling. In September of the same year, the coal market witnessed a tight supply and upward price trend. Afterwards, the price remained at a high level. In 2011, the gas prices saw a slight increase. The prices of automobile-used natural gas in some areas have been picking up. According to the Analysis and Forecasting Report on National Electric Power Supply and Demand in 2012 by China Electricity Council, the electricity-coal conflicts remain outstanding and their prices continue to run high.

Fourth, the labor costs are growing. Recently, the wage levels of workers and staff members in China have seen a big boost. In 2001, the average wage for employees in urban units was 10,834 yuan. Allowing for price factors, the average wage for employees in urban units in China in 2010 was 36,539 yuan, 3.4 times that in 2010. The average growth rate was 10.1% higher than the growth rate of the prices during the same period. In 2005, the phenomena of "workforce shortage" began to appear in some places. The Labor Contract Law and the Social Insurance Law enacted respectively in 2007 and 2010 boosted the labor costs further more. In 2011, twenty-four provinces in China raised their minimum wages with an average rise of 22% which has resulted in the rapid growth of labor costs.

Fifth, the costs of capital are ascending. For nearly three years, the People's Bank of China has continuously raised the deposit reserve ratio for 12 times to the historic high of 21.5%. Although at the end of 2011 the ratio started to go down by 0.5% for twice in a row, it remained to be on the high level of 20.5%. Such circumstance resulted in the constrained capital supply and the rather high capital costs. Meanwhile, since December 23, 2008 the People's Bank of China has raised lending rates for five consecutive times in which the short-term lending rates (within six months, from six months to one year) have raised from 4.86% and 5.31% to 6.10% and 6.56% respectively, the medium and long term ones (from one year to three years, from three years to five years, over five years) from 5.40%, 5.76% and 5.94% to 6.65%, 6.90% and 7.05% respectively. The costs of non-governmental financing are even higher. When getting financing from the guarantee corporations, the small and medium-sized enterprises have to pay for annual interest rates as high as 20% of the principal even with collaterals. If without adequate collaterals, they have to pay the annual interest rates at as 50% to 60% of capital, or even higher. From December in 2010 to May 2011, the non-governmental composite interest rates in Wenzhou city were respectively 23.01%, 24.14%, 24.81%, 24.43%, 24.60%, and 24.38%.²

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¹The data on arable land is from the China Statistical Yearbook in which the amount of arable land in 2001 is the former inventory while that in 2010 is from the data according to China’s Ministry of Land and Resources at the end of 2008.

²http://money.163.com/11/0609/08/763FQJRL00253B0H.html.

http://www.zhongsou.net/news/11589632-2.html.