China No Longer the Promised Land for U.S. Businesses

When China's economy was growing at double-digit rates (was it only a couple of years ago?), the Middle Kingdom became an investment target for U.S. firms looking for growth. That enthusiasm is starting to cool a little, however, as China's economic growth slows down due to rising costs, more competition, and a variety of market barriers.

A new survey by the U.S.-China Business Council indicates that 45 of 111 companies surveyed are less optimistic about the Chinese business environment than they were three years ago. Oddly, perhaps, 89% of U.S. businesses currently doing business in China reported that they made a profit in 2011 and two-thirds grew revenues by at least 10%, according to a report at Reuters.

Trade spats between China and the United States are common, with each side accusing the other of illegal subsidies or dumping or whatever. Just yesterday the U.S. House of Representatives urged U.S. companies to avoid doing business with two Chinese telecom firms, citing national security threats. Several U.S. solar panel makers have filed a dumping case against Chinese solar firms, and the U.S. has imposed tariffs on panels imported from China. The Chinese, of course, retaliated and are expected to retaliate for the telecom warning as well.

The biggest problem might be a U.S. refusal to label China a currency manipulator. The Obama administration has refused to slap that label on China, as have preceding administrations. Republican presidential candidate Mitt Romney has promised to label China a manipulator on his first day in office, should he be elected. And in one of those politics-make-strange-bedfellows moments, economist Paul Krugman, no friend of Republican politics, has long argued that China's currency is deliberately undervalued and that the U.S. should take steps to force China to let its currency appreciate.

Another odd result from the Council's survey is that currency issues did not even make the list of the top 25 issues that U.S. businesses have with China. The biggest challenge is "finding, hiring and retaining workers, followed by weak Chinese enforcement of intellectual property rights."

Still, two-thirds of the survey respondents plan to increase their investments in China over the next 12 months, while just 17% have either delayed or cancelled new investment. Of those, half cited market access and investment barriers as the chief reasons for restraining investment.

Overall, U.S. businesses invested 20% less in China in the past year than they did the year before. The bloom is definitely off the rose.

Paul Ausick