European firms may take their business elsewhere

Rising labour costs, fiercer market competition and deteriorating regulatory barriers have prompted almost a quarter of European Union companies in China to consider shifting investments to other countries.

A survey by the European Union Chamber of Commerce found that 22 per cent of 557 respondents said they may move their mainland investment to developing economies in Southeast Asia and South America, where doing business is easier.

'As [China's] regulatory reform continues to stall and costs rise, a previously reliable stream of foreign direct investment may slow and planned investments may be shifted to other emerging markets,' said chamber president Davide Cucino.

According to the study, more than 40 per cent of respondents said policies related to foreign-invested enterprises were less fair now than they were two years ago. They were most concerned about the discretionary enforcement of broadly drafted laws, lack of co-ordination among different regulators and local governments enforcing their own standards. Half of the companies said they had missed out on business opportunities because of regulatory barriers.

Rising costs were another concern. Nearly 60 per cent of respondents expected labour costs in China to rise over the next two years. Companies based in the Pearl River Delta, Nanjing and Shanghai were particularly worried about labour costs.

Yin Zhongli, a financial researcher with the Chinese Academy of Social Sciences, said European firms were feeling more pressure doing business in China partly because some of the special treatment they used to enjoy has ended in the past few years.

To attract investment from overseas, Beijing has since the 1980s offered a series of incentives to foreign-invested companies related to taxation, recruitment and the use of land. Some of the tax breaks were scrapped in December 2010.

'Although some European companies are considering moving from China to cheaper emerging markets like Vietnam, I think it will still take a long time for those countries to build up the supporting facilities and infrastructure of today's China,' said Yin.

Despite worries about China's business climate, most of the firms were optimistic about its economy. About two-fifths of those surveyed said profits were higher in China than their global average. Nearly half did not expect profitability to change in the next two years. About 60 per cent planned to boost investment in China in the next two years.