U.S. Businesses Still Bullish on South China

UNCLAS GUANGZHOU 000201 SIPDIS SENSITIVE SIPDIS STATE PASS USTR CHINA OFFICE STATE FOR EAP/CM E.O. 12958: N/A TAGS: ECON ETRD EINV ELAB CH SUBJECT: U.S. Businesses Still Bullish on South China (U) This document is sensitive but unclassified. Please protect accordingly ¶1. (SBU) Summary: U.S. companies are optimistic about the economic outlook for south China, according to the American Chamber of Commerce in South China's (Amcham) annual survey of firms. However, some results suggested their outlook was slightly less rosy than a year ago, with fewer firms stating that the investment environment had improved over the year before. U.S. firms continue to be focused on south China's domestic market, while the number engaged in services rose sharply; most firms today say that their main objective in setting up in China is to take advantage of domestic opportunities. Regulatory issues were again the most frequent complaint, followed by rising labor costs. The survey also suggested that complacency among firms about the threat of avian influenza appears to be growing. End summary. Note: Amcham will release the results of its survey on April 8. Please do not disclose this information until that date. End note. Upbeat on South China Economic Outlook -------------- ¶2. (SBU) U.S. companies in south China remain upbeat about the region's economic outlook, according to Amcham's 2008 survey of more than 400 firms. The survey found that 87 percent of firms rated the business environment in south China as "good/acceptable," "very good" or "outstanding." However, this represented a small decline from 2007 when 92 percent rated the environment in one of those categories. Further suggesting a slightly less optimistic outlook than a year ago, fewer firms said the business environment had improved over the last 12 months. In the 2007 survey, 72 percent of firms said that it had "improved greatly" or "improved somewhat." However, that percentage dropped to 60 percent this year. ¶3. (SBU) Amcham firms continue to make money in south China with little change in the percentage of firms reporting that they are profitable. In 2008, 75 percent of firms said they were already profitable and approximately 90 percent will be profitable within two years or less. ¶4. (SBU) Investment results also suggest a strong positive outlook on the region's economy. The results showed that 15 percent of firms invested more than US$50 million in south China in 2007. But according to last year's survey, only eight percent had planned to invest that much. Business conditions during the last year appear to have justified levels of investment that were higher than originally planned. Targeting the Domestic Market and Services -------------- ¶5. (SBU) U.S. businesses continue to be focused primarily on the domestic south China market and are increasingly engaged in services. Their number one goal overall for south China is to "produce goods and services in south China for the China market," and the most commonly cited reason for setting up operations in south China instead of other parts of the country was "opportunities in south China's domestic market." The increase in firms engaged in services was one of the most dramatic changes from 2007, rising more than seven percentage points to 58 percent. Regulatory Concerns and Rising Labor Costs -------------- ¶6. (SBU) The problems facing U.S. firms in the region are little changed. "Regulatory issues (Chinese government)" was the number one challenge cited by companies, reflecting the lack of transparency, widespread corruption, and weakness of rule of law in south China. Rising labor costs was the second most common complaint, replacing lack of qualified talent; the tight labor market is still a key concern, but the emphasis has shifted to cost. AI Complacency Grows -------------- ¶7. (SBU) U.S. businesses are growing more complacent about the threat of avian influenza (AI),even though south China continues to be a hotspot for AI and other infectious diseases. Only 17 percent of firms said they had made specific preparations for an outbreak, down from 46 percent in 2005. GOLDBERG