The European Union Chamber of Commerce in China (EU Chamber) recognized China’s efforts to reactivate its economy after the COVID-19 lockdowns and urged the country to continue its reforms towards market opening and increased competition. European companies remain optimistic but worry about the future of the business environment in the region.
European companies operating in China play a key role in contributing to innovation capacity and competitive industries. According to the EU Chamber, it is vital that they continue to be able to contribute fully to the Chinese economy through further market opening and genuine free trade.
In its annual European Business in China Position Paper for 2022/2023 (position paper), published last September, the EU Chamber points to troubling signs that China is increasingly turning inwards, which is casting doubts over its long-term growth trajectory.
China’s rapid economic growth in the last four decades has been achieved thanks to its bold reforms towards market opening and increased competition, and according to the EU Chamber, will remain strong for decades to come.
The position paper, which consists of 967 recommendations based on consultations with Chamber members, criticizes the country’s “zero COVID policy” and the regulations that force companies to create distinct policies and procedures when dealing with China compared to the rest of the world, such as developing separate supply chains.
China’s COVID policy is inflexible and inconsistently implemented and it threatens economic growth, says the report. In a survey conducted by the Chamber in April 2022, 75 percent of participants said that the COVID policy had a negative impact on overall operations and represents a significant challenge.
The paper estimates that China will not fully open its borders until at least the second half of 2023 and suggests that the only way to do so would be for the government to provide vaccines and boosters to its entire population.
The report states that policies such as “Made in China 2025” and “dual circulation”, which promote self-reliance and many foreign investors worry will reduce opportunities for foreign businesses, will push the country towards isolation. China is already engaged in a trade war with the US, limiting the import and export of certain products and components.
“Europe misses the deep level of engagement in hand with China in areas such as arts and culture, sport and tourism”, states the paper. With COVID policies in place, it is difficult for European executives to visit China. The Chamber estimates that the total number of Europeans living and working in the country is half of what it was before the pandemic.
Due to this measures, foreign investors cannot profit from the incredible business potential in China. Opportunities offered by the Chinese market, such as its manufacturing capabilities and large consumer base, are becoming less accessible to foreign businesses.
Though many areas of the Chinese economy are better regulated, a few strategic industries remain only open to state-owned enterprises. Policies are increasingly implemented in a blanket manner with limited transparency and prior consultation, catching the business community off guard.
According to the paper, the growing politicization of business is a factor contributing to a less transparent and predictable environment. European companies would be reassured if the Chinese government reaffirms its commitment to continue opening its economy, states the report.
The current geopolitical situation and other market obstacles are pushing European enterprises to mitigate risk by shifting their business strategies to other regions. Policy changes and trade disputes have been deciding factors to look elsewhere for suppliers and investment opportunities.
The report adds that European businesses are not leaving China, but potential new entrants to the Chinese market may not take the plunge given the current obstacles. “While those already established in China are not looking to leave, they are increasingly weighing up the possibility of shifting planned or future investments to other markets that are perceived to provide greater reliability and predictability,” it says.
Between 2006 and 2015, EU FDI (foreign direct investment) into China was evenly distributed between the top 10 investors and the rest. However, over the last four years, the top 10 investors have contributed over 70 percent of total FDI.
European FDI is increasingly concentrated among larger corporations, while small and medium-sized enterprises (SMEs) are investing comparatively less. The paper states that there is an “increasing discrepancy between market potential and the actual market share of European companies.”
Many investors are considering the “China+1” strategy, which allows them to supplement their China operations with investments in other Asian countries such as Vietnam and Indonesia and to mitigate the risks of being overly dependent on one country. The paper adds that some are looking into “China+1+2+3” strategies to further diversify their risk exposure.
Despite its open criticism to government policy, the EU Chamber encourages its members to proactively engage with China, remain deeply integrated with the global economy and steer away from excessive self-sufficiency. This position underlines the significance of the EU-China economic relationship.
The EU is the third largest source of FDI into China, following Hong Kong and Singapore, though the latter two often act as intermediaries for investment from other countries. In 2021, EU-based entities invested US$5.1 billion in China, about 3.5 percent of the total, slightly down from 3.8 percent in 2020.
In 2021, the EU exported EUR 223 billion (US$215.25 billion) worth of goods to China and imported EUR 472 billion (US$455.61 billion). Through the first seven months of 2022, China’s exports to the EU grew by close to 20 percent, while EU exports to China declined by 7.5 percent.
The EU Chamber concluded that European companies should remain informed regarding future policy changes and should establish a strong line of communication between its headquarters and its China subsidiaries.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
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