China Economy

Rising wages and doubts over reform dent business optimism in China

Rising wages and doubts about reforms see drop in European investor confidence, with more companies reporting lower earnings

PUBLISHED : Friday, 31 May, 2013, 12:00am
UPDATED : Monday, 30 May, 2016, 5:01pm

European companies are more pessimistic about profits in China because of rising labour costs and a lack of confidence in reforms, a survey has found.

The findings, released yesterday by the European Union Chamber of Commerce in China, reflect the fading allure of the country's cheap labour that was once effective in luring foreign capital.

Foreign investors' shrinking confidence may not bode well for the country's growth in the long run unless the new leadership can further liberalise the market, analysts have warned.

About 44 per cent of the companies in the survey reported a rise in their mainland earnings, down from 64 per cent last year.

A rising share - 21 per cent, from 14 per cent last year - of companies reported a drop in earnings, according to the survey, which covered more than 550 European businesses operating in China.

Less than a third of the companies said they remained optimistic about their profitability outlook in China over the next two years, compared with close to half in 2008.

"The most notable factor negatively affecting net profit margins is rising labour costs, but slower economic growth in both China and Europe, as well as increased competition, also had notable effects," the chamber said in a statement.

Last year, 25 provinces raised the minimum wage by an average of 20.2 per cent, the National Bureau of Statistics said this week. The pace exceeded the mainland's 7.8 per cent economic growth last year.

The government should treat foreign and domestic enterprises equally, allowing foreign businesses to participate in the projects or sectors that are off-limits to them, said Davide Cucino, the chamber's president.

"It's not an issue of opportunities. It's an issue of offering those opportunities in an equal way to everybody," Cucino said.

The potential drivers of the Chinese economy deemed most important are rule of law and transparent policymaking, as well as promotion of fair competition and fewer monopolies, the survey found.

However, only 38 per cent of the respondents said they believed the new leadership would implement significant economic reforms. About half said they were unsure.

"Despite the 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 Cucino. He urged "meaningful changes" to be "swiftly implemented".

But despite the challenges, foreign companies still view China as a priority market for expanding business, according to the survey.

Only 10 per cent of them said they were considering shifting investments outside China, down from 22 per cent last year.

About 86 per cent stated that they were considering expanding operations on the mainland, while 41 per cent said they were mulling mergers and acquisitions.