European companies are rethinking their plans for a “closed” China

Foreign direct investment from Germany to China rose by about 30 percent in the first eight months of the year from a year earlier, China’s Ministry of Commerce said on Monday.

Vcg | Visual China Group | Getty Images

BEIJING — European firms in China are reassessing their market plans after this year’s Covid control measures further isolated the country from the rest of the world, said Jörg Wuttke, president of the European Union Chamber of Commerce in China.

China’s strict Covid policies have restricted international travel and business activity – especially after a two-month lockdown this year in Shanghai.

The strict measures of the past two years initially helped China recover more quickly from the shock of the pandemic than other countries.

But the policy increasingly contrasts with a world that is increasingly easing many Covid restrictions.

For European business, “we’ve been talking about a complete realignment of our view of China over the last six months,” Wuttke told reporters at a briefing for the chamber’s annual China position paper released on Wednesday.

He said the lockdown and uncertainty for business had made China a “closed” and “distinctly different” country that could drive companies away.

So far, most companies haven’t left — only some very small ones, Wuttke said. But he pointed out that the chamber is not in a position to survey companies that have decided not to enter China at all.

I’ve been here off and on for 40 years and I’ve never seen anything like this, where suddenly ideological decision-making is more important than economic decision-making.

Jörg Wuttke

President of the EU Chamber of Commerce in China

EU foreign direct investment in China fell by 11.8% in 2020 compared to a year earlier, according to the chamber’s position. More recent data was not available.

“Although there is still a ‘select group of high-profile multinationals ready to commit billions of dollars’, the trend of declining FDI is unlikely to reverse, while European executives are severely restricted from traveling to and from China to develop potential greenfield projects ,” the newspaper said.

Investors are still on hold when it comes to China, analyst says

China’s economy grew by 2.5% in the first half of the year, well below the official target of around 5.5%. In late July, Beijing indicated that the country may fall short of that goal.

Meanwhile, authorities have shown little sign of lifting the so-called dynamic zero Covid policy.

China has reduced the quarantine time for international and domestic travelers. But sporadic shutdowns, whether on the tourist island of Hainan or the city of Chengdu, keep business uncertainty high.

Wuttke said he expects China to open its borders in late 2023 at the earliest, based on the time it takes to vaccinate a sufficient population.

“Ideology trumps economics”

European businesses that have remained in China are increasingly facing an environment where “ideology trumps economics,” the chamber’s position summary said.

“I’ve been here 40 years and I’ve never seen anything like this, where suddenly ideological decision-making is more important than economic decision-making,” Wuttke said. “And maybe it’s also reinforced by voices from outside America[n] sanctions, America is cutting off China, so I can partly understand why self-reliance is so high on the agenda.”

He was referring to China’s push over the past few years to build its own technology and other industries.

Meanwhile, among other measures, the US has restricted its companies from supplying key components to Chinese technology companies such as Huawei.

Read more about China from CNBC Pro

The chamber did not specify what that ideology consisted of, but said China’s policy on Covid represented “the country’s distancing from the rest of the world”.

The policy has not changed despite many long, frank conversations with Chinese government officials, Wuttke said.

“I think these people, they’re torn between what they see should be done, can be done,” he said. “Then [there’s] very strict, very clear directive from the top, that’s how it should be, that’s the ideology. And how can you challenge ideology?”

Chinese President Xi Jinping said earlier this month that the country had “continued to respond to Covid-19 and promote economic and social development in a well-coordinated manner,” according to a paraphrase of his remarks shared by China’s foreign ministry.

Although Xi said that “China has entered a new stage of development,” he maintained that “China’s door of opening up and friendly cooperation will always be open to the world,” according to the release. His remarks came during his first trip abroad since the start of the pandemic – to Kazakhstan and Uzbekistan – during which he met with leaders of several countries in the region.

Over the past few years, the Chinese leader has sought to unite the country around the ruling Communist Party and his plans for the “great rejuvenation of the Chinese nation.” Xi is due to consolidate his power at a major political meeting next month.

The big market of China

Foreign firms already in China are generally staying put for now.

Even if China’s economy grows more slowly, its size and low base “are actually compelling arguments [for foreign businesses]we will still make it,” Wuttke said.

Some, notably the German auto giants, are investing more.

In the first eight months of the year, foreign direct investment from Germany rose by about 30 percent from a year earlier, faster than the 23.5 percent pace recorded in the first seven months, China’s Ministry of Commerce said on Monday.

However, the ministry did not release updated figures on investment from the US, which according to official data rose by about 36% in the first seven months of the year.

Foreign firms can still find specific areas of opportunity.

China is improving domestic market access, albeit in areas where locals already dominate or are “desperate” for foreign investment, Wuttke said. “Otherwise, frankly, I would stop producing this paper.”

Why China shows no signs of backing down from its 'zero Covid' strategy.
Share is Love^^