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China's strong domestic consumption will curb fears of multinationals relocating production to countries with cheaper labor costs, experts said.

Rising production costs in China are rapidly eroding manufacturers' profit margins, but the international finance community expressed continued optimism over China's investment environment.

"China has robust domestic demand and encouraging growth figures. While the wage arbitrage between China and Western markets is closing up, many multinationals are still keen to be a part of China's growth story," Peter Lacy, a managing director at Accenture, told China Daily.

"What we see in China is rapid urban development, increasing awareness of corporate social responsibility and energy security - all factors creating a stable investment environment for foreign businesses," Lacy said.

David Michael, senior partner and managing director of The Boston Consulting Group, said that multinationals' decisions to relocate in reaction to rising costs vary depending on why they initially chose to expand into China.

"If they entered China to serve China's domestic consumers, then they may stay and focus on improving productivity. But if they outsource production to serve US and European consumers, they may find Mexico and other Asian countries more attractive options when costs in China become too high."

Robin Bew of the Economist Intelligence Unit, an in-house research unit for The Economist, singled out China as a classic example of an emerging country with a substantial domestic demand when explaining differences between emerging economies. Businesses that produce in these countries will find themselves less vulnerable to global financial shocks and risks, he said.

Relatively mature infrastructure and logistics also give China a distinct advantage.

But optimism alone cannot solve the problem of tightening profit margins. Companies need to adapt their business models, experts said.

"Companies have to increase productivity. This means making a conscious effort to invest in training staff, increase automation, improve information technology and look for opportunities to expand into less labor intensive sectors," Michael said.

"Smart companies that make these investments will not only grow in China but expand internationally and find their investments justified."

Arun Bhikshesvaran, chief marketing officer at Ericsson, said if production demands certain skills, costs are not the only factor multinationals consider when choosing employees.

"We choose the most capable people to do the job, whether they are from Canada, Sweden or the emerging markets."

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