Self-reliance will cut China growth, drive out foreign firms

September 24, 2021 10:02
Photo: European Chamber in China

The government’s policy of self-reliance will reduce the rate of economic growth and drive out foreign companies, a report by one of the country’s most important business groups in China said.

The European Business in China Position Paper 2021/2022 was released yesterday (Thursday) in Beijing and Shanghai. It was the culmination of six months’ dedicated work by 35 working groups and sub-working groups. The European Chamber in China represents 1,700 companies.

“There are troubling signs that China is increasingly turning inwards … and this tendency is casting considerable doubt over the country’s future growth trajectory,” it said.

“We see that actually they’re willing to sacrifice certain growth potential for, frankly, economic control and political control,” Chamber president Joerg Wuttke told reporters.

The report appealed to Beijing to open telecom, finance and other state-denominated industries wider to private and foreign competitors. It made 930 recommendations, including calling on regulators to clarify a mass of cybersecurity, personal data and other rules and make sure they apply only when needed.

“China should increase integration into the global economy and steer away from ‘self-sufficiency’,” the report said.

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 did not provide sufficient transparency or legal certainty, and therefore made China less attractive.

“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,” the report said.

One measure of the change is the fall of foreign nationals resident in Beijing and Shanghai from 316,047 in 2010 to 226,768 in 2021. These are people who make significant contributions to innovation, efficiency and productivity.

The latest census found only 845,697 foreigners in a country of 1.4 billion people, or only 0.06 per cent, a proportion far below that in South Korea, Japan or Taiwan.

Because of increasing 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.

Another historic change is the dramatic 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 report said.

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 ones 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 US$49 billion to US$72 billion in state subsidies. All this money has not created 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. Also, the C919 can barely be considered a Chinese aircraft – the vast majority of its component suppliers are American and European companies.

Semi-conductors are another industry in which the state dictates policy, the report said. 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 companies produced only 5.9 per cent of the total market; the value of imports was US$350 billion. 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.

Foreign companies contribute to significant chunks of China’s tax revenue, trade and employment, said Wuttke. China remains a key market for European companies, especially during Covid-19.

“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. China will contribute more than 20 per cent of global GDP growth over the next five years, according to IMF forecasts,” the report said.

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