Illustration: Lu Ting/GT

The latest China Business Report released by the American Chamber of Commerce (AmCham) in Shanghai illustrates the increasingly difficult business environment facing foreign companies in China amid slowing economic growth, rising costs and sweeping campaigns against corruption and extravagance. Meanwhile, the report also illustrates how important it is for US companies to invest in the service industry if they are to continue benefiting from China's transformation from a manufacturing-centered to a service-oriented economy.

The annual report surveyed 399 US companies, of which over 60 percent had been operating in China for more than five years. A total of 86 percent of these companies said they remain optimistic on their business prospects in China over the coming five years, down 5 percentage points from 2012. However, the percentage of respondents who said they would increase investment in China dropped from 74 percent in 2012 to 65 percent last year.

"Despite optimism and growth, challenges in the business and regulatory environment in China continue to hinder business," said the report.

At the same time, close to 90 percent of companies that contributed their views to the report said rising costs have adversely impacted their business in China, as steady appreciation of the renminbi against the US dollar over recent years has significantly increased business costs for foreign companies. The risk of a significant economic slowdown in China remained a major concern for US companies in 2013, but in general most companies were less worried about this issue than in 2012, the report also showed.

US companies in China also devoted more time and energy toward compliance last year after several high-profile probes by the Chinese government into foreign companies such as British drug manufacturer GlaxoSmithKline and US milk powder maker Mead Johnson Nutrition Co.

As a result of these investigations, 44 percent of US companies said they focused more on compliance last year, up from 36 percent in 2012. The probes have also resulted in more US companies observing Chinese laws than international laws. Forty percent of companies also said they would increase spending on compliance over the coming year.

Apart from compliance to international laws such as the Foreign Corrupt Practices Act, US companies "now have the additional pressure from Chinese anti-corruption authorities to deal with to avoid financial and reputational losses as a result of increased prosecutions," said Kent Kedl, managing director of Greater China and North Asia for Control Risks, a global risk consultancy who worked with the AmCham Shanghai in the China Business Report, in a report sent to the Global Times.

Despite these business and regulatory challenges, US companies will still have many opportunities in China as the country's service industry is rapidly expanding. AmCham's report, in fact, reveals a gradual shift among US companies in China toward developing the service sector. Specifically, the chamber showed 52 percent of US companies' revenue came from the service sector last year, an increase of 11 percentage points over 2012, while manufacturing dropped 10 percentage points to 37 percent. These data mark the first time in the report's 13-year history that service sector revenues have contributed more than those from manufacturing.

Looking at the broader picture, American companies can look forward to more business opportunities in China as the central leadership maintains its pledge to let the market play a more important role in the economy. The establishment of the free trade zone in Shanghai last year was also seen as a major move by the central government to develop the service industry and attract foreign investment, although the AmCham Shanghai noted at the release of the report that the concrete benefits of the free trade zone for foreign companies remained to be seen.

The fundamentals are in place for US companies in China, but how well can they respond to opportunities is another issue. Adapting to the local market, for one thing, is still a matter of great importance for US companies looking to succeed in China, especially those in the service industry.

Chris Wingo, managing director of China Sage Consultants (Shanghai) Co, which helps small- and medium-sized US companies to set up business in China, said at the release of this year's China Business Report that companies would have no business if they don't adapt to the local market. This will require US companies to recruit more local talent and confront competition from Chinese companies across all industries.

The author is an editor with the Global Times. bizopinion@globaltimes.com.cn