European companies in China are under pressure from slowing growth and excess capacity.

BEIJING — European companies in China are finding it increasingly difficult to make money in the country as economic growth slows and pressure from overcapacity increases, according to research published Friday by the EU Chamber of Commerce in China.

In the Shanghai metropolis, businesses even reported delays in paying wages as contracts became more difficult to enforce compared to the previous year, according to branch head Carlo D’Andrea.

“State-owned enterprises have deferred payments and are using this to de facto obtain loans from companies, especially small and medium-sized enterprises,” D’Andrea said, citing comments from members.

China’s growth has slowed in recent years amid geopolitical tensions. The downturn in the real estate sector, which is closely linked to local government finances, has also dragged down the economy.

Just 30% of EU Chamber survey respondents said their profit margins in China were higher than the global average, an eight-year low.

Back in 2016, only 24% of respondents said their profits in China were higher than the rest of the world, the report found.

This reflected the collapse of the Chinese stock market in the summer of 2015, as well as the slowdown in the property market at the time, EU Chamber President Jens Eskelund told reporters.

He said China’s current slowdown has similar cyclical aspects, but there are questions about how long and deep it will be this time.

The chamber’s latest survey had 529 respondents and was conducted from mid-January to early February.

This year’s survey included a new question asking whether members had difficulty remitting dividends back to their headquarters. While more than 70% reported no problems, 4% said they were unable to do so, and about a quarter said they encountered some difficulties or delays.

It was not immediately clear whether this was due to a new stance from regulators or typical tax audit requirements.

China’s economy is much larger now than it was in 2015 and 2016. Trade tensions with the United States have also escalated in recent years as Beijing doubled output to bolster technological self-sufficiency.

“Our members have seen, to some extent, that their ability to grow and profit in the Chinese market is [the] the correlation with GDP is getting weaker,” Eskelund said.

“What matters for foreign companies is not some overall GDP figure, 5.3% or something like that, but the composition of GDP,” he said. “If you have a GDP figure that is rising because there is more investment in production capacity, that is not good for foreign companies. But if you have a GDP that is growing because domestic demand is growing, then that’s good. “

China’s National Bureau of Statistics is due to release data on fixed capital investment, industrial production and retail sales for April next Friday.

China’s emphasis on manufacturing, coupled with modest domestic demand, has led to growing global fears that overproduction will squeeze profits.

More than a third of EU Chamber survey respondents said they had seen excess capacity in their industry in the past year, with a further 10% expecting to see it in the near future.

The civil engineering, construction and automotive industries had the largest share of respondents reporting excess capacity.

More than 70% of respondents said excess capacity in their industry has led to falling prices.

“This is not just whining from European companies,” Eskelund said. “It’s just as painful, if not more so, for Chinese companies.”

Meanwhile, Chinese authorities have stepped up high-level efforts to attract foreign investment.

Eskelund noted that Beijing’s recent visa-free policy for several EU countries gave executives the opportunity to plan trips to China a week in advance, rather than two to three months in advance.

He added that Beijing’s expansion of tax-exempt policies has also encouraged more foreign employees and their families to stay in China.

Cosmetics, food and beverage companies have benefited from China’s recent efforts to open up its market, he said, noting a record-high 39% of respondents said the local market is fully open to their industry.

China has limited the extent to which foreign businesses can own or operate in certain industries. Every year, Beijing removes some banned categories through a “negative list.”

But the EU Chamber and other business organizations said China could do much more to implement its 24 measures to improve conditions for foreign companies.

The latest Chamber poll found historically high numbers of respondents said conditions were getting worse:

• the record high suggests they are skeptical about their growth potential in China over the next two years.
• A record number of respondents expect increased competitive pressure
• record share doubts their profitability in China
• record-high plan to cut costs this year, primarily through staff cuts and slashed marketing budgets
• A record number of respondents said they missed out on opportunities in China due to regulatory barriers equal to more than half their annual income
• expectations that regulatory hurdles will decrease are at a record low

“When you compare to previous years, we see that a lot of the challenges actually remain the same in terms of predictability and transparency in the regulatory environment,” Eskelund said. “Those concerns remain largely the same.”

“What’s happening now is that companies are starting to recognize some of those pressures that we’re seeing in the local market, whether it’s competition or lower demand, that may be becoming more permanent,” he said. “This is something that is starting to influence investment decisions and how we approach local market development.”