Bloomberg News

China Investment Appeal Waning Adds to Wen’s Challenge

May 29, 2012

A laborer builds scaffolding on the foundation of a massive commercial complex outside Shanghai in China's southern coastal Zhejiang Province. China’s economy is forecast to expand 8.2 percent this year, based on the median estimate of analysts surveyed earlier this month by Bloomberg News. Photographer: Stephen Shaver/Bloomberg News

A laborer builds scaffolding on the foundation of a massive commercial complex outside Shanghai in China's southern coastal Zhejiang Province. China’s economy is forecast to expand 8.2 percent this year, based on the median estimate of analysts surveyed earlier this month by Bloomberg News. Photographer: Stephen Shaver/Bloomberg News

China’s rising labor costs and a deteriorating regulatory environment are prompting almost a quarter of European Union companies to consider shifting investments to other countries, a survey showed.

Twenty-two percent of 557 respondents said they may move investment to developing economies including those in Southeast Asia and South America, where doing business is easier, according to a confidence survey conducted in February by the EU Chamber of Commerce in China and Roland Berger Strategy Consultants and released today in Beijing.

The views present additional challenges to leaders of the world’s second-largest economy trying to sustain growth that may slow to a 13-year low this year and is further threatened by the prospect of Greece leaving the euro. Europe’s debt crisis is damping exports while Premier Wen Jiabao’s extended curbs on the property market have restricted domestic demand.

“The slowdown in China is going to have implications for the rest of the world,” Eswar Prasad, a Brookings Institution senior fellow and former head of the International Monetary Fund’s China division, said today in an interview with Bloomberg Television in Hong Kong. “But the big global risk of course is Europe. It’s going to affect China. It’s going to affect everybody else.”

The yuan weakened against the dollar for a second day, falling less than 0.1 percent to 6.3480, near the lowest since December, at 4:29 p.m. in Shanghai.

Growth Projections

China’s economy is forecast to expand 8.2 percent this year, based on the median estimate of analysts surveyed earlier this month by Bloomberg News. That would be the least since 1999. Lawrence Summers, who was formerly U.S. Treasury secretary and chief economic adviser to President Barack Obama, said today that he wouldn’t be surprised if growth slows to less than 7 percent for at least a year during the next decade.

The Chinese government’s stimulus in response to the nation’s economic slowdown will probably range from 1 trillion yuan to 2 trillion yuan ($315 billion), half the size of 2008’s package, Credit Suisse Group AG said yesterday. Economists at China International Capital Corp., the nation’s biggest investment bank, said last week they see expansion slowing to 6.4 percent in 2012 without policy stimulus.

The EU is China’s biggest trading partner and the country’s largest export market. China accounted for more than a quarter of global revenue for 26 percent of respondents, compared with 17 percent in 2009, according to the chamber report.

Western Development

The trends shown by the EU survey may undermine China’s plan to boost development in western regions by offering foreign companies incentives to relocate from the east coast, and may threaten efforts to make the nation’s development “more stable and inclusive,” the report said.

Foreign direct investment in China from the EU slumped 27.9 percent in the first four months from a year earlier, while total overseas spending dropped 2.4 percent, according to Ministry of Commerce data. “Let’s not think that the decrease on FDI from Europe is completely due to the European crisis,” Davide Cucino, president of the EU Chamber, said today. “Probably there’s also something related to the business environment.”

The average wage for Chinese urban workers at “non-private enterprises” that include state-owned companies and foreign- funded firms rose an inflation-adjusted 8.5 percent to 42,452 yuan in 2011, the National Bureau of Statistics said today. Wages for urban workers at private enterprises rose 12.3 percent in 2011 to 24,556 yuan.

Rising labor costs were perceived as the second “most significant risk” to doing business in China, with the nation’s economic slowdown in first place and concern about the global situation ranking third, the survey found.

Remaining Pessimistic

“The perception that the regulatory environment will continue to deteriorate for European enterprises suggests that companies remain pessimistic that vested interests in China will stymie reform,” the EU Chamber said.

Elsewhere in the Asia-Pacific region, Japan’s jobless rate unexpectedly rose in April and retail sales fell for a second month. Unemployment increased to 4.6 percent from 4.5 percent in March, the statistics bureau said in Tokyo. Retail sales fell 0.3 percent from March, the Trade Ministry said.

A South Korean index of manufacturers’ confidence for June fell from a nine-month high, according to the Bank of Korea.

Germany, Europe’s largest economy, may say later today that inflation calculated using a harmonized European Union method was 2.2 percent in May, matching the year-over-year pace in April, according to the median of 19 estimates in a Bloomberg News survey.

U.S. Confidence

U.S. consumer confidence was probably little changed in May, economists predicted. The Conference Board’s index rose to 69.5 from 69.2 in April, according to the median forecast of 64 economists in a Bloomberg News survey ahead of a report due today.

Prasad, who is also a professor at Cornell University in Ithaca, New York, said his “sense is that China can manage the slowdown -- they have a lot of room to move in terms of policies.”

The “world is going to be watching” what kind of stimulus China employs, Prasad said. “The reality they face again is that credit policy, pushing money out through the banks into investment, delivers the bottom line really effectively.”

The EU Chamber said China’s cost advantages previously offset concerns about doing business in the country. “However, as China moves up the value chain and its domestic workforce becomes more educated, demanding higher salaries, other developing economies” have become more attractive, according to the report.

Vietnam was highlighted for its low labor costs and South America was considered to have easier market access and fair treatment, while Southeast Asia and India were also seen as “attractive emerging markets,” according to the report.

Rising Competition

More European companies are focusing on reducing costs to stave off price pressures, and “much effort is being exerted to maintain current market share” as competition rises from domestic enterprises, the chamber said.

Some businesses are shifting operations inland from the industrial east coast to reduce costs, the report said. Fifty- two percent of companies surveyed said they will expand into other provinces within “the next few years,” it said.

Even as costs and competition increase, European companies see China as a “driver” of their global business, according to the survey, with 74 percent of respondents viewing China as becoming increasingly important in their company’s global strategy and 78 percent saying they are “optimistic” about the growth potential in China over the next two years.

Almost two-thirds of respondents said they were considering new investments in China in 2012 compared with 39 percent in 2009, the chamber said.

--Kevin Hamlin. With assistance from Tracy Withers in Wellington, Susan Li and Rishaad Salamat in Hong Kong, Zhou Xin in Beijing and Shamim Adam in Singapore. Editors: Nerys Avery, Scott Lanman

To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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