Difficult market access, opaque regulations, weak demand: foreign companies are struggling in China. Is the country still a good location? The European Chamber of Commerce warns.
According to a report, China’s market is becoming less attractive for European companies due to unfulfilled reforms and increasing problems. For some companies, the risks of investing in China are already beginning to outweigh the returns, according to the annual position paper of the EU Chamber of Commerce in Beijing. This trend will intensify if companies’ main concerns are not addressed. “Concrete action is therefore needed to turn the tide,” demanded the lobby group with more than 1,700 members.
The list of concerns is long and has pushed the confidence of companies in China to an all-time low: the economy is not getting going, market access remains difficult and domestic consumption is weak. In addition, the ruling Communist Party repeatedly unsettles many companies with opaque laws in the name of national security. One consequence: companies have to spend more on legal advice.
“Long Covid” in China’s economy?
“The predictability, reliability and efficiency that made the Chinese market so attractive for foreign companies are continuing to decline, and the business environment is even more politicized,” the paper said. In addition, according to Chamber President Jens Eskelund, the economic situation in China is now deteriorating. “It feels a bit like the Chinese economy has long Covid,” he said. After the corona pandemic, it has not yet managed to fully get back on its feet.
The outlook is accordingly: making money in China is becoming more difficult, explained Eskelund. Margins are sometimes better outside the People’s Republic, and this could increase in the future. Eskelund roughly estimates that a third to a half of EU companies are waiting on the sidelines to see how the economy develops and, if necessary, rethink their strategy for China with a view to further investments. This is the group to whom Beijing must prove that China is still an attractive location, emphasized Eskelund.
No retreat evident
Despite the problems, the Chamber of Commerce does not see its members wanting to withdraw. According to Eskelund, the People’s Republic is too important for the automotive and chemical industries. Almost a third of global container exports come from China. “If you are not in China and continue to invest here, you are simply no longer a global company,” he said. According to the Chamber, however, around a quarter of members are examining their dependence on China in the supply chain as a lesson from the corona pandemic and because of geopolitical tensions. The solution could be to relocate some production to India or Vietnam.
However, many remain skeptical. A survey published in May by the EU Chamber of Commerce found that 44 percent of the 512 members surveyed were more pessimistic about their business prospects than ever before. Eskelund estimates that this trend could continue without countermeasures from Beijing. Companies in the automotive industry and in the financial services and medical products sectors were particularly skeptical. Cosmetics and pharmaceutical companies were somewhat more hopeful.
Growing tensions with the EU possible
Some observers were also disappointed by the results of a rare meeting of top Communist Party cadres who had discussed China’s long-term economic policy in Beijing. The Third Plenum had continued to support investment in the manufacturing sector as an important driver of China’s economic development, wrote the EU Chamber. Beijing wanted to use this to increase production capacity in technologies in which more is already being produced than is being demanded, which in turn had led to tensions with important trading partners.
One example is solar cells, which found no buyers in China and therefore ended up cheaply on markets in the EU and the USA. Although China claims to be developing a demand system at the national level, the EU Chamber criticized the fact that the party had not specified how consumption should be stimulated. The failure to implement significant economic reforms is likely to lead to growing tensions between the EU and China, the position paper said.
Source: Stern
