US companies operating in China are largely optimistic about the future, despite certain uncertainties in Sino-US trade relations, according to a report issued yesterday by the American Chamber of Commerce in China (AmCham-China).

According to AmCham-China President Charlie Martin, companies continue to improve their performance as the business environment improves.

Released yesterday, the annual paper, White Paper 2006, American Business in China: Enhancing Dialogue, Moving Forward, highlights the importance of Sino-US commercial relations and calls on both governments to take specific measures to improve the business climate.

It is based on the chamber's annual survey of members and on input from more than 30 industry- and topic-specific forums.

Almost all respondents, or 91 percent, are optimistic about prospects for continued success in China in the next five years.

China continues to rank as a top investment destination for most respondents.

Some 33 percent of respondents chose China as the No 1 destination and 42 percent said it was one of the top three.

"We noted three trends in companies' expansion strategies," Martin said.

First, companies are increasingly expanding into secondary cities. Some 58 percent of respondents have a presence beyond first-tier cities such as Beijing, Shanghai and Guangzhou.

Two years ago, less than half of those surveyed had extended their China operations into secondary cities.

Furthermore, new entrants are moving quickly to establish a presence in secondary cities: 24 percent of companies that have been in China for two years or less have a presence in secondary cities.

In addition, more than 20 percent of companies are putting more than half of their investment into places outside of first-tier cities.

Second, US companies are spending more on research and development (R&D).

According to last year's figures, only seven percent of respondents had R&D centers and 45 percent had increased their R&D activities.

In the 2006 survey, 65 percent had increased R&D operations in 2005, and 39 percent were likely to invest in R&D this year.

Third, investments by US companies are increasingly being made through the purchase of local assets.

22 percent of companies plan to acquire a Chinese company this year, an increase from the 17 percent who have acquired Chinese corporate assets over the past two years.

Over a third of companies that describe themselves as "very profitable" in the survey are actively pursuing acquisitions, compared to only 17 percent of the overall survey pool.

There are various reasons for acquiring Chinese firms.

These include improving market access, expanding customer base and increasing distribution rights.

For US service companies, nearly 70 percent cited acquiring a business license in a restricted industry as their key objective.

But the report found China's commercial policies do not always create a favorable regulatory environment.

Currently, between 70 an 80 percent of deals involving foreign buyers fall through.

"We just want to know who is in charge," Martin said.

Emory Williams, chairman of AmCham-China, said that while companies are profiting from China's market growth and improved business environment, they continue to wrestle with obstacles that impede their ability to grow.

"But it is critical we recognize that a good Sino-US commercial relationship can, and does, have a positive impact on overall Sino-US relations," he said.

(China Daily May 17, 2006)