Weaker outlook for European firms operating in China

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/24

The European Chamber of Commerce in China last week published its annual survey of member companies in China. The survey, conducted in February and March, drew responses from over 500 European firms operating in China. The firms reported that China’s business environment had become increasingly hostile and that firms were more pessimistic about their prospects than earlier. In 2011, nearly 80 % of firms surveyed still expected their businesses in China to grow over the next two years. Last year, that share fell to 58 % and this year it was just 44 %. In addition, firms increasingly report that profit growth has stalled and that only 20 % of surveyed firms expect their profitability to improve over the next two years. Given the degraded outlook, fewer companies are considering expanding their operations in China and more are moving to slash costs.

About 70 % of responding firms said they were in China to serve the domestic market. The largest concern by far for firms remained the slowdown in growth of China’s economy. The next biggest worries were rising production costs and slowing growth of the global economy. A large and still growing share of firms feel operationally challenged due to unpredictable regulatory shifts. Nearly 60 % of firms noted that tight Internet controls complicate their business. Notably, firms felt that China’s anti-corruption efforts were successful and the share of firms still seeing corruption as a significant problem has become smaller.

European industrial firms also suffer from China’s overcapacity problems. The capacity utilisation rates in most industrial branches have fallen and 45 % of the surveyed firms remarked on significant overcapacity problems in their field. The firms felt that market-driven change and a level playing field with Chinese SOEs were the best ways to deal with overcapacity problems.

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