MOMENTUM: U.S. companies like General Motors continued their bull run last year on the back of China's economic boom    Photo by CHEN FEI

Doing business in China is no easy feat at the moment-at least not as easy as it was a few years ago. Surging labor costs, high environmental protection requirements and rising tax expenses have put many foreign enterprises in a tight spot.

However, U.S. companies in China have reported widening profit margins in the past year and many are planning to expand throughout the country, according to the 2008 White Paper on American Business in China released by the American Chamber of Commerce in China (AmCham-China) in Beijing on April 28.

According to the survey on the business climate for American firms in China conducted by the chamber, 74 percent of the respondents said they were either profitable or very profitable in China last year, exceeding the 70-percent ratio of the previous year. Among those, 70 percent of the surveyed medium and small-sized enterprises generated profits in China, slightly eclipsed by the 84-percent ratio of large enterprises.

Of the companies, 88 percent witnessed increased revenues compared to the previous year, and 65 percent improved the operating margins of their China operations.

"In a shrinking world, the future of the U.S. economy is linked to the competitiveness of American companies globally, especially in China, the world's largest emerging market," said the white paper. "With a population of 1.3 billion, an emerging middle class of 150 million, the global competitiveness of U.S. firms will increasingly be defined by how they fare in China."

In recent years, the Chinese Government has downplayed foreign participation in low value-added and environmentally damaging industries. Beside this, the burgeoning domestic economy has also fostered a fiercely competitive business environment, which is feeding the increased costs. Of the respondents, 65 percent confessed to substantially or slightly-increased competitive pressures from Chinese firms.

Nevertheless, according to the survey, an overwhelming 89 percent of American firms remain "very optimistic" or "cautiously optimistic" about their business performance in China. Only 15 percent of surveyed U.S. firms in Shanghai and 7 percent of those in Beijing had considered relocating to other Chinese cities or out of the country to save costs.

The Chinese market will maintain its attractiveness for investments and will further prop up expansion of foreign firms. Growing domestic consumption, strong inflows of foreign direct investment and a stable business environment will power the economy and ensure growth prospects remain robust. Recent economic reverberations, ignited by the U.S. economic slowdown, may undermine China's net export growth, despite a lower export dependency than other economies.

While China appears set to continue as a strategically important manufacturing base thanks to its domestic market potential, more than two thirds of the companies agreed that rising costs are eroding its competitive advantage in global markets.

The survey found that, for manufacturers, the seemingly endless supply of low-cost unskilled labor may be approaching its limits. The competitive labor market also poses difficulties for export-oriented manufacturers, especially in low-margin sectors such as toys, garments and shoes.

Wages for factory workers in China have been on the rise, but that is less of an issue for most U.S. companies, relatively few of which manufacture low-margin products, such as shoes and textiles, for export, according to an article in the Wall Street Journal.

Of the surveyed companies, 37 percent said their top operating challenge was attracting, developing and retaining managers and technical staff-greater than such issues as regulation, bureaucracy and piracy. "Demand for skilled, qualified staff still outstrips supply and this leading operational constraint shows no sign of easing in the near term," J. Norwell Coquillard, Chairman of the AmCham-China in Shanghai told the press.

The simmering U.S. trade imbalance with China is stoking protectionist sentiments in the United States in recent years. But the chamber recognizes that rapid economic growth in China and other countries also serves the interests of Americans by adding to the growth of the global economy and sparking greater demand for U.S. products and more jobs for U.S. workers. Moreover, American consumers can also benefit from lower-priced imports.

AmCham-China believes that the best way to address the U.S. trade deficit with China is for American companies to capture more market share in China. The white paper also advises against enacting legislation that attempts to change the terms of trade with China through currency realignment in the hope of redressing trade balance issues.

"With slowing growth in the United States, the focus needs to be on enhancing America's overall competitiveness rather than seeking defensive protectionist solutions," said James M. Zimmerman, Chairman of the AmCham-China on the news conference for the release of the white paper.

AmCham-China attached great importance to efforts of the U.S. Government, whose priorities for China should include "more resources supporting U.S. companies to grasp Chinese market opportunities; more resources to meet the projected increase in Chinese demand for business and tourist visas; and the ongoing review of export controls and license requirements to ensure they reflect market realities and facilitate commercial trade."

"The bilateral economic relationship stands on solid footing, with trade climbing steadily to an all-time high and an unprecedented level of dialogue between the U.S. and Chinese governments," said James M. Zimmerman. "But if we are to continue this positive momentum, growing protectionist tendencies in both countries must be resisted and openness reinforced," he added.

"The Chinese currency has become a touchstone for broader anxieties about competition from China," said the white paper. "However, the value of the renminbi is not the primary cause of the U.S. trade deficit with China, and the United States should not expect its appreciation to have a large impact on its trade difficulties with China. Because much of China's manufacturing consists of assembling parts made elsewhere, a stronger yuan would make these components cheaper to import, thus limiting the price impact on completed products for export."

Renminbi appreciation against the U.S. dollar is not the only answer, according to some.

"Depreciation of the U.S. dollar against the euro, the Japanese yen and the renminbi will assist U.S. exports and help address its multilateral trade deficit, but the bilateral deficit will persist," said J. Norwell Coquillard.