China business optimism hits a bump in Q2

Beijing - In the wake of sovereign debt issues in the eurozone and the inflation pressure in domestic economy, business optimism in mainland China has slumped to a balance of +43% in the second quarter of 2011, falling by 15% from a quarter ago, according to the Grant Thornton International Business Report 2011 (IBR).

Majority Chinese businesses remains confident on the export prospect during the second quarter, in spite of continuing concerns over the future of global recovery. The survey funds that levels of optimism on export prospect amongst Chinese businesses climbed by 15% from a quarter earlier, while confidence over profitability faltered, tumbling 9% from Q1, under the combined pressure from rising costs of raw materials and workforce.

The latest finding also uncovers that mainland Chinese businesses still consider cost of financing (30%) as well as shortage of skilled labours (32%) as major barriers to expansion during the latest three months. As tightened policy lingers on, 31% businesses expect increasing difficulty in financing, marking a y-o-y increase of 19%.

Xu Hua, Chairman of Grant Thornton Jingdu Tianhua, said, “Business optimism in China is battered partly because of concerns over intensifying inflation. Fuelled by rising food prices, the CPI in June is likely to hit 6%. The worry amongst businesses there is that inflation will continue to rise and that the soft landing is hard to achieve. Our research tells us that over half the businesses in China (56%) expect to increase prices, and with tight labour markets also making it difficult for those businesses to keep wages down, such fears look warranted.”

Xu Hua pointed out: “In the past six months, some small-and-medium-sized enterprises have been hit hard in the face of shortage of orders, rising costs, and difficulty in financing, which we expect to relieve in future, especially the issue of financing. Meanwhile, we suggest businesses strengthen credit management, strive for transformation, as well as fill up the insufficiency in technology development and brand building.”

Global business optimism still gloomy

With the impact of sovereign debt issues in the eurozone still to be felt, the outlook for business remains uncertain.

The research reveals that across many regions there has been a dramatic quarter on quarter decline in levels of business optimism. Although levels of optimism remain higher now than a year ago, the revival in optimism has stuttered badly in the second quarter of 2011. The trend is most acute in Latin America, where optimism fell 15% over the last quarter. The BRIC group of economies fell collectively by 13%. Globally, business optimism has fallen by 3% from the previous quarter.

Ed Nusbaum, CEO of Grant Thornton International, said: “In global terms the past three months have been challenging and business optimism has been hit hard. Companies are feeling the effects of the unrest in the Middle East and the subsequent volatility in oil and commodity prices. In addition, the earthquake and nuclear disaster in Japan caused huge disruption to supply chains. Eyes are now fixed on the horizon to determine if this is a bump in the road for optimism or the beginnings of a trend. Clearly governments, and international organisations such as the IMF, must demonstrate that they are able to steer the economy and make credible decisions. If businesses are left unconvinced that their leaders can deal with these issues, what is currently a stutter has the potential to become an economic stall.”