Although it remains a magnet for foreign investment, China's rising labor costs, crowded marketplace and "challenging" business-approval process are bumping the country down the priority list for US investors, the United States China Business Council said.

In its annual China Business Environment Survey released today, the Washington-based nonprofit organization said that with investment and market access restrictions continuing to be a"priority concern" for US companies operating in China, the country must act to ensure it treats China-incorporated foreign companies equally, "regardless of ownership".

The report – which comes a week after a free-trade zone in Shanghai went into operation, ostensibly allowing foreign investment into a wider range of industries – urged China to follow what it called the US' practice of equal treatment for both homegrown companies and US-incorporated foreign enterprises.

"Once a foreign company invests and incorporates in the United States, the resulting US entity is treated the same as any other US company under US laws and regulations," the report said. "This approach is one that China should adopt as well."

The report said China's value for US investors would be even larger without market barriers.

USCBC, which represents 220 US companies selling US goods and services in China, surveys its member companies each year to gauge the business climate in China. The report said that as China's economy has slowed in the past year, "many companies face business and market access issues in a market that for the past five years has been a rare bright spot in a difficult global downturn."

The survey identified 10 challenges as having high priority with US companies operating in China: cost increases, competition with Chinese companies in China, administrative licensing/talent recruitment and retention (a tie), intellectual property rights enforcement, uneven enforcement or implementation of Chinese laws, nondiscrimination/national treatment, transparency, standards and conformity assessment and foreign investment restrictions.

Despite an economic slowdown tied to the nation's embrace of consumption and move away from investment and exports, China attracted $8.38 billion of foreign direct investment in August, up 0.62 percent from a year earlier, the Ministry of Commerce said last month. The figure was below the previous month's growth rate. In the first eight months of this year, China attracted $79.8 billion of FDI, up 6.4 percent from the same period in 2012, but below the economy's overall growth rate.

USCBC said that while slowing economic growth, rising costs and "persistent operating challenges" continue to "moderate corporate optimism toward the China market," companies are "not pessimistic". Still, the report said, fewer companies in this year's survey reported that their profit margins in China are better than that of their global rates, and fewer companies report double-digit revenue increases compared with prior years.

More than 90 percent of survey respondents reported that their China operations are profitable, the highest percentage reported since the USCBC began surveying its membership, the report said.

While a growing number of companies place China as one of the top five global market priorities, the number of companies that cited China as the top priority declined, according to the survey. Just over half of survey respondents said they plan to commit more resources to China in the next year, down from 67 percent in the 2012 survey, the USCBC said.

USCBC said problems with licensing "occur at the central, provincial and local levels and affect almost every aspect of doing business in China". Meanwhile, US and Chinese regulators hold divergent views on investment and market access restrictions which "continue to be a priority concern for American companies operating in China", according to the survey.

Analysts said China still offers advantages to investors despite the issues identified in the report, but one analyst called the survey "biased from an American point of view".

"I disagree that foreign companies incorporated in the US get equal treatment as the US companies," said Ann Lee, an economics professor at New York University. "They may be supposed to have equal rights and access under the law, but in practice, that is rarely the case."

Lee, the author of the book What the US Can Learn from China, said corporate discrimination abounds in the US but the perpetrators are "just more discreet about it", for instance, in "awarding government contracts that are not even open to bidding."

China's slip in optimism, she said, "may be nothing more than American companies becoming less naive about doing business in China rather than an actual deterioration in the business environment in China. If foreign companies don't like the rising labor costs in China, then they can move their operations elsewhere."

Lee predicted that market barriers in China will "likely decrease" over time. "Today they need it to protect their infant industries that are not yet competitive," she said. "The US should tend its own garden before they complain since the US is rife with market barriers too, which is one of the largest reasons why US growth is sluggish."Sophii Weng, an economist with Standard Chartered Bank, said that despite China's rising labor costs, it will remain a "target market for many US companies, thanks to its massive population of middle-level skilled workers as well as a large supply network that very few competitors can match."

"Red tape has been a particular barrier for foreign investors" in China, Weng said. If it were to streamline its administrative processes, "US companies might be more inclined to invest" there, she said.

Harold Sirkin, a Boston Consulting Group senior partner, said rising labor costs represent China's biggest economic challenge. Although years of "very, very hefty cost increases" have been "very good for people in China in terms of wage increases," foreign companies feel the pinch as the spread between developed world prices and China prices shrinks, he said.

Given China's phenomenal growth and rise as an investment destination, its slip on priority lists was inevitable, Sirkin said. But "very few countries still have a 7.5 percent growth rate," he said. "That leaves room for optimism."

Regarding USCBC's call for China to change how it does business with foreign companies, the analyst said, "There's always concerns about regulations and approval processes from governments. China has its issues that it's going to have to work through. A decision has to get made one way or another."

Erik Gordon, a business and law professor at the University of Michigan, had the opposite view of Lee. The report, he said, "understates the growing hesitation and discouragement many US companies feel toward doing business in China."

"China does not seem to be moving in a direction that is positive for non-Chinese companies," Gordon said. "It seems to be moving the opposite direction, so it may be a more difficult market in five years, not a more attractive market."

Regarding the perception that China favors its own companies in licensing, he said, "has a direct effect of making it more difficult to to do business in China and the indirect effect of making it clear that a company should not expect fair treatment in any matter from the government – in a country in which the government has a lot of control over business."

Contact the writer at michaelbarris@chinadailyusa.com