BUSINESSES SHOULD rethink their China strategies in the light of pre-Olympic moves by Beijing to allay social unrest, one of Scotland's leading advisers on business in China has warned.

In an article for the Sunday Herald, Philip Carmichael, who sits on the international advisory board of Scottish Enterprise, warns Scottish companies to review their plans in the light of soaring costs of employing Chinese workers and the rapid appreciation of the currency, the renminbi (RMB).

Carmichael, a senior executive of the US-owned IT and software company Fusion Systems Holdings with 32 years' experience of the Chinese market, said that new laws requiring employers to contribute to workers' welfare costs amounted in some cases to a "55% added tax burden" to be paid by employers on each employee.

At the same time, he said, input prices for raw materials had soared largely because of Chinese demand, and the RMB had increased by 12% since November 2007, which "equates to an annual inflation rate of 29%".

Dr Mairi Macrae, head of greater China for Scottish Development International (SDI), said: "The need for Scottish companies to do their homework properly has increased. The social changes in China that these changes reflect are good for the long-term stability of the country. The issues of employer costs and currency appreciation are on people's radar as part of a much wider set of issues in terms of the credit crunch and the state of international markets."

Chinese news reports have been filled in recent months with stories of workers returned from their Chinese New Year holiday to discover their overseas bosses had absconded because of the rising cost of doing business in China, leaving behind abandoned factories and unpaid wages, with more workers expected to face a similar plight in the coming months.

Bill Thomson, executive director of the East Kilbride-based Clyde Blowers, which last week announced a new joint venture with China's second-biggest pump maker, said: "Scottish investors tend not to be in the high volume category so have been less affected.

"We have six companies in China and we can see these rapid but steady changes happening but are not too concerned about it ourselves as 90% of what we make in China stays in China. It is no surprise that the single most rapid economic development in the history of man comes with demands for increases in the standard of living.

"Employers in low-cost manufacturing sectors are moving their operations out of China to Vietnam or Africa. The impact is greatest in industries where you are employing thousands of low-skilled people, but at the top end of the scale you have long been approaching what you would call full Western salaries. You are paying top dollar to get top-quality people.

"We have to think positively about the strengthening of the RMB, as it means more purchasing power for Chinese people to study at Scottish universities or take Scottish holidays. On balance, these developments are a good thing."

One Scots businessman with 12 years' experience of mass manufacturing of toys in China told the Sunday Herald: "It's great for Chinese people, but it's us who have to absorb the costs.

"Looking around the Pearl River Delta and around Shanghai, a lot of smaller overseas companies have already upped sticks or gone to the wall.

"I would advise prospective investors to be aware that prices are high, and are rising, but even so the authorities are much more keen to smooth the way for investors than British bureaucrats, and its still far more efficient and cheaper than doing business in the UK."