Significant concerns: Companies express apprehension towards China's market
Strict guidelines, restricted market entry, and subpar demand: Foreign corporations encounter significant obstacles in China. Is the Celestial Empire still a suitable choice? The European Chamber of Commerce alerts us.
China's market is losing appeal for European corporations as a result of unfulfilled pledges and mounting issues, according to a study. "We observe a decrease in China's allure relative to other locations," remarked Jens Eskelund, president of the EU Chamber of Commerce in China, in Beijing. For some corporations, the risks of investing in China are starting to surpass the rewards, as detailed in the chamber's annual position paper. This trend will intensify if the primary concerns of corporations are not addressed. "Urgent action is required to alter the course," the organization with over 1,700 members urged.
The list of grievances is extensive and has deteriorated corporations' trust in China to an all-time low: The economy is not picking up, market entry remains restricted, and domestic consumption is weak. Furthermore, the ruling Communist Party has frequently disconcerted numerous corporations with obscure laws in the name of national security, forcing corporations to spend more on legal advice.
"Chronic Covid-19" in China's Economy?
"The predictability, reliability, and efficiency that once made the Chinese market appealing to foreign corporations are decreasing, and the business environment is becoming more politicized," the report stated. Eskelund added that China's economic situation is deteriorating. "It feels a bit like China's economy has 'Chronic Covid-19'," he said. Since the COVID-19 pandemic, the economy has not fully recovered.
Consequently, the possibilities are: Making money in China is becoming more challenging, explained Eskelund. Margins outside the People's Republic are sometimes better and could improve in the future. Many corporations feel they are at a "turning point" where they must decide whether to invest more in their China business or seek a more lucrative long-term location. Eskelund estimates that one-third to one-half of EU corporations are on the sidelines, watching how the economy evolves and may reevaluate their China strategy. This group is the one that Beijing must persuade China remains an appealing location.
No Indication of Withdrawal
Despite the challenges, the chamber does not anticipate its members wishing to withdraw. For industries like autos or chemicals, China is too significant, Eskelund said. Almost a third of global container exports originate from China. "If you're not in China and continue to invest here, you're simply not a global corporation anymore," he said. According to the chamber, about a quarter of its members are reviewing their reliance on China in the supply chain as a result of the COVID-19 pandemic and geopolitical tensions. The solution could be to partially relocate production to India or Vietnam.
Similarly, the costs and risks of engaging in China are receiving increased attention for the German industry, explained Elisa Höhne, representative of the Federation of German Industries (BDI) in China. There are still "opportunities, potential, and dynamism" on the Chinese market. "However, overall, the perspective for foreign corporations is turning cloudier," she said.
Numerous remain skeptical. A survey released by the EU Chamber of Commerce in May found that 44% of the 512 members surveyed had the most pessimistic business outlook ever. Without intervention from Beijing, this trend could persist, according to Eskelund. Companies in the automotive industry, as well as financial services and medical devices, were particularly pessimistic. Cosmetics and pharmaceutical companies displayed a slightly more optimistic outlook.
Growing tensions with the EU possible
Some observers were also disillusioned with the results of a rare meeting of top Communist Party officials who had gathered in Beijing to discuss China's long-term economic policy. The Third Plenum continued to advocate for investments in manufacturing as a key driver of China's economic development, the EU Chamber wrote. This would increase production capacity in technologies where supply already exceeds demand, leading to tensions with significant trading partners.
Solar panels are an example of this, as they found no buyers in China and ended up flooding markets in the EU and the US. While China claims to be creating a demand system at the national level, the EU Chamber criticized the party for not specifying how demand would be stimulated. The failure to implement significant economic reforms could lead to growing tensions between the EU and China, as stated in the position paper.
- The challenging business environment in China, including unfulfilled pledges, restricted market entry, and weak domestic consumption, is leading some corporations to question whether the rewards of investing in China outweigh the risks, as mentioned in the EU Chamber of Commerce's annual position paper.
- Trade tensions and unreliable market conditions are causing some European corporations to reconsider their investment strategies in China, potentially seeking more lucrative locations abroad, as indicated by Jens Eskelund, the president of the EU Chamber of Commerce in China.
