Costs of investments in China on the rise

Despite China’s rapidly expanding global reach as an economic power, it may be losing a little of its luster as a magnet for U.S. investment dollars.

A new survey of more than 200 American businesses by the U.S.-China Business Council released this week found concerns about labor costs, investment restrictions and regulation, even though 90 percent of those responding said their Chinese operations were profitable in the past year — the highest percentage ever in the 7-year-old survey.

“Tempered optimism sums up corporate America’s view of the China business environment for the second year in a row,” said USCBC President John Frisbie in a statement accompanying the report. “While most respondents … report that China remains among their company’s top five priorities, fewer respondents this year ranked China as their top priority.”

The USCBC identified 10 challenges to greater U.S. investment, led by rising costs, competition from Chinese enterprises, administrative licensing and human resource strains.

Since the survey was first administered in 2006, cost concerns have never before taken the top spot.

“China can’t control its rising costs. [Chinese officials are] already doing everything that is within their power to keep costs from rising,” said Arthur T. Dong, an international economics professor at Georgetown University’s McDonough School of Business.

“Allowing the currency to appreciate will make its raw material imports cheaper, so this may be a step that has to be taken to stem rising costs. Currency appreciation will also inject real purchasing power to the average Chinese household as imported consumer goods become ’cheaper’ as a result of a stronger currency.”

The USCBC estimates that China is a $300 billion annual market for American companies. Without restrictive market access barriers, the figure could be much higher.

Despite the uncertain growth trajectory, business relations likely will increase, according to statistics recently released by the Ministry of Commerce. In August, China attracted $8.38 billion in foreign direct investments, up 0.62 percent from a year earlier. In the first eight months of 2013, China attracted $79.8 billion worth of foreign direct investments, a 6.4 percent increase from the same period last year.

Andrew Karolyi, a finance professor at Cornell University’s Johnson School of Management, believes that China is “being very careful about managing their growth trajectory.”

Although growth is present, it is not as quick as expected, Mr. Karolyi added.

This growth may soon expand, thanks in part to last week’s enactment of new free trade zone in Shanghai. Shanghai, which has greater accessibility to mainland China, has the potential to boost trade.