Prices in February soared 11 per cent from a year ago, surpassing the peak during the boom days before the global financial crisis, latest data showed.
Chinese goods are expected to get even more expensive this year, with some companies reportedly forecasting at least a 10 per cent hike.
All this has even set some Chinese officials warning that the country's days as the world's lowest-cost factory are drawing to an end.
Rising production costs have become an 'irreversible trend' for small businesses, said Mr Quan Zhezhu, party secretary of the All-China Federation of Industry and Commerce, last Friday.
He told a forum held by Peking University that the time of low labour and raw materials prices enjoyed by China's 10 million-odd small and medium enterprises (SMEs) is over.
From 2005 to last year, the average wage per month for migrant workers jumped 14 per cent to 1,690 yuan (S$321).
This year, rising inflation has become an even bigger headache, according to another official, Mr Zhu Hongren.
'The quantitative easing monetary policies of major developed nations to weather the global financial crisis have caused fast price rises of commodities such as energy, raw materials and crops,' Mr Zhu, chief engineer of the Ministry of Industry and Information Technology, told a press conference in Beijing.
China's consumer price index rose to a 32-month high of 5.4 per cent in March from a year ago.
Meanwhile, the Chinese currency has appreciated roughly 1 per cent against the US dollar so far this year. It is expected by many analysts to rise as much as 6 per cent for the full year, further hurting price competitiveness.
Besides consumers, small Chinese exporters have been the worst-hit.
Losses by SMEs, which provide jobs for roughly 80 per cent of the urban work force in China, jumped 22 per cent in the first two months of this year compared with a year ago.
To cope with this, some SMEs have had to cut staff. Ms Li Jingjing's family business, a garment factory in Shandong, has had to pare staff by a fifth this year.
'We expect to raise the prices of our clothes by 10 per cent this year at least. Even so, our profit margins are already so thin that we can hardly keep afloat,' said Ms Li, who is in her 50s.
With the minimum wage targeted to increase by at least 13 per cent a year over the next five years, businesses will have to adapt by restructuring, the government says. Premier Wen Jiabao stressed this during last month's top political meetings, when he said that 'China's economy needs to be quickly put on the path of endogenous growth driven by innovation'.
However, the government's incentives to accelerate restructuring will largely benefit state-owned companies and industries that already have significant state support, say analysts.
The SMEs' best bet for survival for now may be to move some of their operations to the western and central regions, where costs are cheaper.
But 'so far, this has been difficult to achieve on a large scale', noted Royal Bank of Scotland China analyst Li Cui.
'Over the years, the share of exports from coastal cities has risen to near 80 per cent of the country's total, and the trend shows no sign of reversing,' he pointed out.
These coastal hubs are still the preferred location for operations since they are more accessible to ports and suppliers. So 'cost pressures will likely persist in the near future'.
Ms Li is prepared for this: 'In the short term, we are thinking of moving some of our manufacturing to Sichuan province.
'In the longer term, we will probably have to buy new technology to produce better products more efficiently. But first, we need to survive this year.'
graceng@sph.com.sg
