Uncertainty around the global regulatory environment and increasingly strict laws and regulations in domestic markets are stalling business decision-making and planning in enterprises operating in China, Ernst & Young found in a survey.
Respondents said regulation and compliance were the top threats and challenges across the majority of sectors even though the acute stress of the financial crisis had passed, the firm said. Meanwhile, limited access to credit for non-state-owned entities and a continuing weak economy in parts of the world remain a big concern for entrepreneurs in China.
Ernst & Young interviewed more than 70 leading industry executives and analysts from 14 industrial sectors and asked them to identify and rank the top business risks for each sector for the next 12 months as well as risks that could arise in the years ahead.
The unpredictable regulatory environment is the number one worry expressed by interviewees particularly those from the banking, asset management, real estate, power and utilities sectors.
Indeed, despite three-decades of unbelievably rapid development, China remains a highly Beijing-controlled state. The top-down command system applies to every vein of the economy -- from how many loans the banks issue every year to how many children a married couple is allowed to have.
“For the financial services sector, the risk of encroaching regulation is still growing with severe worries regarding a poorly designed regulatory response to the credit crisis. Banking executives and academic analysts expressed concern that this could result in an over-regulated sector and greater protectionism, preventing global firms from effectively operating across borders,” Ernst & Young said in a press release.
Interviewees worried that, in the wider financial sector, regulatory reform proposals have the potential to destroy customers’ and shareholders’ value, it said.
This is the firm’s third annual business-risk survey. Concerns over regulation and compliance topped the list in 2008, but slid to second last year, overtaken by worries about the credit crunch.
While decision-makers in media and entertainment, and mining and metals companies in China think that governmental policies will only moderately impact their businesses, Chinese companies looking to expand have said they are concerned about the global regulatory environment's complexity post the global financial crisis.
The second biggest concern is the access to credit, which was highlighted as “critical” by managers in the banking, asset management, real estate and power and utilities sectors. Although some respondents expressed confidence that the recovery in the global credit market would last, others, especially executives in the financial sector, were more concerned about the credit crunch aftershocks and unrealised or unrevealed losses.
Bankers worried in particular about companies holding asset-backed securities and loans coming up for refinancing in the real estate and power and utilities sectors, Ernst & Young said.
Chinese companies seemingly have received a flood of credit from banks that issued a total of Rmb9.6 trillion ($1.4 trillion) in loans under the government’s order to stave off the recession last year. However, Chinese banks favour big state-owned enterprises in their lending and tend to marginalise small and medium-size enterprises, even though big companies have more cash than they need, while SMEs are lacking.
In an interview with FinanceAsia last month, Charlene Chu, Beijing-based senior director for financial institutions at Fitch Ratings, said “there was an over-allocation of the amount of lending to state-owned companies. And the government needs to get the financing to trickle down beyond the state enterprise level.”