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Report: European business outlook on China sours

By: Steve Toloken

May 30, 2013

The outlook for European businesses in China has soured, with a “clear downturn” on profitability and uncertainty about whether China’s leaders can seriously address needed economic reforms, according to a report from the largest European business group in China.

In a May 30 report released in Beijing, the European Union Chamber of Commerce in China said profitability for its member companies there has declined to an all-time low, and it said they are unsure if China’s leaders have the political will to “seriously” address needed economic reforms.

“Pressures from increasingly challenging market and economic conditions in China, which are exacerbated by a regulatory environment that continues to be demanding and at times discriminatory, have led to a clear downturn in profitability and revenue growth for European companies,” the chamber said in its annual Business Confidence Survey.

The report is compiled with input from 550 European companies operating in China.

“Despite increasing rhetoric from senior Chinese leaders that efforts will be undertaken to transform and level the regulatory environment through allowing greater play to market forces, European companies have so far perceived few concrete changes,” said chamber President Davide Cucino, in a statement. “Financial performance is worsening and optimism about profitability is at its lowest ebb.”

The Chamber said its companies identified promoting greater rule of law as the most notable of the reforms that could drive additional economic growth in China.

It said the companies reporting revenue growth in China decreased to 62 percent of the respondents, with the number reporting profitability growth declining to 44 percent.

The biggest factor hurting profits, it said, was rising labor costs, along with slower growth in both China and Europe and more competition. It said the situation was aggravated by a “discriminatory” regulatory environment for European business.

“Market access is the key concern,” the report said. “Approximately half of European companies noted missed business opportunities due to market access and regulatory concerns, thus challenging the government’s assertion that China has a level playing field.”

Still, the report said the companies see China as an increasingly important market and increasingly important to their global strategies. More than 70 percent remain optimistic about growth prospects in China and 86 percent are planning further investments, the chamber said.

The European report on business conditions is similar in its conclusions to one issued in February by the American Chamber of Commerce in Shanghai, although the American report takes a less pessimistic tone.

Like the Europeans, the American report pointed to a tougher business environment — the second straight year that profits, revenues and margins in China dropped — and it pointed to a jump in the number of U.S. companies complaining about uneven enforcement of laws that benefitted Chinese companies.

The “perhaps most concerning” conclusion was that, for the third straight year, two-thirds of American companies found the legal and regulatory environment either getting worse and staying the same, the report said.

Still, the report said more than 90 percent of U.S. companies were either optimistic or slightly optimistic about their five-year business plans in the country, because of rising personal incomes, up nearly 10 percent last year, and domestic consumption that is expected to triple in the next 20 years.

The American group said generally speaking U.S. companies have carved out positions in the mass market consumer goods sectors, while it said European firms tend to dominate luxury goods markets.