China's still gold

A new China began to emerge towards the end of last year. After more than two decades of fairly predictable performance the China the business world knew so well disappeared. Foreign businesses were baffled and shocked by economic changes and governmental regulations. Around 80,000 factories failed to reopen after the Chinese New Year holiday last February.

So what caused these changes? First, inflation arrived and with it price increases for raw materials, freight, electricity and support services, all of which dramatically increased the costs of doing business.

New labour laws were enacted to protect the interests of Chinese workers and remove the abuses occurring throughout the country. As these began to take effect, the cost of Chinese labour increased by 30 to 40 per cent.

Export subsidies which for many years had granted rebates to Chinese manufacturers and encouraged overseas business, were sharply reduced in some industries and eliminated in others.

In 2007 the Chinese Yuan rose 10 per cent against the US dollar. So far in 2008 it has risen a further five per cent. Trade has traditionally been carried out in US dollars, so the currency moves have resulted in unavoidable increases and enormous strain on profits.