A skills shortage has emerged as the top challenge for U.S. companies operating in China, according to a report from the American Chamber of Commerce in Shanghai.

The "2006 China Business Report" was released Wednesday after the organization polled 274 member companies throughout China.

Charles Mo, who heads human resources at the chamber of commerce, said the skills shortage had, for the first time in five years, overtaken bureaucracy as the No. 1 headache for US companies in China.

"The vast majority of US companies said their China operations were suffering from challenges in recruiting capable Chinese managers and retaining them," Mo said at the press conference in Shanghai yesterday.

They account for around 80 percent of those companies polled.

And the scarcity of entry-level and clerical staff has also had a negative impact on U.S. companies.

"Controlling salary increases was also a problem for 82 percent of the companies," Mo said.

Mo said the growth in operations in China had outpaced the supply of desirable staff.

"US companies have to fight for talent against international and domestic competitors," Mo said.

Bureaucracy, lack of transparency and inconsistent regulatory interpretation were the second biggest challenge facing US companies, the report showed. These challenges, along with other factors, are squeezing the profit margins of US companies in China, according to the report.

More than half of those firms polled said their China margins were threatened by price pressure from domestic competitors, price pressure from major customers, or changes in salary and wages in China. These factors have affected the bottom line of many US companies.

While half of those polled saw improved profitability in 2005 over 2004, most saw profit margins increase by less than 10 per cent and only a quarter reported higher margins for China than for their worldwide operations.

Nevertheless, US companies are clearly bullish about China and the country is a priority for many. When describing their five-year business outlook in China, 94 percent of those polled were either "slightly optimistic" or "optimistic." And 79 percent were more optimistic about their business outlook in 2006 than a year before.