U.S. firms lower China expectations as growth slows, scrutiny rises

By Matthew Miller

BEIJING (Reuters) - U.S. companies, which have led Western investment in China over the last 35 years, are scaling back their expectations and business plans in the face of slowing growth, heightened competition and increased regulatory scrutiny from Beijing.

"Clearly, there's moderating optimism," said John Frisbie, president of the U.S.-China Business Council (USCBC). "There’s also a lot of policy uncertainty in the business community."

The USCBC estimates U.S. business in China is worth about $350 billion a year, a figure that includes exports, as well as domestic and offshore sales by U.S. affiliates located in China.

That market may be growing at about 10 percent a year, but with China’s top-line gross domestic product growth expected to slow to 7.4 percent this year, the message from executives speaking on the sidelines of an APEC regional summit in Beijing was that many big investors are holding fire on fresh commitments.

U.S. foreign direct investment for the first nine months of this year declined 24.7 percent, China's Commerce Ministry said, while the American Chamber of Commerce in China noted in its annual survey that U.S. firms are "increasingly cautious".

"The world knew, and always should have known, that an economy of this size is not going to grow from 12 to 15 percent for eons," said Douglas Oberhelman, Chief Executive Officer of Caterpillar Inc (CAT.N), which operates 26 factories and, with distributors, employs 25,000 people in China.

China's massive real estate-driven investment boom, which at its height outpaced economic growth by more than three times, has created a glut for heavy equipment and mining machines, spurring cut-throat pricing among many local manufacturers.

Caterpillar, despite recording flat sales, is "not in a de-investment mode", Oberhelman said. The Illinois-based company's China operations remain profitable, while local capacity remains "in line with where we want to be", he added.

"It may be a while until we increase investments," Oberhelman said.

Wal-Mart Inc (WMT.N), which has been fined by regulators and come under fire from Chinese media over a handful of food scandals, is continuing to build distribution centres and open stores to attract more of China's urban shoppers, said Scott Price, CEO for Walmart Asia. "We're patient and we’re willing to continue to invest," Price said.

REGULATORY PRESSURE

China's aggressive use of its 2008 Anti-Monopoly Law is among the most contentious issues facing foreign business, after its three anti-trust regulators launched a flurry of investigations over the last two years targeting foreign automobile manufacturers, food producers and technology firms.

Chipset maker Qualcomm Inc (QCOM.O) and software giant Microsoft Corp (MSFT.O) are among the U.S. companies under scrutiny.

Critics have accused the Chinese government of using its regulatory authority to bolster domestic firms, an accusation the regulators have repeatedly denied.

"There are areas where China is clearly set on developing national champions, and in those areas it has made it more difficult for U.S. companies and Western companies to navigate the regulatory regime," said Myron Brilliant, executive vice president of the U.S. Chamber of Commerce. "It's not as easy a place to do business as we would like it to be."

Many U.S. executives hope that a Bilateral Investment Treaty (BIT) under negotiation may represent an important step forward. The BIT would help lower investment barriers for many products and services by adopting a so-called "negative list", a finite list of restrictions and prohibitions on foreign investment.

In October, Caterpillar's Oberhelman, Wal-Mart's Doug McMillon, Coca Cola's Muhtar Kent and 47 other chief executives of U.S. multinationals signed a letter urging the Obama administration to prioritize BIT discussions.

On Wednesday, U.S. President Barack Obama and Chinese President Xi Jinping identified the treaty as a top priority, with proposed "negative lists" being exchanged early next year.

"There's a new norm here," said Brilliant of the U.S. Chamber. "We're all getting used to lower profits and lower margins. As long as there's fair competition, transparency, and rule-of-law, we're good."

(Editing by Alex Richardson)