We study wage‐price dynamics in Mainland China with a novel data set using province‐level data from 1994 to 2010. We find that the growth in labour costs in China is not passed through fully to final prices, neither in the tradable goods sector nor in the economy as a whole. This probably reflects the strong pressure on profit margins from a highly competitive environment, especially in manufactured goods. These findings have potential implications for global price developments, given China's relevance in global supply chains.