BUSINESS

Survey of U.S. companies in China finds that not all's well

More than three-fourths of American companies in China feel less welcome than in the past and 45% say revenue is dropping or flat, a survey released Wednesday by the American Chamber of Commerce in China indicates.

The report comes amid a slowdown in the Chinese economy, which in recent decades often had been growing at 10% or more annually. But official data released this week showed that the country’s gross domestic product rose 6.9% in 2015, the slowest pace of expansion in 25 years.

Almost 500 members representing a range of industries took part in the group’s 2016 business climate survey; the respondents included small, medium and large companies.

The proportion of respondents reporting profits dropped to 64% in 2015, from 73% a year earlier. Many businesses reported serious concern about rising labor costs, and shrinking margins are causing some U.S. companies to rethink their strategies in China. Companies in the agricultural, automotive, machinery and other industrial sectors reported the biggest downturns in profits.

Since its economic reforms in the 1980s, China has attracted significant foreign investment, thanks in large part to its low wages. But in the last few years, this advantage has been disappearing fast, and companies are looking to lower-cost economies such as Vietnam and Indonesia.

One in four American companies have already moved capacity out of China or plan to do so soon, according to the chamber’s report. About half of those say they will move to other developing Asian economies, while a third say they intend to move capacity to North America.

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Despite the slowing economy and rising labor costs, a significant amount of confidence in the Chinese market remains. More than 50% of respondents still rank China as one of the top three investment destinations, and most indicated they are still optimistic about China’s domestic growth potential.

“Business will continue to invest in China,” said James Zimmerman, chairman of the chamber, “but with more calculation and caution.”

The report cited regulatory challenges as the top concern of American businesses in China, with labor costs a close second.

“Members report an environment that has not yet converged with the stated goals of the Chinese government to allow the market to play a decisive role in the economy [and] open the market equally to foreign companies,” the report said.

“The issue of inconsistent regulatory interpretation and unclear laws is on everyone's mind,” Zimmerman said, “and we encourage China’s leadership to make changes.”

Though China has opened many sectors to at least partial foreign investment, significant restrictions remain in a large number of strategically important industries such as information communication technology. China and the U.S. are currently negotiating a bilateral investment treaty that aims to reduce the number of sectors from which U.S. companies are excluded, but progress has been slow.

Meanwhile, pending legislation on foreign nongovernmental organizations and national security is drawing concern about new restrictions on U.S. entities’ operations and business opportunities.

Lester Ross, the chamber’s vice chairman, said his group would continue to press for what he called a “dynamic, open investment environment.”

Nearly 80% of respondents said China’s Internet censorship negatively or somewhat negatively affects their ability to conduct normal business operations, and 77% complained about the slowness of accessing websites outside China.

More than half the respondents also said China’s severe air pollution has created difficulty in recruiting senior executives to work in the country.

Follow @JulieMakLAT for news from China

julie.makinen@latimes.com

Chuan Xu is a special correspondent.

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