As development slows and pressures from overcapacity mount, European businesses in China are finding it more difficult to turn a profit, according to a poll issued on Friday by the EU Chamber of Commerce in China.

According to chapter director Carlo D’Andrea, company members in Shanghai even complained payment delays since it was harder to enforce contracts than it was the year before.

“State-owned enterprises, they postponed payments and they are using this in order to get some defacto loans from companies, especially from small, medium enterprise,” D’Andrea said, citing members’ comments.

China’s economic development has decelerated in the wake of geopolitical unrest. The economy has also been negatively impacted by a downturn in the real estate market, which is closely related to local government budgets.

An eight-year low, just 30% of respondents to the EU Chamber study stated that their profit margins were greater in China than the global average for their firm.

According to the research, in 2016, just 24% of participants claimed that their profit margins were higher in China than they were worldwide.

EU Chamber President Jens Eskelund told reporters that this was a reflection of the summer 2015 collapse of the Chinese stock market as well as the downturn in the real estate market at the time.

He said that while there are uncertainties over the length and depth of the present downturn in Chinese economy, it has comparable cyclical characteristics.

529 people participated in the Chamber’s most recent poll, which was conducted between mid-January and early-February.

One new item on the form this year asked members if they had any trouble sending profits back to their headquarters. Over 70% of respondents indicated there were no problems, 4% said they couldn’t do so, and over 25% said there were some problems or delays.

Whether this was because of standard tax audit obligations or a new regulatory position was not immediately apparent.

China’s economy has grown significantly from 2015 and 2016. In order to strengthen its technological self-sufficiency, Beijing has increased its manufacturing sector, which has led to a rise in trade disputes with the United States.

“To a certain extent, our members realised that their capacity to expand and generate revenue in the Chinese market—[the] relationship with the GDP number is waning,” stated Eskelund.

“What is important to foreign companies is not necessarily sort of a headline GDP figure, 5.3% or whatever, but the composition of GDP,” he said. “If you have a GDP figure that is growing because more investment is being made into manufacturing capacity, that is not good for foreign companies. But if you have a GDP that is growing because domestic demand is growing, then that is a good thing.”

Next Friday marks the publication of April’s fixed asset investment, industrial output, and retail sales data by China’s National Bureau of Statistics.

The world is becoming increasingly concerned that China’s concentration on manufacturing and low domestic demand may result in lower profit margins from overproduction.

In the recent year, nearly one-third of respondents to the EU Chamber study reported seeing overcapacity in their industry, and another 10% predicted it would occur soon.

The largest percentage of respondents who reported overcapacity were from the civil engineering, construction, and automotive industries.

Over 70% of those surveyed claimed that price reductions were caused by overcapacity in their sector.

“This is not just European companies whining,” Eskelund said. “This is equally, if not more painful, for Chinese companies.”

In the meanwhile, Chinese authorities have increased high-level initiatives to draw in outside capital.

Eskelund pointed out that CEOs now have the freedom to schedule China travels just one week in advance rather than two or three months in advance thanks to Beijing’s new visa-free policy for a number of EU nations.

He continued by saying that more foreign employees and their families are choosing to remain in China as a result of Beijing’s expansion of tax exemption schemes.

He pointed out that a record high of 39% of respondents stated the local market was totally open in their business, indicating that enterprises in the food and beverage and cosmetics industries have profited from China’s recent attempts to expand its market.

China has imposed limitations on the ownership and operation of foreign companies in several industries. Beijing uses a “negative list” to exclude several categories every year.
China can, however, do much more to put its 24 initiatives for bettering the business climate for international enterprises into effect, according to the EU Chamber and other industry associations.

According to a record high percentage of respondents to the Chamber’s most recent study, things were getting worse:

• a record number of respondents expressed worry about their capacity to develop in China over the next two years, and a record number anticipated more competition. a record percentage also expressed doubt about their profitability in China.
  a historically large effort to reduce expenses this year, mostly through manpower reduction and marketing budget reduction
• a record numbers of respondents claimed that regulatory obstacles in China prevented them from taking advantage of possibilities, the value of which accounted for more than half of their yearly income.
• a record low in anticipations of a reduction in regulatory barriers

“When you compare to the previous years we can see that a lot of the concerns actually remain the same regarding the predictability, the visibility of the regulatory environment,” Eskelund said. “These concerns pretty much remain the same.”

“What is happening now is that companies are beginning to realize some of these pressures that we have seen in the local market, whether it’s competition, whether it’s lower demand, that they are taking on perhaps a more permanent nature,” he said. “That is something that is beginning to impact investment decisions and the way the go about thinking about developing the local market.”

(Adapted from CNBC.com)