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Compliance becomes hotter issue for U.S. firms in China: report

By Adam Jourdan

SHANGHAI (Reuters) - U.S. companies in China placed greater focus on compliance last year after several high profile probes into corruption and high pricing, but rising costs and a skills shortage remained their main concerns, the American Chamber of Commerce in Shanghai said in its annual report.

The handover of power to a new generation of Chinese leaders last year raised uncertainty among U.S. companies over the political environment, but they were less worried than earlier about the risk of a slowing Chinese economy, according to the report released on Tuesday.

China is the world's second largest economy and posted 7.7 percent GDP growth in 2013, slow by Chinese standards but far quicker than stagnant growth in Europe and the United States.

Issues of corporate corruption caused ripples last year after a series of investigations against firms from British drugmaker GlaxoSmithKline Plc (GSK.L) to U.S. milk powder maker Mead Johnson Nutrition Co (MJN.N).

This pushed compliance up the agenda, with 44.2 percent of the roughly 400 firms polled saying there was a greater focus on this area last year, up from 36.6 percent who said the same in 2012. Over four in 10 said they would increase compliance spending over the next year.

"Despite optimism and growth, challenges in the business and regulatory environment in China continue to hinder business," the report said.

U.S. firms turned attention from international corruption laws to China's own domestic legislation, with 46.8 percent of firms saying it was the most important area of legal compliance. That was up markedly from 31.5 percent the year before.


The top five challenges cited by U.S. firms were still high costs, a skills gaps, competition from local rivals, an immature market and corruption.

Rising costs was cited by 89 percent of firms as a hindrance to their business in China last year.

Human resources was the second most cited problem, with rising wages, an ageing population, and greater social mobility making it more difficult to recruit and retain staff.

"The stand out in Asia is really China, where there is a consistent skills shortage," Simon Lance, regional director for China at recruiting expert Hays Plc (HAYS.L), told Reuters in an interview last week.

Slower Chinese growth meant that fewer firms reported a growth in annual sales, with 67 percent seeing an increase in revenue last year compared to 71 percent in 2012. This was the fourth year in a row the figure had fallen back.

However, profitability remained a bright spot, with 74 percent of firms in profit for the year, edging up slightly from a year before, according to the report.

Services overtook manufacturing for the first time as the main driver of sales, accounting for around 52 percent of firms' revenues, up from 41 percent the year before. Manufacturing slipped 10 percentage points to 37 percent.

Concern over initial property rights (IPR), a long-running complaint from foreign firms in China, remained high on the agenda, although the proportion who said it hindered their business in the country fell from 63 percent to 56.3 percent.

(Reporting by Adam Jourdan; Editing by Simon Cameron-Moore)