2012 State of American Business in China

Amid rising costs and moderating economic growth， there is increasing urgency for China to enact market reforms in order to transition to a more innovative and sustainable economic model， according to the 2012 State of American Business in China White Paper released by the American Chamber of Commerce in China (AmCham China).

The annual White Paper， now in its 14th edition， is written by representatives from over 1，200 member companies of AmCham China. It outlines key developments and challenges across a wide range of industries in which US member companies operate in China， from agriculture to financial services to retail. It also contains suggestions for both the US and Chinese government on how to improve the business climate.

As China’s economy grows， market conditions remain good for business， and AmCham China members report strong revenues and good profit margins. AmCham China members remain strongly committed to business growth and participation in the China market.

However， the 2012 White Paper identifies growing uncertainties over the future pace and direction of economic reform and the impact on operations in China.

China’s progress toward a market economy has slowed in recent years and the outcome of ongoing efforts to rebalance the economy to create a market based on domestic demand and sustainable innovation remains uncertain. “AmCham China commends the government for the many successes it has achieved， but the transition to a new economic growth model presents new challenges. A new commitment to deepen market reforms and extend a truly market economy to additional sectors of the economy will ensure more sustainable economic growth in the future and create new opportunities for companies and consumers，” said AmCham China Chairman Ted Dean.

As China enters a transition phase in its economic development， the 2012 White Paper outlines policy recommendations that will benefit China’s economy and advance China’s development goals. “To position itself for the coming decades of growth， we believe China should promote more vibrant competition. It could do so by opening up market access across the many industries that remain restricted to foreign investors， completing the transition to a market economy， and promoting greater consistency and transparency in government policies around the country，” said Ted Dean.

Specific policy recommendations in the 2012 White Paper for improving the business and investment environment include a focus on human resource challenges， improving regulatory coherence across China， increasing licensing opportunities for member companies and improving intellectual property rights protection.

Rising labor costs

Eighty nine percent of member companies believe China is losing its competitive advantage due to rising costs， up 11 percent from last year. 82 percent of respondents said the cost of social benefits would hurt their operations， compared to 53 percent a year ago.

Management-level human resources are seen as the leading business challenge and nonmanagement-level constraints rank third， while other inputs such as the cost of land， rent， raw materials and transportation are also rising. China is losing its competitiveness in labor costs and that will eventually lead to a structural change in manufacturing and trade， but it is also a positive outcome of ongoing efforts to rebalance the economy， AmCham China said.

Strong commitment of US companies to the Chinese market is subject to China’s future policy choices and development path， as well as external risks such as another global economic slowdown， according to Ted Dean， chairman for AmCham China.

Stronger competition from Chinese enterprises

The growing strength of Chinese companies -both State-owned and in the private sector - has been highlighted in the report. 68 percent of respondents said they had faced increased competition from Chinese firms， with a third saying that this competition had“increased greatly”. The period measured was between 2011 and 2010.

AmCham claims some of the competition unfair， saying that Chinese companies often receive preferential treatment in terms of credit， taxation and regulatory policy.

However， regulatory factors are unlikely to be the only reason for increased competition.

Some argue the financial crisis， which has forced many Western companies to cut back on investment， has caused a shift in the balance of power. Meanwhile Chinese companies， often cash-rich and less dependent on capital markets to raise funds， have taken advantage of depressed asset prices in Europe and the United States and have strategically bought companies to boost their competitiveness.

A new factor， however， is that China’s private sector is rapidly upscaling from low-tech export-oriented manufacturing to more high-tech sectors， which was once solely the preserve of foreign companies. The Chinese private sector is being driven into making this change largely by rapidly rising labor costs.

Concern over China’s long term growth path

The report showed that the chief concerns of US companies have shifted from the investment climate to the country’s medium-term economic growth path.

China’s course over the next decade as it seeks a structural shift has become a big concern for the foreign business community. They may think that there are some ambiguities and uncertainties， but in fact， China has given clear information， AmCham said.

“The government is on track to make progress toward a market economy by actively promoting the liberalization of interest rates and further improving the exchange rate mechanism， as well as deepening the reform of State-owned enterprises，” Dean said. “China has no doubts about sticking to opening-up and gradually advancing its reforms in a cautiously optimistic way. A ‘shock type’ reform， expected by some people， is impossible in China.”

IPR enforcement to be strengthened

Seventy nine percent of respondents rate China’s enforcement of intellectual property rights as ineffective. The percentage of respondents who rated China’s IPR enforcement as effective declined 9 points from last year. “At the time of the survey， respondents reported seeing little progress on IPR protection， though new government initiatives announced last year may yield improvements，” said AmCham China Chairman Ted Dean.

Continued commitment to China

After several years of strong growth， US companies in China have begun to temper their growth outlook due to increasing concerns about slower economic growth， rising labor costs， tougher competition and future uncertainties.

Despite these pressures， China is increasingly viewed as a major growing market: 82 percent of respondents surveyed plan to increase investment in their China operations in 2012， with 66 percent saying their goal is to produce goods and services for China， an 8 percent increase from two years ago.

U.S. companies remained relatively optimistic about China’s market， while most of the surveyed companies expected to grow faster than China’s real GDP this year， as they did in 2010 and 2011.

Besides， nearly three quarters of respondents believe that slow or unstable Internet access affects their ability to efficiently conduct business in China.

The White Paper is AmCham China’s most important and authoritative policy document. It is widely distributed and referred to by officials in the Chinese and US governments， and will be used by AmCham China as a basis for policy discussion and dialogue for the next 12 months.

AmCham China is a national non-profit organization representing the interests of nearly 1，200 companies and 3，000 individuals doing business throughout China. Headquartered in Beijing， it has chapters in Tianjin， Northeast China (Dalian) and Central China (Wuhan).