Businesses Optimistic About China Despite Slowing Growth, Rising Costs, Market Barriers
The U.S.-China Business Council’s annual survey on the business environment in China finds that while companies are decidedly not pessimistic with respect to the Chinese market, their optimism is being tempered by slowing economic growth, rising costs and persistent, unaddressed operating challenges.
Top Challenges. The number one challenge to doing business in China cited by respondents was rising costs, the first time this issue has earned the top ranking. Labor was the biggest cost concern, followed by materials, general inflation, land, tax burdens, energy and utilities, and payroll taxes and insurance fees.
Rounding out the top ten list of challenges were (2) competition with Chinese companies, including state-owned enterprises, (3) administrative licensing, especially getting approval for products to be sold in the market, expanding operations, and securing approvals of foreign investments more generally, (4) talent recruitment and retention, with 69% anticipating wage increases of 5-10% in the next year, (5) intellectual property rights enforcement, which 54% of respondents said has remained unchanged but 41% said has improved somewhat, (6) uneven enforcement or implementation of Chinese laws, (7) nondiscrimination/national treatment (up from 15th place in 2012), (8) transparency, with most laws and regulations still not being published for comment, (9) standards and conformity assessment, particularly the inability to get products certified and approved for sale in China, and (10) foreign investment restrictions. Nine of the top ten categories are characterized as “unchanged,” suggesting that companies feel little is being done to address their concerns in these areas.
Not among the primary challenges reported by respondents are cybersecurity (although it moved up from 23rd to 14th in the rankings) and the value of China’s currency (last place).
Investment in China. Nearly all (96%) of respondents placed China as one of their top five global market priorities, up from 94% in 2012, but only 15% said it is their number one priority, down from 22%. The percentage of respondents planning to commit more resources to China in the next year dropped from 67% to 52% in a year’s time. Fifteen percent said they had reduced or stopped planned investments in China over the past year (down from 17% in 2012) and a quarter of those (down from 50%) cited market access restrictions as the primary reason.
Profitability. More than 90% of respondents said their China operations are profitable, the highest percentage reported since the Council began its membership surveys. However, 39% of respondents said their profit margin was lower than the year before and only 31% said it was higher, in contrast with figures of 25% and 45%, respectively, in 2012. The percentage of respondents reporting greater profit margins in China than the rest of the world fell from 75% to 61%, and the number reporting decreased profitability more than doubled from 10% to 21%.
Outlook. The percentage of respondents who say they are optimistic about China’s prospects for the next five years has dropped from 58% to 39% in two years, but the percentage of those who say they are optimistic or somewhat optimistic has only fallen from 91% to 88%.