usbcStill think China is a cheap place to do business? Think again. US businesses operating in China complain that getting — and keeping — talented employees is their biggest headache and this is reflected in soaring wage inflation.

While rising labor costs have long been a concern for western businesses in China, this is the first time that the cost issue has moved to be the number one problem,  according to an  annual survey conducted by the US-China Business Council.

The vast majority of respondents to the USCBC survey have expressed concern  about rising costs since the question was frst asked in 2007, so the problem is not new. Nevertheless, it is now reached the point where costs pressures are causing some business to rethink their reason for being in China.

As one company put it, “Costs, particularly in major metropolitan areas, are moving to a point that China is no longer world-competitive.”

Indeed, some US manufacturers have shifted production away from China, either back to the US or to Mexico.

Human resources costs have consistently been the specific  cost of most concern, reaching 92% in this year’s survey.  Four out of every five US businesses operating in China expect to have to pay wage increases of 5% or more this year.  Concerns about materials and  land costs also increased this year.

Because of these and other issues, China is losing some of its former importance as a location for strategic investment. Back in 2009, 23% of US businesses surveyed said China was their top priority when it came to global strategic investment planning. Four years on, the  share has dropped to 15%, although 81% still include China in their top five priority areas.

In other words, locating to China remains a strategically important investment theme but the unbridled enthusiasm of five or six years ago is now tempered by the realisation that  any investment in China needs to be weighed against other strategic areas of investment.

The full report can be downloaded here.