While optimism is growing in several areas, profit expectations are falling which indicates lower margins due to increased production costs and increasing competition.
The Chinese economy grew by 8.7 per cent last year thereby outperforming all other major markets in the world. Massive fiscal stimulus financed by huge bank lending were factors behind the growth, which is now supported by increasing private consumption and improved export figures.
“When Nordic and German multinational companies look into the crystal ball for 2010 there is now doubt that China is a top priority in relation to other markets," says Fredrik Hähnel, a client executive at SEB in China who is also responsible for the China Financial Index survey and report.
He notes that companies now move back to an offensive strategy in China and 83 per cent of the companies in SEB’s survey say they plan for continued investments during the coming six months. 20 per cent of those are planning major investments.
Lower profits indicate deteriorating margins
However, more companies than previously now expect lower profits, which indicates deteriorating margins.
”More than half of the companies in our survey have manufacturing in China. Based on discussion with them, and based on official statistics, we can see that manufacturing costs have gone up, mainly due to increased costs for raw material,” Hähnel says.
The companies also expect an appreciation of the Chinese currency against the dollar going forward. This in combination with increased competition and oversupply in almost every manufacturing sector limits the ability of firms to raise the prices of final goods.
48 per cent of respondents in SEB’s survey see lower customer demand as the greatest cause for concern the coming six months, while 13 per cent see lack of qualified labour as their main concern.
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