Persistent market barriers and a slowing economy have moderated corporate optimism toward the China market.

China is still a top priority for American companies, but increasing costs, growing competition and market access barriers are causing a shift in executives’ expectations for China’s prospects, according to the US-China Business Council’s annual survey of its member companies.

Ninety-six percent of survey respondents—the highest percentage reported since the question has been asked over the past five years—said China was among their top five priorities. But fewer respondents this year labeled it as their number one strategic investment priority.

“USCBC estimates that China is roughly a $300 billion market for American companies—and would be much larger without the market access barriers,” USCBC President John Frisbie said. “That number underscores why reducing market access and other barriers in China is so important.”

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Companies reported lower profit margins and declining profitability in this year’s survey compared to previous years. Although 61 percent of respondents say the profit margins of their China-based operations are the same or better than the previous year, that number is down from 75 percent in USCBC’s 2012 survey. Companies reporting increased profitability in the 2013 survey fell to 30 percent from 55 percent in the 2012 survey.

In addition to increasing costs and greater competition, obtaining licenses to do business in China, talent recruitment and retention, intellectual property rights enforcement, uneven implementation of Chinese laws, preferential treatment for Chinese companies, regulatory transparency, standards and conformity assessment, and foreign investment restrictions ranked among the top 10 challenges companies face in China.

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Rising costs were a concern for 96 percent of respondents’ operations in China. One respondent said that “costs, particularly in major metropolitan areas, are moving to a point that China is no longer world-competitive.”

Wages aren’t rising as fast as previous years, but human resources costs remained the cost of most concern. Competition for qualified employees in China has been significant in recent years, and companies often increase wages to retain skilled employees. Respondents indicated that wages are rising the fastest for middle managers and technical and engineering staff.

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Some survey respondents said that China’s slowing economy has strengthened local competition from both state-owned and private companies. In addition, 34 percent of respondents said they have “concrete knowledge” that their state-owned competitors are receiving benefits or other favorable treatment not available to foreign companies. Twenty-two percent said they knew their non-state-owned Chinese competitors were receiving benefits that foreign companies were not eligible for.

Respondents reported that their state-owned Chinese competitors were getting preferential treatment in government financing, licensing, and access to government contracts, and were receiving tax benefits, and lower rates for land and utility costs.

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To read the full survey, visit USCBC’s website. USCBC is the publisher of the China Business Review.

Posted by Christina Nelson