U.S. companies in China continue to report strong financial performance and rankChina as a top global investment destination. But for the second year in a row, American businesses experienced a dip in year-on-year performance indicators – profitability, revenue and operating margins. A leveling off in performance reflects stubborn business challenges and a Chinese economy slowed by its ongoing transition from export and investment-led expansion to one sustained by consumption and services. This is according to AmCham Shanghai's 2012–2013 China Business Reportreleased at the Four Seasons hotel in Shanghai.

Brenda Foster , President of AmCham Shanghai, said, "We should no longer expect China's economy to grow at the same double-digit rates of years past. Steadily rising costs, human resource constraints and an increasingly competitive business environment will also be the rule rather than the exception in the years ahead."

Continued Foster, "Yet, U.S. companies remain committed to the China market, which is critical to their global strategies. As the Chinese economy continues its transition to what we expect to be a healthier and more sustainable growth rate focused on consumption and services, the China market offers American businesses tremendous opportunity."

The report, based on AmCham Shanghai's annual China Business Climate Survey first launched in 1999, found that of the 420 companies surveyed, 73 percent were profitable in 2012. This number declined from 78% in 2011 and 79% the year before. Similarly strong numbers for margin and revenue growth were tempered by drops for both over the past two years.

At the same time, survey results indicate that U.S. companies are adjusting to China's transitioning market, having largely moved away from the low-cost export model that once drove U.S. business strategies in China. Nearly two-thirds of companies surveyed said they were "in China for China." They are in China to compete in the growing domestic market driven by steadily increasing household income, which grew by nearly 10% in 2012, and spiking consumption projected by McKinsey & Co. to triple within the next 20 years.  

A record 91 percent report an "optimistic" or "slightly optimistic" outlook for their 5-year business prospects in China, a number that has scarcely dropped over the past several years.

Robert Theleen , Chair of AmCham Shanghai and Chairman and CEO of ChinaVest, commented, "U.S. managers are benefiting from 'in China, for China' business strategies driven by double-digit personal income growth." Continued Theleen, "While European companies tend to dominate the luxury brand markets, the U.S. has carved out large parts of the rising middle-class branded consumer sectors and the transition in China's market favors companies targeting this consumer sector."

Yet U.S. companies continue to struggle with bureaucracy and an unclear regulatory environment in China, which were ranked as the number one and two regulatory challenges in this year's survey, respectively. Fifty-four percent of U.S. managers cited what they observe as uneven enforcement of laws and regulations that favor local Chinese companies in their industry as a hindrance to their business, a jump of 8% from the year before.

Perhaps most concerning, in this year's survey more than two-thirds of companies said the regulatory environment was either "not improving" or "deteriorating," a consistent trend over the previous three years.

"China is a tough place to do business, it always has been, and this year's survey results quantify that," said Kent Kedl , Managing Director, Greater China and North Asia, Control Risks. "While challenges like  rising costs, talent shortages and increasing domestic competition are manageable, regulatory and policy challenges that may unfairly impact the competitive environment in China have the potential to make continued investment and organic expansion a more significant challenge for U.S. companies to overcome."

Despite the challenges, survey results indicate that China remains an investment priority for U.S. companies. 

China ranked as the top investment destination for more than one-fifth of companies in this year's survey, and 54% rate it a top-three investment priority. A near majority state they plan to make additional global investment inside China.

Less than 15 percent of companies reported they have moved or plan to move production out of China to respond to rising costs in China, and 13% have moved production to lower-cost regions within China or have plans to do so. 

As more and more U.S. companies in China target the Chinese domestic market, 59% of survey respondents indicate that they export finished goods or components to China from the U.S. to support their operations in China. This "pulling" of U.S. exports toChina by American businesses in China supports production and jobs at home – a trend that has increased over the past three years.