For European Firms, Dark Clouds Overhang China’s Strong Growth

The environment for foreign companies in China has become more challenging. A sharp increase in political influence and a strong belief that China can go it alone are factors that affect every foreign company.

Jörg Wuttke

Deutsche Version

On the surface, there is much good news to report in the Middle Kingdom. The economy in China made an impressive recovery from the Covid-19 pandemic. In 2020, many European Chamber members posted record revenue and profits, helping to stabilise their headquarters and make up for losses in other markets. According to IMF forecasts, China will contribute more than 20 per cent of global GDP growth over the next five years.

But there are troubling signs that the country is turning inwards and reversing some of the policies in place since 1980 that helped to create its economic miracle.

China’s economic policy is increasingly influenced by concerns over national security. It wants to become more self-sufficient and reduce the role foreign companies play in its economy, especially in high-technology sectors. Its strong GDP growth relative to most of the rest of the world seems to have given China the confidence that it can largely go it alone. But the European Chamber believes that the potential costs will be extensive and have a long-term negative impact.

Ease of doing business in China has not improved

The use of broad and vague language for what is designated a national security concern makes it extremely challenging for companies to make well-informed decisions and adjust investment strategies accordingly.

Of respondents to the Chamber’s annual survey in 2021, 90 per cent said that the ease of doing business in China did not improve or became more difficult in 2020. China’s approach to managing foreign investment does not provide sufficient transparency or legal certainty, and therefore makes China less attractive.

One measure of the change is the decline of foreign nationals resident in Beijing and Shanghai from 316,000 in 2010 to 226,000 in 2021. These are people who make significant contributions to innovation, efficiency and productivity.

Because of increasingly stringent demands of national security, especially in the digital field, an exodus of small and medium-sized European banks should be anticipated in the not-too-distant future. Also at risk are European firms who provide network equipment, telecommunications services and most things digital. They are increasingly unwelcome because of national and economic security and to preserve market share for indigenous providers.

Sharp increase in political influence

Another major change is the sharp increase in political influence over the private sector. More than 92 per cent of China’s top 500 private enterprises now have Communist Party cells, with the mission to strengthen their role in human resources and management. The private sector contributes 60 per cent of GDP, 70 per cent of innovation, 80 per cent of urban employment and 90 per cent of new jobs, according to a World Economic Forum white paper.

Private firms outperform state firms in efficiency, return on investment, innovation and decarbonisation. But, for political reasons, the government favours SOEs in strategic areas of the economy.

One good example is the Commercial Aircraft Corporation of China (COMAC), which has since its foundation in 2008 received $49bn to $72bn in state subsidies. All this money has not brought a good return. COMAC is building the C919, which China wants to rival the Airbus A320. But only Chinese buyers have placed orders and no foreign regulator has certified it, so that it cannot fly outside China. In addition, the C919 can barely be considered a Chinese aircraft – the vast majority of its component suppliers are American and European companies.

Wasteful misallocation of capital

Semiconductors are another industry in which the state demands self-sufficiency. The CM 2025 initiative set the ambitious goal of 40 per cent chips in 2020 and 70 per cent by 2025. But, in 2020, domestic semiconductor companies produced only 5.9 per cent of the total market; the value of imports was $350bn.

To avoid the consequences of continuing to grossly misallocate resources, China would be better off adopting policy measures that can foster its integration into the existing global semiconductor value chain.

European companies have no interest in politics. But they have to operate in an environment that is increasingly politicised. Outspoken Chinese diplomats, dubbed «wolf warriors», have undermined China’s diplomatic efforts and caused years of soft-power to unravel. This has diminished the space for political leaders in the EU and China. Sanctions by the two sides have derailed the EU-China Comprehensive Agreement on Investment (CAI), which took seven years to negotiate.

Both sides would be well advised to find a way to fulfill obligations under the agreement in the absence of ratification and continue to co-operate in other areas of mutual interest. The European Chamber recommends that both sides co-operate in decarbonisation and climate change, the setting of international standards, sustainable development, WTO reform and the fight against Covid-19.

It also recommends that China increases its integration into the global economy and steer away from «self-sufficiency» and take a more proportionate approach to «national security» and «critical information infrastructure», with definitions that are as narrow as possible.

This op-ed is the foreword to the recent European Business in China Position Paper 2020/2021.

Joerg Wuttke

Jörg Wuttke is President of the EU Chamber of Commerce in China, Chairman of the China Task Force of the Business and Industry Advisory Committee of the OECD (BIAC) and a member of the Advisory Board of the Mercator Institute for China Studies (MERICS) in Berlin. He has lived in Beijing for more than three decades.
Jörg Wuttke is President of the EU Chamber of Commerce in China, Chairman of the China Task Force of the Business and Industry Advisory Committee of the OECD (BIAC) and a member of the Advisory Board of the Mercator Institute for China Studies (MERICS) in Berlin. He has lived in Beijing for more than three decades.