Volume of trade with China shrinking slightly but investment growing

Despite the outlook on profitability declining to an all-time low in China, European companies remain committed to the Chinese market, at the same time calling for further reforms to promote the rule of law and fairer competition.

"Although European companies are faced with tougher conditions in China, including slower economic growth in European and Chinese markets, rising labor costs and competition from privately owned Chinese companies, they are still confident in the marketplace," said Davide Cucino, president of the European Union Chamber of Commerce in China.

The growing investment from the bloc is proof. In the first seven months of 2013, investment from the EU rose by 16.72 percent to $4.64 billion, while the trade volume between China and EU declined 1.8 percent, according to the Ministry of Commerce.

"The trade volume between the two sides is shrinking a bit, not heavily, and this is mainly because of the economic crisis in Europe. Figures are showing that there is still interest from European companies in having a presence in the Chinese market," said Cucino.

In the May release of an annual publication that measures the confidence of European companies in China, the EU chamber said among the 526 respondents, the number of EU companies reporting revenue growth shrank to just 62 percent and only 64 percent of European companies in China were making profits.

But China remains a pillar for global revenue generation. Nearly half of European companies said China now accounts for more than 10 percent of their global revenues. And 86 percent of the respondents are planning further investment to build upon current capabilities and maintain an edge over local competition.

However, in its annual position paper, which was released on Thursday, the EU chamber said the business environment in China should be improved to further foster bilateral cooperation and facilitate China's innovation and productivity in the process of transformation.

In the paper, the chamber praised the encouraging steps to reform China has taken. But it said it was only the start of a long and difficult process to strengthen the regulatory system to better suit an increasingly complex economy.

"Liberalization has stalled and domestic companies - in particular State-owned enterprises - continue to receive partisan treatment," Cucino added.

The EU chamber has been calling for a balance between government control and market forces for years. This year it is emphasizing a reassessment of the government's role in the economy and business environment.

The government's role as a regulator should be strengthened in a way that allows it to become more efficient, protect its independence, leverage transparency and consultation and empower regulatory implementation and enforcement functions, the paper noted.

Cucino said continual reform is important because private companies cannot reach the same finance and resource channels as State-owned companies because of over-intervention by the government.

"Foreign companies are restricted in some of China's strategic industries, such as telecommunications," said Cucino.

Cucino said market access is a two-way street in that domestic policies can negatively affect the perception of Chinese companies abroad.

"The vast contrast between market access for European companies in China and Chinese companies investing in Europe causes tensions that may add obstacles to the internationalization of Chinese companies," said the paper.

"Because the EU has been recording a trade deficit with China in recent years, they are expecting to pick up opportunities in the direct investment sector in China, such as in energy, services, and finance," said Liu Mingli, a researcher with the China Institutes of Contemporary International Relations.

"The gap between what China can do and what European companies expect is still there, but China is on track for more opening-up and reform," Liu said.

As for the future, Liu said EU companies are tending to adjust their investment structure in China, reducing investment in the traditional manufacturing sector.

"China is undergoing an economic transformation. It has lost some competitiveness in labor-intensive industry," Liu said.

The paper also pointed out China has paved the way for reform and opening-up by such methods as reducing the number of ministries and commissions under the State Council from 27 to 25, the announcement of the creation of the Shanghai Integrated Free Trade Zone, and the elimination of the lending rate floor for commercial loans.

"While China could previously make a choice between economic restructuring and maintaining growth, economic restructuring is now necessary to maintain growth," said the paper.

Consistent with the economic development strategy of the 12th Five-Year Plan (2011-15), China has pledged to turn itself into an innovative economy.

Meanwhile, from January to June, the added value of high-tech industries increased by 11.6 percent. High-tech industries and strategic emerging industries are displaying a development momentum.

(China Daily USA 09/06/2013 page4)