BOFIT Viikkokatsaus / BOFIT Weekly 2019/21

European companies doing business in China say the gap between words and practice is huge when it comes to Chinese reforms of the business environment. For example, a substantial share of companies engaged in high value-added production still are forced to surrender know-how to their Chinese counterparts, even if China officially claims to have ended the practice of mandatory technology transfers. Only a handful of responding firms felt that the discriminatory treatment they receive from China’s regulators will improve in coming years.

This week, the EU Chamber of Commerce in China released its Business Confidence Survey 2019 conducted in January and February. The top three concerns expressed by the 585 of its 1,326 members were China’s slowing growth, the slowdown in the global economy and the rapid rise in wage costs in China. The US-China trade war only ranked as the fourth biggest concern, possibly because direct fallout from the dispute has been less than feared though it has heavily worsened business sentiment. The EU Chamber blamed the “reform gap” (the government’s slow-walking of reform even as the economy matures and grows rapidly) as the main cause for the trade war and lack of reciprocity in economic relations with the rest of the world.

While firms in many branches reported easier market access, EU Chamber is concerned about new barriers faced by law and ICT firms that serve businesses in many branches. European firms are increasingly united in seeking a level playing field and consistent treatment from regulators. About 70 % of European firms reported that Chinese state-owned firms do business in their fields and receive preferential treatment in e.g. public procurements, financing and licencing.

Despite the obstacles, over 60 % of respondent firms ranked China among their top-three investment countries. In the response to the survey’s innovation question last year, the number of firms saying they considered Chinese firms at least as innovative as European firms exceeded half for the first time. This year, 62 % of firms considered Chinese inventiveness to be at least on par with European firms. Most EU firms saw this trend as a positive development also for them.

This week, also the American Chamber of Commerce in China (AmCham China) and its partner AmCham Shanghai released a joint survey of their members. Three-quarters of the nearly 250 member firms surveyed said that they had suffered under the US and Chinese tariff hikes. Slightly fewer than half of responding firms said they had also been subject to Chinese non-tariff retaliatory measures such as increased inspections, foot-dragging by customs authorities and delays in licencing processes. To get around tariffs, many firms have shifted their focus to buying and selling primarily in the Chinese market. About 40 % of firms said they were considering moving or had already shifted production away from China to other countries, especially Southeast Asia or Mexico.