Overwhelmed by change 

"The business environment has changed and the fleeing  investors faced great challenges," said Kwang Jae Won, vice  president of the Korea Trade Center (KTC) in Qingdao. The center  is part of the Korea Trade-Investment Promotion Agency. Kwang  noted that new Chinese labor and tax policies have had a large  impact on these small enterprises.    

For small and medium-sized, labor-intensive enterprises, the cost of labor is a key factor in their survival. But China's labor costs have been rising in recent years, despite its seemingly  inexhaustible labor supply.    

That pool of cheap workers was an almost unbeatable advantage  when the country opened its doors to the outside world in the late 1970s. Chinese commodities were very cost-competitive and  factories could depend on big profit margins.    

However, Chinese workers' living standards lagged the country's rapid economic growth and huge domestic economic disparities  developed. China's government has turned its attention to workers' demand for higher pay.    

A labor contract law was brought into effect this year.  Employers must contribute to workers' social security accounts and set wage standards for workers on probation and overtime. The  KTC's Kwang estimated that the new law had driven up labor costs  by 30 percent.  

Separately, China has revamped its tax policies for foreign  investors. In 2007, the enterprise income tax law was adopted,  ending two decades of preferential tax treatment for foreign  investors. The law established a uniform income tax rate for  domestic and foreign companies of 25 percent. Previously, the  effective income tax rate for Chinese companies was 25 percent,  while that for foreign enterprises was 15 percent.    

Also, in a bid to slow down its rapid export growth, which has  caused trade friction, China adjusted its tax rebate policies last July, ending or cutting the rebate rates for some export products.    

All these changes are parts of the policy of transforming the  Chinese economy, but they have adversely affected many  export-oriented enterprises.    

Qingdao Sejung Musical Instruments Co Ltd is a case in  point. As a large labor-intensive ROK-funded company, Sejung's  products are mainly exported. General manger Nan Fanzhu said that  his business clearly felt the impact of the new policies.    

Nan said that due to the labor contract law, the company had  to shrink its labor force from 5,000 to 2,000 to cut costs.  Meanwhile, the unified tax law caused a 10 percent rise in foreign enterprises' tax liabilities.    

Further, export tax rebates on labor-intensive products,  including musical instruments, textiles and toys, have been  reduced. Nan said that the rebate on pianos and guitars fell from  17 percent to 13 percent.    

Due to these factors and the appreciation of the Chinese yuan, which has appreciated by 14 percent against the U.S. dollar since  2005, Sejung's  profit margin plummeted from 10 percent in 2004 to 0.3 percent.    

Nan said some small foreign companies must move to Vietnam or  some other Southeast Asian country as they cannot adapt to changed environment.