Business optimism in China wanes as concern over rising inflation deepens

10 January 2011

Levels of business optimism in mainland China have taken a dramatic fall over the past 12 months partly caused by the growing inflation concerns, according to the Grant Thornton International Business Report 2011 (IBR). Despite faltering optimism, businesses in mainland China continue to take a long term view. A balance of +69% of mainland Chinese businesses expect to increase revenue in 2011, +52% expect to increase employment, +61% expect to increase expenditure on research and development (R&D) and +47% expect to increase investment in plant and machinery.

In the meantime, +28% businesses, which nearly double last year’s figure, expect export to rise in 2011 after experiencing the surging demand during the holiday season as global economy gradually recovers.

Business optimism in mainland China has slumped to a balance of +42% in 2011, from +60% a year ago, representing the largest negative swing in the IBR survey. By comparison, the report reveals that businesses in emerging markets across Latin America lead the way for business confidence with a balance of +75%. The report indicates that it is impossible to ignore the knock-on effects right across the region since Brazil won the right to host the 2014 World Cup and the 2016 Olympics.

Xu Hua, Chairman of Grant Thornton Jingdu Tianhua, says, “The warning lights started to flash for the Chinese economy in 2010. A CPI of 5.1% was recorded in November, increasing the likelihood of further interest rate increases. Low costs, particularly in labour, have powered the Chinese economy over the past few years, so it is of little surprise that business confidence is being hit by these new challenges.”

In the short term, the rising cost of commodities and human recourse pose new challenge for Chinese businesses. According to the survey, +57% businesses anticipate increased selling prices in 2011, which records the highest number since 2006. Xu Hua believes that privately held businesses are more likely to increase selling price when they experience a rise of the raw materials. However, for more consolidated or SOE dominated industries such as auto or chemical, the businesses are less likely to increase its price due to government price control or lack of bargaining power over end consumers.

In the long term, Xu Hua points out, “China is about to launch the 12th Five Year Plan which highlights a more balanced and sustainable economic growth instead of the pursuit for high GDP growth. With the government’s support to the seven emerging industries with strategic importance, China businesses are growing to put more focus on innovation of technology and products. We find an increasing number of privately held businesses currently in the traditional industries are seeking more opportunities in the field of new energy or environmental protection. We believe the faltered economic outlook has not curbed Chinese businesses’ intention to increase R&D, infrastructure investment and their confidence in long-term development.”