US companies are cautiously optimistic about future prospects in China, but face growing business and market access issues, according to an annual survey by the US-China Business Council (USCBC)Slowing economic growth, rising costs, and strong domestic competition are among the top ten business and market concerns.

  1. Cost increases 
    Rising costs have been a concern in China for many years, but this year's survey suggests the increases may have outpaced company expectations of tolerable expense increases. This is the first time rising costs have ranked number one in USCBC's survey and it is the only issue characterised as having "deteriorated" over the last year. 

    As one company put it, "costs, particularly in major metropolitan areas, are moving to a point that China is no longer world-competitive".  

  2. Competition with Chinese companies in China
    As has been the case in past USCBC surveys, most companies report that they have a variety of competitors in China, including Chinese state-owned enterprises (75%), Chinese non-state-owned and private companies (86%), and US and other foreign companies (89%). In short, the discriminatory treatment problem is not just an SOE problem. It is a problem of Chinese companies versus foreign and foreign-invested companies. 

    Addressing concerns about an unlevel competitive playing field provides a good example of the vital importance of solutions that focus on the right problems. Focusing simply on state ownership misses the similar benefits that many non-SOE companies also receive. 

  3. Administrative licensing
    Administrative licensing-which refers to the array of licenses and government approvals required to do business in China-has been at or near the top of USCBC's survey results for eight years, and it remains one of the most complex challenges to address.

    Almost 70% of respondents in this year's survey indicated they had experienced challenges with licensing in China. The most frequent problems came in getting approval for products to be sold in the market, expanding operations, and securing approvals of foreign investments more generally. These problems are occurring not only at the central government level, but also at the provincial and municipal levels. 

  4. Human resources
    Demand for qualified workers continues to outstrip availability, resulting in significant competition among companies-Chinese and foreign-for employees. One way in which companies have usually sought to retain employees is by increasing wages and salaries.

    Despite these still significant year-on-year wage increases, most companies report that they plan to expand head count for their China operations in 2014 and that hiring more staff is the top vehicle through which the company plans to expand their resource commitment in China. 

  5. IPR enforcement
    While the protection of intellectual property rights (IPR) has shown modest improvements in recent years, the vast majority of companies (98%) still say IPR enforcement is a concern for them.

    A shifting IPR landscape and continued issues with enforcement have led a majority of respondents to state that IPR protection has gone unchanged" from a year ago. Similar to last year's survey, 41% said the IPR environment had "somewhat improved," while only 4% cited deterioration. 

    For IP enforcement more broadly, China's courts continue to gain momentum as a viable channel for addressing problems, though not in all cases. More companies reported they have brought court cases in China, with increasingly successful outcomes: just over 20% of companies reported that they had brought a case with a successful outcome.

    While there is no single fix to these problems, at a minimum China should adopt a tougher deterrent to IP theft, that is, the international standard of allowing criminal penalties (not just civil) in cases of IP theft on a commercial scale. 

  6. Uneven enforcement or implementation of Chinese laws and regulations
  7. Nondiscrimination/national treatment
    Challenges 6 and 7 are closely related and deal with how foreign and foreign-invested companies are treated in China versus their domestic competitors. In essence, respondents have indicated that rules and regulations are not applied consistently or equitably in China, and that their companies often are not treated the same as Chinese companies with regard to regulation and implementation.

    There are many changes Chinese regulators can make to solve the problems created by uneven enforcement and unequal treatment. In its 2013 Statement of Priorities, USCBC's board of directors recommends two important actions: ensuring equal treatment in licensing for all companies operating in China regardless of ownership, just as the United States does, and ensuring equal treatment in government procurement for all legal entities in China, regardless of ownership.  

  8. Transparency
    Transparency is a broad subject that ranges from the public release of draft laws and regulations for comment to fair and open government decision making. As such, it is a core element of a well-functioning licensing regime in that greater transparency increases understanding about the licensing process, reduces the potential for bureaucratic mismanagement and corruption, and speeds time to market for products and services.

    China's central government has made inconsistent improvements in rule-making transparency over the past several years. USCBC's report on China's transparency efforts goes into further details about the transparency records of the key ministries and agencies in China affecting business operations.

    China should fully implement its commitment to publish all draft trade and economic-related laws, administrative regulations, and departmental rules for a full 30-day period, but it should also consider going further by posting draft regulations on a designated website for a 60- or 90-day public comment period. In addition, China's central government should ensure that laws and regulations, once finalised, are consistently interpreted and implemented nationwide. 

  9. Standards and conformity assessment
    China's standards and conformity assessment regime raises concerns for companies in a variety of sectors-as they set the ground-rules that dictate if and how companies and products can enter new markets. 

    This year's survey shows that companies remain concerned with a number of long-standing issues, such as China's use of unique standards for goods and services sold in its market and the inability of conformity assessment service providers to test goods for China's market. Both challenges significantly raise costs for American companies trying to sell to China while also limiting the access that Chinese consumers have to the fullest possible range of the latest products and services.

    As noted in the 2013 USCBC Board Statement of Priorities, China should use global standards as the basis for Chinese standards wherever practical and adopt a fairer, more equal, and transparent market-led approach to standards setting and development.  

  10. Foreign onvestment restrictions
    China's Catalogue Guiding Foreign Investment maintains foreign ownership restrictions in nearly 100 manufacturing and services sector categories in China. Additional restrictions on foreign investment appear in other policies and regulations.

    Key sectors for reduced foreign ownership restrictions include financial services, agriculture, cloud computing, data centers, health insurance, hospitals, refining, petrochemicals, audiovisual, and other media industries.

    Both the Chinese and US governments should seek to conclude a BIT incorporating these elements as quickly as possible. 

Click here to see the full report from the USCBC's annual survey.