China Businesses Show Cautious Optimism on Economic Prospects

China business optimism on economic prospects increased modestly to +25% with +6% up from the level in Q4-2012, according to the latest Grant Thornton International Business Report 2013 (IBR).


Although China businesses are optimistic on the economic outlook, development pressure still exists given current structural problems with the economy.


The survey also suggests global business optimism improves significantly, climbed to +27%, up from +4% of Q4-2012, with sharp increase in mature markets including the US (+31%).


Lower expectations on revenue and profit
While China businesses are cautiously optimistic on economic prospects, the survey indicates that the respondents are more conservative regarding to expectation on revenue and profitability.


Business expectations for revenue and profit growth fall by 18 and 21 percentage points respectively, to +72% and +69%, which demonstrates their pressure over business development.


The survey reveals that China businesses are constrained with shortage of skilled working force, shortage of orders and falling exports.


There are growing concerns on shortage of skilled working force with +42% of businesses citing it as the primary factor of restraining business expansion, up 15 percentage points from Q4-2012. And nearly half (+48%) businesses worry on the shortage of orders. The expectation on exports also falls by 15 percentage points over Q4-2012, to +29%.


The respondents show growing concerns on the rise of product prices during the past half year and the percentage of businesses planning to increase the prices of their products reaches +41% in Q1.


Among the respondents, +67% intend to offer employees a pay rise in the next 12 months, up 9% from Q4-2012. The rising price of product and labor cost will stoke inflation pressure.


“According to recent forecast by several institutions, the GDP of China in 2013 would reach 8.5%, higher than government target of 7.5%," says Xu Hua, CEO of Grant Thornton. "China businesses’ optimism is underpinned by recovering global economy and reform signals by new leaders of central government. But still there are various structural problems in many sectors of our economy needing to be dealt with in this crucial year."


The survey also shows that businesses especially small and medium enterprises are confronted with challenges which result in lacking of confidence on their own development.


Sharp increase in mature markets optimism boosting the global average

The global business optimism falls to 4%, close to the freezing point level (0%) in the Q4-2012, but sees a strong pick up in Q1-2013 of +27%, higher than results of all quarters in 2012, which is primarily driven by a strong recovery in mature economy including the US and Japan.


The so-called “fiscal cliff” was avoided in January, markedly improving business sentiment from -4% in Q4-2012 to +31% Q1-2013. For US businesses, although economic uncertainties may increase due to automatic spending cuts and tax rises as well as tough negotiations between Democrats and Republicans over the debt ceiling, they feel that the politicians will find solutions.


In other markets, the long time depressed business optimism in Japan climbs sharply from -70% in Q4-2012 to -2%, which is mainly driven by the fiscal stimulus plan from Prime Minister Shinzo Abe’s government at the beginning of the quarter. As Japan’s economy is getting out of deflationary cycle, it largely boosts business optimism in the first quarter although it’s uncertain whether the newly launched measures will be effective.


In the meanwhile, the market demand is growing gradually. Globally, the proportion of businesses citing reduced demand as a constraint on growth fell from 38% to 26% between Q4-2012 and Q1-2013. Furthermore, we see a rising number of businesses plan to increase the investment for future growth. Globally, +38% of businesses are going to increase investment in plant and machinery over the next 12 months, the highest since before the financial crisis in 2008. G7 average is up from +27% to +34% led by Japan (35%) and US (32%).


“If businesses think another crisis is coming, they will hoard cash to insulate their operations. However the signs over the past quarter are that businesses (especially in mature markets) are going to use some of this cash to invest in the future growth of their operations, which suggests they are feeling more confident about the economic outlook. Although the stability of the economy has recently been unsettled, investing now would get ahead of the competition when the economy really recovers,” said Hua.


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