FORECAST: Looming clouds on the horizon in China with definite signs of wet weather, and not even the remotest connection to the presence of bears.

This is self-inflicted rain.

The Chinese Ministry of Labor and Social Security is apparently working on a new law that encourages employers to pay higher salaries. It has not been announced as specifically mandatory, with compulsion for employers, but the fact of it’s consideration is problematic, to say the least.

The logic behind the move is that there is increased inflation in China, and this must be offset with salary increases. (Says who?...) The fact that this would feed further inflation seems to have escaped everyone’s notice. No specific details are available but what is confirmed is the linkage between these salary increases and the Consumer Price Index (CPI).

I strongly suspect that this measure is intended to impact the lives of manual laborers but even if it is not a threat to your average Chinese professional in the short term, it will be in the medium term. Higher worker salaries mean that China becomes less attractive as an FDI market, and eventually there has to be a spillover effect on professional jobs.

The impact would include factories that don’t get built; factories that don’t expand; factories that actually reduce worker numbers; and those factories that would have come to China but are moved to cheaper countries. Never mind the effect on retail or hospitality establishments that depend so heavily on manual labor. In all these scenarios fewer professional managers are needed to manage the workforce, and that’s not a good thing in a country with so many new workers coming onstream.

It is also odd that this salary increase law, for want of a better term, should be considered at a time when the world’s economy is drifting, if not actually heading to recession. According to the International Monetary Fund (IMF), the pace of the world’s economy will slow significantly in 2008; in fact they cite an inevitable slowdown. Yesterday they warned that restoring world financial markets was going to be a complex and protracted task.

It could be a bumpy ride in China this year. Let’s hope for as few bears as possible.