MercoPress. South Atlantic News Agency

High wages and regulations making EU companies in China think twice

Davice Cucino: “FDI may slow and planned investments may be shifted to other emerging markets”

One in five European companies operating in China may invest elsewhere in the future as wages are getting too high and regulations too cumbersome, according to a poll released Tuesday.

The European Chamber of Commerce said that while China was an increasingly important market for its members, many were deterred by rising prices and regulatory barriers in the world's second largest economy.

In all, 22% of respondents in its annual business confidence survey were considering shifting investment from China to other markets, it said.

“We are happy to report that European companies are continuing to invest and create jobs in China, but the lack of reform of the regulatory environment is worrying and has a disproportionate impact on foreign business as well as on the domestic private sector,” said the chamber's president, Davide Cucino.

”There are indications from this survey that as reform continues to stall and costs rise, a previously reliable stream of FDI (foreign direct investment) may slow and planned investments may be shifted to other emerging markets.”

The average annual salary of workers in private businesses in the Chinese cities rose 12.3% last year from the year before to 24,556 Yuan (3,900 US dollars), the National Bureau of Statistics said separately Tuesday.

While Chinese salaries remain low compared with rich countries in Europe and North America, they have been outpacing wage increases in neighbouring countries. This causes China to lose competitiveness with other growth economies such as Vietnam, and many economists have forecast a trend for companies to set up shop elsewhere.

In April, Finnish mobile phone maker Nokia, which operates several factories in China, broke ground for its first Vietnamese plant, expected to be completed by 2013.

While rising costs are somewhat inevitable as a result of shifts in labour supply and demand, enterprises are also increasingly frustrated about the regulations they have to obey, and sometimes feel unfairly targeted.

Officially, foreign and Chinese companies have to obey roughly the same rules, but it is a widespread sentiment among non-Chinese companies that they face much tougher implementation. For example, more than 50% of the companies surveyed by the chamber said they thought Chinese authorities enforced environmental rules in a more stringent manner when dealing with foreign companies than local ones.

The feeling of unfair treatment extends into other areas too, and EU Trade Commissioner Karel De Gucht complained in February that out of China's 1.1-trillion dollars public procurements market, “only a small fraction is open to foreign business”.

While 78% of the 557 European companies surveyed planned to expand their China operations, only 36% said they expected them to become more profitable.

More than 60 percent listed China's slowing economy, rising labour costs and the slowing global economy as their major concerns.

Overall 59% of the companies said they were pessimistic about the cost of labour in the near term, a percentage that grew to 75% in the Pearl River Delta, the factory floor of China's export-driven economy, located in south China near Hong Kong.