BOFIT Viikkokatsaus / BOFIT Weekly Review 2022/40

The European Union Chamber of Commerce in China (European Chamber) released its latest position paper at the end of September. The paper provides a broad overview of the current Chinese business environment and challenges facing foreign firms operating in China. The European Chamber paper finds that the business environment for European firms operating in China has been severely impacted by changing circumstances and increased uncertainty. Ideology now takes precedence over economic issues, which is reflected in China’s strict covid policies, unpredictable rule changes, bias favouring domestic producers and political quest for economic “self-sufficiency.”

Russia’s invasion of Ukraine has caused many firms to reassess their risk exposures in China. While very few European firms have decided to move their entire production from China, the European Chamber notes that companies are increasingly isolating their China operations and arrangements from their other operations. Many firms consider making their future investments in other countries. An important priority for many companies is to diversify supply chains to limit production disruptions even if it raises costs. Possible reputational damage related to China has also increased as European perceptions of China have soured.

China’s zero-covid policies have isolated China by making it harder to conduct business or otherwise permit the normal engagement of Chinese and Europeans. Many European expats have left China and skilled foreigners to replace them are hard to find. In recent years, the investment flows from Europe to China have decreased and the investments have been concentrated to a handful of large European firms. The latest calculation from research and analytics specialists Rhodium Group show that just ten companies in recent years have accounted annually for an average of 80 % of all European investment in China. Investment of car companies accounts for about a third of that investment. According to the European Chamber, there are basically no newcomers to China, and it is unlikely that this situation will change as long as China’s strict covid policies remain in place and significantly limit business travel.

The European Chamber’s latest paper offers 967 constructive suggestions, many of which have already been on the table for several years. A leading suggestion is that China refocus its policy emphasis back to reform and opening up of the economy. This policy reorientation would raise corporate and investor confidence, as well as improve China’s growth outlook over the long run. Greater regulatory transparency is also needed, and capricious regulatory changes should be avoided. The European Chamber also would like to see officials to pay better attention to the views of their colleagues in other ministries, government agencies, firms and research institutions in decision-making. The operations of state-owned enterprises should be reformed to make them more market-based and forced to compete without unfair advantages. More effort is needed in vaccinating the population against severe covid and increasing opportunities for international air travel.

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