China is losing ground as the premier source of low-cost goods, in part because of rising costs and a mandate from Beijing to discourage low-end manufacturing.

Industry associations in Hong Kong have reported a 15 per cent surge in costs over the past year. Chinese companies have been quoted as forecasting a 30 per cent rise in operating costs this year.

Increased labour costs, higher lending fees, tighter pollution controls and the elimination of preferential tax treatment for foreign enterprises are seen as the culprits. According to one source, 2,000 factories that make shoes and toys in the Pearl River Delta have closed down since 1 January.

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