Island spat dulls appeal of China as production base for Japan firms: survey TOKYO (Reuters) - A territorial dispute and rising labor costs have dulled the appeal of China as a production base for Japanese manufacturers, with Indonesia, India and Thailand more attractive, an annual survey by the Japan Bank of International Cooperation showed Wednesday. China dropped to fourth place in a survey it has topped since it began in 1992, with the proportion of companies naming it the most promising region over the next three years falling to 37.5 percent from 62.1 percent last year. State-owned JBIC, which provides loans to help Japanese companies expand overseas, in July-September surveyed 625 firms which have three or more overseas affiliates, including at least one production base outside of Japan. Sino-Japanese relations have worsened since the survey after China established an air defense zone in the East China Sea covering islands controlled by Japan but claimed by China. Most companies in the survey, 77 percent, cited rising labor costs as a concern for manufacturing operations in China. Almost a third said they were also worried about security and social instability there. A consumer boycott of Japanese goods in China following anti-Japanese riots last year hurt income from Asia's largest economy, making China a less profitable source of income than India and Europe, JBIC said. Reporting by Tim Kelly; Editing by Shinichi Saoshiro and Christopher Cushing