European Firms Grow Frustrated With China, Despite Improved Sales

By Mark Magnier Features Dow Jones Newswires

A majority of European companies operating in China saw their business improve last year despite growing frustration over operating impediments in the world's second-largest economy, according to a survey.

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More than 50% of respondents in an annual survey on business confidence released Wednesday by the European Union Chamber of Commerce in China reported higher sales last year over 2015, particularly among companies operating in the information technology, auto, machinery, cosmetics, retail and environmental sectors. Some firms saw their 2016 earnings, before interest and taxes, increase by 70% to 100% in 2016 over year-earlier levels.

The relatively upbeat results come after several years of surveys that were decidedly sour, and the latest survey suggested the conditions were unlikely to last. EU companies said their better performance was largely tied to short-term monetary and fiscal stimulus started by Beijing in early 2016 rather than much-needed structural reform.

Foreign companies face such entrenched impediments as cumbersome regulations, vaguely worded laws, arbitrary implementation of policy and "draconian control of the internet," the survey said: Nearly 50% of the 570-some respondents reported that working in the country was more difficult last year than the year before.

"We need a level-playing field," said Mats Harborn, president of the EU Chamber, which has nearly 1,600 members. "Regulations are not being simplified and not being applied in an evenhanded way."

That is a message the EU companies want Chinese Premier Li Keqiang to hear when he travels to Brussels for an annual summit with EU leaders on Thursday and Friday.

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Chinese officials didn't immediately respond to requests for comment on the survey.

Beijing has said it is committed to open markets and free trade, a commitment President Xi Jinping reiterated at the World Economic Forum in Davos in January. That same month the State Council -- China's cabinet -- issued a document outlining proposed improvements for foreign companies operating in China.

EU survey respondents said they saw little immediate hope for change, with only 15% expressing confidence that regulatory barriers would fall over the next 5 years; 40% said they thought barriers would increase. And nearly half of respondents said operating impediments shaved 10% or more off their annual revenue in China.

Concerns voiced in the survey dovetail with longstanding calls for reform and debt reduction voiced by the World Bank, International Monetary Fund, American business groups and credit-rating firms.

Findings from the EU survey underscored an emerging flashpoint in trade ties between China and its major developed nation partners: the lack of reciprocity in market access and investment. While Chinese investment in the European Union grew 77% year on year in 2016 to over 35 billion euros [$39 billion], counterpart funds moving in the opposite direction fell 23% to 8 billion euros, according to a study by the Rhodium Group and the Mercator Institute for China Studies.

"European investment in China is simply being held back," the EU report said. "Meanwhile, Chinese businesses in Europe face few, if any, obstacles to expansion."

Some European companies also reported challenges tied to heavy state control. Fewer financial services companies reported that their revenue expanded which they attributed in part to unpredictable, informal and unpublished policies and rules that tightened limits on transactions and the amount of foreign currency banks could lend in the fourth quarter of 2016. This, the report added, "ate into bottom lines."

Beijing policy aside, the chamber warned that private Chinese companies are becoming more competitive and innovative, adding that this should be a "wake-up call to the whole of Europe."

"We need to keep on our toes," said Mr. Harborn.

Write to Mark Magnier at mark.magnier@wsj.com

(END) Dow Jones Newswires

May 30, 2017 22:44 ET (02:44 GMT)