Chinese businesses optimism sharply dampened as concerns for global downturn uplift

In the face of the aggravated debt crisis among the western economies and the lingering inflationary pressure in domestic market, business optimism in mainland China has dropped drastically to a balance of +14% in the third quarter of 2011, falling by 44% and 29% from Q1 and Q2 respectively, according to the Grant Thornton International Business Report 2011 (IBR). In general, business optimism around the global witnesses an apparent slide. The optimism of business owners in mature markets has been hit particularly hard; in North America optimism has dropped by 40%, and in the EU by 34%.

Shortage of orders is the largest concern

The research reveals that 38% Chinese businesses consider orders shrinkage as the largest concern. In comparison with the second quarter, the confidence for export prospect declined 9%, as the debt crisis and economic uncertainty in the two major export partners for China have damaged the situation for export-oriented companies. Statistics from the National Bureau of Statistics indicates the drop of PMI in August, with the export indicator of PMI sliding to a critical point.

Xu Hua, Chairman of Grant Thornton Jingdu Tianhua, said, “The aggravation of Euro zone sovereign debt crisis and the postpone of a third round of quantitive easing in the United States increased the possibility of a double-dip of global economy whereas dampened the business confidence in China. However, the robust economic growth and the policy control taking effect made it unnecessary for over pessimism. We suggest businesses keep cautious while conducting structural transformation proactively for the upcoming rebound. Export-oriented businesses are also suggested to shift focus to domestic market for opportunities.”

Fundraising and labour costs remain high

The new findings also uncovers fundraising difficulty remains the most critical challenge for Chinese businesses. 31% interviewee labels fundraising costs as the most constraint for growth, while 38% expect the difficulty will mount in the coming 12 months. Xu Hua said, “Privately-held businesses are in need of government support, including tax relief and fundraising channel, to ensure the cash flow for corporate development and operation. Government should support them, to create a stable and safe environment for the businesses to survive the difficulties.”

The research demonstrates shortage of labour will become a long-term challenge for mainland businesses as it will further push up the labour costs. Statistics for the second quarter shows the inadequate supply of labour, as 100 positions can only attract 93 candidates on average. Therefore, 60% businesses plan to increase salary in coming 12 months, and 8% expect a salary increase at a higher rate than inflationary rate.

Xu Hua pointed out, “Mainland businesses are greatly compressed in profitability in the face of shortage of orders and rising costs. They should improve innovative capability to develop more competitive products and services besides rely on government support.”