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Foreign companies adopt a wait-and-see approach in China

After more than two years of strict Covid-19 controls, supply-chain problems, and a deterioration in bilateral relations with the United States, foreign companies with a business presence in China are putting their expansion plans on hold and considering the relocation of their production lines to friendlier shores.

The climate of uncertainty in China during 2022 forced many international companies to adopt a wait-and-see approach.

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Even in one of China’s most economically dynamic regions – the Greater Bay Area – several foreign firms that are intent on maintaining a presence in the country continue to put off expansion plans or have begun scaling back operations, according to business experts.

American companies are worried that the economic and political tensions between China and the US will continue to have a negative impact on their business operations. According to analysts, China has no plans on closing its doors to US firms largely because it does not want to kick out the jobs and the technology those companies contribute to China.

Foreign companies operating in the country should be extremely vigilant with their compliance of Chinese laws and regulations to avoid any possible misunderstanding or altercation with local authorities.

China may be aware of the growing challenges it faces at home and abroad over the next five years. "These challenges stem in large part from its intensifying strategic competition with the US, which Beijing sees as both opportunities — as the balance of power shifted and US power declines relatively — and risks, as China is not yet strong enough to be the US's peer," said Ivy Kwek, a fellow for China at the International Crisis Group (ICG), to the press.

Experts estimate that things are likely to get even tougher for foreign companies that do business in or with China, and they should plan accordingly.

Many international firms have already left the country or are considering the possibility of doing so, while others are moving their production lines to friendlier shores. However, foreign businesses still able to be profitable and interested in keeping a presence in China, are remaining in the country but with a reduced footprint.

Some companies are asking their Chinese manufacturers to set up factories elsewhere, such as Vietnam, Cambodia, Thailand, Malaysia, Mexico, Pakistan, and the Philippines, while others are simply shifting their manufacturing contracts from China to Vietnam, Thailand, Malaysia, India, Sri Lanka, Mexico, and Taiwan.

In certain cases, foreign businesses have been able to negotiate discounts with their Chinese suppliers. This is a good time to renegotiate contracts and pricing, however, maintaining a civilized relationship with the suppliers is extremely important to avoid problems down the road. An unhappy Chinese manufacturer may steal IP and become a competitor.

In the technology sector, 2022 was a difficult year. Chinese internet firms have seen a slowdown as consumer spending was hit and advertising dollars were cut back.

Investors are treading with caution into next year regarding Chinese tech stocks and analysts are broadly expecting regulation to be more predictable and growth to accelerate. But uncertainty around China’s economic outlook is creating risks.

Still, signs that China could be thinking about opening its economy again have given investors hope of a turnaround.

Companies, both foreign and Chinese, in the tech sector are being extremely cautious.

Firms interested in remaining in China should ensure that they fully comply with Chinese laws. It is important to stay current with taxes, review contracts, update licenses, conduct an employer audit and confirm that all trademarks and IP are registered in China, among other things.

Investment by American companies in China is plunging. U.S. firms invested US$13 billion in China in 2019, down from a 2012 high point of US$15.4 billion, according to data compiled by research group Rhodium Group. Investment then sank to just US$8.4 billion in 2021.

Figures from data provider Eurekahedge showed that hedge funds with a focus on the Greater China region experienced the highest net outflows in 2022 since the index began recording the data 15 years ago. Net outflows reached US$3.6 billion in the first seven months of 2022, according to Reuters, as hedge funds sought to reduce their exposure to China.

According to a report from data and analytics firm Rhodium Group, Foreign Direct Investment (FDI) from European firms into China has become increasingly consolidated among a few investors, sectors, and origin countries over the past four years. According to the paper, in the period from 2018 to 2020, over 80 percent of FDI came from just 10 investors, although this proportion dropped to 71 percent in 2021.

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From 2018 to 2021, almost 70 percent of FDI from Europe went to just five sectors – autos, food processing, pharmaceuticals and biotech, chemicals, and consumer products manufacturing. Of this, 31 percent went to automotive equipment and components.

In the same period, just four European countries – Germany, the UK, France, and the Netherlands – accounted for 87 percent of total FDI on average. Of this, four German firms – Volkswagen, BMW and Daimler, and BASF – accounted for 34 percent of the total European FDI by value during this period.

The European Union Chamber of Commerce blamed factors such as stalling SOE (state owned enterprises) reform and increasingly ad-hoc policymaking, inflexible COVID-19 policy, fewer opportunities for knowledge exchange, and shifting supply chain strategies, for the decline in interest from European investors.

In the wake of the economic slowdown and uncertainty created by the pandemic, the Chinese government has taken steps to boost spending and get the economy back on track to faster growth. This includes measures to encourage foreign investment, such as promoting the implementation of several key foreign-funded projects and further facilitating the entry and exit of foreign business, technical personnel, and their families.


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