SPECIAL FEATURE

Chamber's new 2006 Position Paper and Business Confidence Survey reveal an overall positive outlook in the European business community, but worries about transparency and IPR protection persist

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The European Chamber's Position Paper is published annually and represents the overall view of European companies doing business in China. It details the key concerns and recommendations of each of the 26 Working Groups with regards to WTO implementation issues, trade issues beyond China's WTO commitments, regulatory issues and broader policy-related issues. Each year, the positions and recommendations of the Working Groups have been further refined so that the most pressing concerns and recommendations are clearly and succinctly stated. The Position Paper is presented to the Chinese government and EU authorities each year with the aim of improving the investment climate in China. The following passage is an edited version of the Position Paper's Executive Summary which focuses on the results from the Chamber's Business Confidence survey.

Looking good

This year's survey reveals that the geographic distribution of companies has changed over the past year. In 2004, 71 percent of members resided in Shanghai, Beijing and Guangzhou. In 2005, however, this figure decreased to 57 percent. A major reason for this change is due to the fact that EU companies are now starting to invest in the relatively less developed parts of China, which offer new markets as well as lower labour costs.

The number one reason for establishing operations in China for European companies was the "Production of goods in China for China". The fact that 30 percent of companies chose this as the number one reason suggests that companies no longer use China simply as a manufacturing base. It highlights the importance of China's domestic markets and the fact that EU companies are increasingly directly involved in developing China's domestic markets. "Establishing a regional base" and "Satisfying requests from consumers/partners in home country" were the other two most popular reasons for establishing operations in China. Lower production costs, a top-three reason last year, were seen as less important this year. This also supports the notion that the rise in production costs in major cities such as Beijing, Shanghai, and Guangzhou is encouraging companies to move elsewhere.

The Chamber survey also provides insight into its members' perceptions of the market. Overall, members have a very positive market outlook. The vast majority of respondents, 92 percent, are optimistic about the overall business outlook in China. The majority of members believe that China's economic reforms have contributed to an improvement of the business environment.

In terms of profitability, 83 percent of respondents expect to be profitable in 2006. However, of those whom do not expect to be profitable in 2006, 71 percent do expect their operations to become profitable within three years. Companies with a longer operating history in China are more optimistic about the profitability and the future outlook thus suggesting again that investments in China are for the long term. Although 23 percent of respondents generated a net loss in 2005, only seven percent expect to generate a loss in 2006.

Crunch time

On December 11, 2006 the five-year accession period for China's entry into the WTO will come to an end. It is commonly agreed that China has implemented the majority of commitments on, or ahead, of schedule, and there is little doubt that WTO accession has brought many benefits to both China and the EU. The Chinese government also recognizes that WTO accession has supported continued economic growth.

However, European companies still face numerous obstacles in China. The business survey revealed that the most common obstacles are government regulation/transparency and IPR protection. China has made substantial efforts to implement WTO rules and regulations, but some members feel that more can be done. Although 71 percent of the respondents this year believe that China is willing to adhere to the principles and spirit of the WTO, 21 percent believe that China is only willing to implement specific commitments such as those explicitly set forth in the accession document. While Chamber members appreciate that market reforms take time, specific regulations and policies that discriminate against foreign companies in industry causes unease. Members are hopeful that Chinese officials will increasingly adhere to the WTO principles of non-discrimination, freer trade and predictability when developing policy.

Given China's geographical size and population, the transition from a planned economy to one driven by market forces is an enormous undertaking. China's ability to implement wide-ranging institutional adjustments has led to a 25-year period of unprecedented economic growth. While the Chamber appreciates the immense challenges faced in the modernisation of China's regulatory environment, Chamber members feel that an increase in transparency will bring even further success to China's development. However, in this year's business survey, Chamber members identify a lack of transparency as the largest obstacle to doing business in China. It is not uncommon for drafts of new laws and regulations to be circulated only to Chinese partners of joint ventures or selected companies with very short timeframes to reply. In addition, the time span between publishing new legislation and implementation often tends to be too short to allow companies to ensure timely compliance.

Despite recent progress and an increasing awareness of the importance of IPR, weak

IPR protection is still regarded as one of the key challenges of doing business in China. This opinion is reflected in the Business Confidence Survey, with only nine percent of respondents never having encountered IPR protection-related problems in China. Effective enforcement of IP rights remains a major challenge with 67 percent of the survey respondents stating that the present enforcement of IP laws and regulations in China does not act as an effective deterrent. While the Chamber welcomes China's efforts to crack down on piracy and, in particular, recent efforts to target not only the sellers but also the manufacturers of counterfeited products. In order to effectively tackle infringements of copyrights and trademarks, more deterrent enforcement mechanisms are required. For industries in which counterfeited products pose a direct threat to the health and safety of consumers, no criminal threshold should be applied in determining prosecution.

The Position Paper thus provides key recommendations to overcome these challenges of doing business in China. All of the Paper's key recommendations are not only directed at the Chinese government but also delivered to the European Commission in order to improve and support their dialogue with China. They are part of the Chamber's ongoing assessment of market access in China and represent the views of each of the Working Groups. They are intended to be constructive and provide further input into the Chamber's dialogue with the Chinese government.