China losing predictability as European firms rethink future investments

Recent Chinese policy decisions mean the country is now seen as "less predictable, less reliable and less efficient" according to the report published by the European Union Chamber of Commerce

China’s focus of political goals like Covid Zero over economic objectives is making the country less appealing to European companies as a place to invest, a business group said, calling on Beijing to refocus on reform. 

Recent Chinese policy decisions mean the country is now seen as “less predictable, less reliable and less efficient” according to the report published Wednesday by the European Union Chamber of Commerce in China. This has led to a loss of confidence in China and firms are increasingly looking to shift planned or future investments to other markets that are seen as providing “greater reliability and predictability,” the paper said. 

“Business people are here for the market and we can see that because of ideology the market is shrinking,” said Joerg Wuttke, president of the chamber. “Ideology trumps the economy,” he said, referring to examples such as the dogged pursuit of controlling all Covid infections despite the rising cost, the crackdown on the tech sector, or power shortages last year driven by prioritizing emissions control over economic activity.

Chinese Investments | Bloomberg

China’s application of Covid Zero is acting as a deterrent to European firms because of its inflexible and inconsistent implementation, the chamber said. It’s already having a “crippling effect” on attracting and retaining foreign and Chinese talent, and the Chinese operations of European companies are becoming increasingly isolated because staff can’t travel freely to headquarters, the report said. 

There is no sign of when the country might start to get rid of domestic virus controls and also start to reopen international borders. A scenario where that starts to happen in the second half of next year is “optimistic,” according to Wuttke, who cited the country’s lack of herd immunity and relatively low vaccination rates among the elderly as factors which will likely delay a quick reopening. 

“The trend of declining FDI is unlikely to reverse while European executives are heavily restricted from traveling to and from China to develop potential greenfield projects,” the brief said. 

The report from the European firms is another sign of how the image of China as a good place to do business has declined, with the US-China Business Council saying last month that American firms’ optimism had fallen to a record low. 

Some New Money
 

Despite the increasing difficulty, a few European companies are still adding to their investments in the country. Investment from the European Union into China was up 15% in the first half of 2022 compared to a year ago, according to data from Rhodium Group, helped by BMW AG’s purchase of a controlling stake in its car-making joint-venture in the first quarter.

And just this month German chemical maker BASF SE opened the first stage of its new plant in the country. The plant is planned to be one of the largest single foreign investments ever in China and the largest investment by BASF, which is planning to spend up to 10 billion euros ($10 billion) by 2030, according to a company statement. 

Those are indicative of the trend in investment from Europe, which is becoming concentrated around a handful of large, mostly German firms, according to a separate study by Rhodium Group. 

Changing Attitudes
 

Companies are also reconsidering where and how to make their goods. 

“With China staying largely closed, European companies see the need to make their global supply chains more resilient,” the report said. “This presents opportunities to other emerging markets that are ready to welcome new investment and jobs.”

There has also been changes in how the public and government in Europe view China, with tensions over Taiwan, sanctions related to Xinjiang, and Chinese economic policies all contributing to the recent decline in relations. “The change in European public sentiment towards China, and the increasing need to ensure fairness in its Single Market, has resulted in the European Union re-evaluating and updating its China policy,” the report said. 

New laws in the US or Europe around eliminating forced labor and ensuring free and fair market access also increase the regulatory burden on European firms in China, the report said. “To justify their investments, European companies therefore need China to demonstrate more transparency and predictability, as the challenge of aligning China operations with both global corporate pledges and legislation increases,” the report said. 

“There will not be full decoupling from China, but alternative supply chain strategies are increasingly being discussed in boardrooms,” according to the report, which contained almost 1, 000 recommendations to improve the business situation in China. 

“Over the last year, there has been a significant shift in focus at the headquarters of European companies when evaluating China. Where discussions once centered primarily on investment opportunities, they are now focused on building supply chain resilience, the challenges of doing business, managing the risk of reputational damage and the importance of global compliance.”

China still has significant growth potential, and has a manufacturing base and world-class industrial clusters, that were hard, if not impossible, to replicate elsewhere, the report said. “However, the extent of European firms’ engagement can no longer be taken for granted,” it added.

--With assistance from Jan Dahinten.