ABSTRACT
Since the implementation of the reform and opening-up policy in the late 1970s, China has taken the opportunities of the world's third industrial relocation after the Second World War and developed itself into the global manufacturing base. The major challenge of ever-rising production costs to the development of China's real economy is manifested in three aspects. First, the ever-rising costs of raw materials. Second, the sustained rise of labor cost. Before 2007, the wage growth of employees in various sectors was much lower than the nominal growth of the added value of various sectors, hence the decrease of the unit cost of labor. Third, there are excessively high financing costs for enterprises. Moreover, as the investment yields of the real economy declines, large amount of capital accumulated during the long period of development tend to flow into the virtual economy, inflating the economic bubble and eroding the real economy.
