China's abundant, cheap labour pool has long been a key driver of the country's industrial growth. In recent years, however, investors have grown concerned about spiralling labour cost in the Mainland, which they fear will dampen the low-cost comparative advantage of their investment in the China market.

The latest pay statistics for China show that salaries for middle- to high-rank staff working in foreign-owned enterprises have been rising far more rapidly than the Consumer Price Index. Take Beijing for example, average wages there have been rising at an annual rate of 7 percent since 1998, reaching 7.6 percent in 2003. Salaries for senior managers increased by 7.9 percent to about 700,000 yuan per annum, while those for general staff increased by 5.8 percent to around 50,000 yuan per year. Some employees in high technology fields received year-end bonus as high as 500,000 yuan.

As China moves towards a market economy, fierce competition for talent is pushing labour costs higher and adding to the difficulties of doing business there.

Senior Mainland managers are paid 700,000 yuan annually, which is comparable to their Hong Kong counterparts (average annual salary amounts to HK$780,000). Although the cost of living in Hong Kong is far higher than that of Mainland cities, tax rates here are relatively low, which balances out the level of disposable income. Salaries paid to Mainland talent are also generally higher than that of their counterparts in ASEAN countries, with the highest-paying jobs being concentrated in Beijing, Shanghai, Guangzhou and Shenzhen.

Pirating of talented managers is rife in China. During the 1980s and '90s, only foreign-owned enterprises in China could afford to attract talented staff with attractive remuneration packages. Private Chinese and state-owned enterprises, on the other hand, faced with limited finances, could barely reward and motivate outstanding staff with pay rises or bonuses.

Today, domestic private enterprises have learned from their rivals that talent is critical to their success. They, too, now offer staff remuneration packages comparable to international levels. Over the past few years, many state-owned enterprises, especially banks, have revamped their remuneration systems to attract talent from home and abroad. This explains why salaries for senior management have been rising constantly in the country.

With China opening its doors to more foreign enterprises under its WTO obligations, competition for talent to prise open access to key Mainland cities is expected to intensify.

Low-skilled workers in China, however, have been experiencing a fall in pay. A few years ago, most general staff in key Mainland cities fell into the 36,000 to 54,000 yuan salary band. This year, however, most workers are in the 24,000 to 36,000 yuan salary band, meaning 25-30 percent of workers in main cities earn between 24,000 and 36,000 annually.

Wages for low-skilled workers from rural areas, however, have remained stable with annual salaries hovering between 6,000 and 8,000 yuan over the past decade. As China has approximately 700 million peasants, there is ample supply of low-skilled workers, and as such wage levels for this category of workers are expected to remain stagnant.

With fierce competition for top talent and an oversupply of low-skilled workers, the competitive edge of cheap labour varies from industry to industry.

In the manufacturing industry, room exists for managers' salaries to rise, whereas wages for general staff are predicted to remain unchanged in the years ahead. This will drive production of made in China goods, but it is also why the Closer Economic Partnership Arrangement (CEPA) cannot attract labour-intensive processes to return to Hong Kong, despite zero tariff for made in Hong Kong goods entering the Mainland. Therefore, made in China goods are expected to retain their low-cost advantage.

For the service sector, rising service standards has increased demand for quality people, which in turn has pushed up the general salary level and businesses' operating cost. This trend is threatening China's competitive advantage as an outsourcing service provider for other economies. Nonetheless, with the Chinese economy growing rapidly, services targeted towards Mainland people and businesses offer strong potential for growth.

Because companies in this sector have gradually been losing their low-cost advantage, they may be able to capitalise on the huge customer base in China. Moreover, the liberalisation of 18 service sectors under CEPA will provide Hong Kong service providers with new business opportunities in the Mainland.