European companies’ optimism for business prospects in China is declining amid slowing growth, rising labor costs, regulatory obstacles and intensified competition, a survey showed.

Optimism for future revenue growth among 526 respondents dropped to a four-year low of 71 percent, while 62 percent lack confidence or aren’t sure the government has the resolve to introduce market-driven change, according to a business confidence survey released today in Beijing. It was conducted in March by the European Union Chamber of Commerce in China and Roland Berger Strategy Consultants.

The International Monetary Fund said yesterday that China needs “decisive” policy changes to put its economy on a more sustainable path and last month the Asian Development Bank said surging wages and costs threaten the nation’s growth potential. The EU Chamber survey showed optimism on profits in the next two years fell to 29 percent, the lowest since the report started a decade ago.

“Optimism is waning,” the chamber’s report said. “Significant economic reforms are needed more than ever before to ensure continued strong economic growth, mitigate cost increases, unlock market opportunities and create an overall well-functioning and efficient business environment.”

The executive committee and regional boards of the chamber in China include representatives of Deutsche Bank AG, Siemens AG and Novo Nordisk A/S, according to the group’s website.

Labor Costs

Sixty-two percent of companies are pessimistic about the outlook for labor costs and 63 percent ranked employee expenses as their most significant challenge, the report said. Sixteen percent of the survey’s respondents reported a decline in revenue last year, compared with 6 percent for 2011.

Amid deteriorating air pollution in Beijing and other cities this year, 72 percent of European companies rated China’s living environment as one of the top three challenges in hiring and retaining foreign staff, the survey said.

Fifty-eight percent of respondents were either neutral or pessimistic about the potential for productivity increases in their industries, up from 53 percent in the 2012 survey, the report said.

European companies also said they are facing increased competition in China from privately owned local firms improving in sales and marketing and brand recognition, the report said.

“There is a marked lack of optimism among survey respondents about future reforms to create a level playing field,” the survey said.

Even so, companies still see China as having among the best opportunities globally and it is an increasingly important part of global strategy for 64 percent of survey respondents, down from 74 percent in 2012, the report said.

China was ranked one of the top three countries for future investments by 43 percent of survey respondents. Further expansion of current operations in the nation is being considered by 86 percent of European companies, the report said.

Kevin Hamlin. Editors: Scott Lanman, Nerys Avery