SEB's China Financial Index: Investments up as the business climate improves - but profit expectations fall as margins deteriorate

Senior managers at Northern European subsidiaries in China foresee a continued improvement in business prospects on the Chinese market. Companies are now moving to a more aggressive strategy in China with increased investments and more recruitments. Meanwhile, profit expectations are falling which is indicating 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 multinationals look into the crystal ball of 2010 there is now doubt that China is a top priority in relation to other markets. Companies are now moving back into an offensive strategy in China and 83 per cent of the companies in our survey are planning for continued investments during the coming six months. 20 per cent of those are planning major investments," says Fredrik Hähnel, Client responsible at SEB in China. However, more companies than previously are now expecting 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. The companies are also expecting an appreciation of the RMB against the US-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," Hähnel continues. The expansive fiscal and monetary policies in China have succeeded in keeping a high economic growth rate but more economists are now warning of overheating if the government does not implement a more cautious policy as both exports and domestic consumption are now improving. Property prices have gone up dramatically and there are signs that inflation is coming back, which make more observers expect a tighter policy going forward. This can also be seen in the answers from Nordic and German companies. "Half of the companies in our survey believe that the RMB will start appreciating against the US-dollar and more than two thirds expect one or more interest rate hikes," Hähnel concludes. 48 per cent of respondents see lower customer demand as the greatest cause for concern the coming 6 months, while 13 per cent see lack of qualified labor as the larges worry. Other issues are complex rules and increasing costs of raw material. This is the third time SEB publishes the China Financial Index, a unique survey published semi-annually. The purpose is to mirror changes in expectations among North European companies in China, in order to facilitate the understanding of the economic and financial development in the country. The survey includes 11 questions related to the business climate, investment plans, recruitment plans and the view of currencies and interest rates. The full report can be downloaded from: _____________________________________________ För ytterligare information kontakta: Fredrik Hähnel, Client Responsible, SEB in China, +86 138 1680 99 77 Press contact: Elisabeth Lennhede, +46 70 763 99 16, [HUG#1394162] China Financial Index March 2010: