American Business Warns of Slowdown in China

American companies that do business in China are the latest group to warn that the economy there has become troubled. The American Chamber of Commerce in the People’s Republic of China, or AmCham China, released a survey recently. Among its conclusions:

China continues to rank among the top three global investment venues for the majority of AmCham China companies, according to the 2012 Business Climate Survey, which tallied responses from 390 members. Although a smaller percentage of respondents in this year’s survey selected China as their number-one global investment priority compared to a year ago.

China, once the clear favorite as the target of growth for their overseas expansion, has lost some of its luster. The members of AmCham China have grown worried for reasons other than outright growth. China has lost much of its competitive edge because of the higher cost of labor. That will pinch the profits of U.S. companies doing business there, even if the nation’s economy continues to expand.

The research data confirms what other data already have shown. China’s gross domestic product, red hot for more than a decade, has begun to expand less rapidly. PMI numbers have flattened at mediocre levels. China experts worry that the new middle class, which is supposed to be a major engine of internal growth, has been buffeted by drops in real estate prices and concerns about job security.

Another side of the problem is that China’s workers have had success as they have lobbied for higher wages. Some of these wage increases have been supported by the national government as a way to improve consumer spending. The pressure has become relentless at a number of large companies, like Foxconn, which supplies manufacturing services to Apple (NASDAQ: AAPL) and other U.S. electronic companies. The trend eventually will cut the gross margins of these American corporations.

The drop in consumer demand my be more evident in the Chinese car market than in any other sector. Global car companies have invested billions of dollars in the People’s Republic, based on the belief the largest market in the world will continue to grow in double digits. Rather, sales may contract in 2012.

The AmCham China research is among the most important indications of China’s stumbling growth. American firms have been rushing into the market at ever-increasing speed over the past several years. Now, they have begun to question their decisions to do so.

Douglas A. McIntyre