BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/25

The European Chamber of Commerce in China has just released its annual business confidence survey European Business in China. As last year, nearly half of the European firms operating in China again reported the country’s slowing economy as their biggest challenge. More than half of the over 500 firms responding to the survey still saw rising revenues, but their expectations of growth and profitability has dimmed.

The survey reflected general concern among firms about China’s rising labour costs. Faced with flagging growth prospects and eroding profit margins, many firms said they were considering curtailing investment plans and reducing wage costs. Although companies primarily strive to stay in the important Chinese markets through cost-cutting, rising labour costs and the yuan’s appreciating exchange rate have caused many labour-intensive branches to move their production elsewhere in Asia.

Respondents noted that problems related to the legal and regulatory environment have remained largely unchanged from a year ago. Foreign firms still find Chinese regulations unclear, and have big problems with bureaucratic red tape and inconsistent rule enforcement.

In their efforts to move up the value chain, European firms would like to see China moving ahead with reforms and improvements in the business environment to promote e.g. product development and innovation. The share of companies in China actively engaged in R&D activities has not increased in the past five years, and most of the firms
engaged in R&D mostly localize products and services for Chinese clients. Nearly 60 % of responding firms said China’s strict Internet regulation and blocking of international service providers such as Google interfered with their everyday operations. It is clear that the government’s tighter monitoring of the Internet and increased censorship are impacting operations of foreign and domestic companies alike in China.

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