Investment environment for Western firms in China deteriorates

Mark O'Neill September 08, 2022 06:00

The investment environment for Western firms in China is deteriorating due to a Zero-Covid policy without end, drought, worsening relations between Beijing and Washington and Brussels, disputes over Xinjiang and human rights and more protectionist policies.

“We are very distressed about the zero-tolerance policy, the kind of closing-up of the country,” said Joerg Wuttke, President of the European Chamber of Commerce in China. “We see no end to it.

“The world has found its way back living with the Omicron virus, whereas here I must get tested every three days. We must find a way out of this, and I do not see any exit strategy,” he said. Since the start of the pandemic, the number of European expats in China has nearly halved.

On October 16, the Communist Party opens a Congress that will give President Xi Jinping a third term as party secretary and allow him to control key government appointments.

“We learn from history that people who have spent a long time in office hardened their stance rather than loosening up, I guess that it will be more of the same. There will be more control,” Wuttke said.

Last week the U.S.-China Business Council issued its 2022 Member Survey based on responses in June from 117 member companies.

Their top challenge is China’s Covid-19 policies. Then comes bilateral tensions. “Respondents report record-high concern with US-China relations, which continue to deteriorate. Geopolitical pressures are bleeding into the commercial realm,” the report said.

“Significant market access barriers remain … Intellectual property protection has seen limited improvement. Chinese economic planners have expanded industrial policies to bolster Chinese companies, and localization requirements to qualify for state-affiliated procurement are increasing. New Chinese data security and privacy rules threaten to disproportionately increase costs for multinational companies,” it said.

In December 2020, China and the European Union reached agreement on a Comprehensive Agreement on Investment (CAI) after seven years of negotiations. But sanctions by the two sides have frozen the agreement.

“I see very little room for compromise between Beijing and Brussels and the member states,” said Wuttke. “It will be very difficult for European companies to operate in because we have new supply chain laws coming up. We are also impacted by the Uyghur Act that came out in the U.S. recently. It becomes just more tedious and difficult to conduct business and many companies have already left the Xinjiang region or the supply chain because they cannot prove that it has no forced labour.”

The Russian invasion of Ukraine is another blow. A European Chamber survey conducted after the start of the war found that European businesses see a correlation between Ukraine and Taiwan.

“I think that is unnecessary,” said Wuttke. “I really do not see that there’s any imminent danger of a real blockade, a war in Taiwan. But the fact is that headquarters (in Europe) see it like this. Of course, the actions of the Chinese navy and army around Taiwan are certainly not helpful either. So, in a way, Russia has dented the view on China.

“The headquarters clearly are under a lot of pressure from public opinion, parliaments, NGOs, media and so on. European companies are not leaving China, but we see them considering putting the money elsewhere in Asia and figures prove it,” he said.

Another negative for European firms was a survey published last week by Berlin-based MERICS, a think tank for China studies, and the BDI industry association. It found that, between February 2010 and March 2022, Beijing used economic coercion against European companies to pressure their governments and not cross certain lines in 123 cases.

“Since 2018, China has increased its use of economic coercion, and the triggers have become more diverse,” it said. “China’s red lines have expanded beyond traditional issues of sovereignty and national security to include China’s international image and the treatment of Chinese firms abroad.”

It said that companies in the consumer and agricultural goods, commodities and services sectors were the most frequent targets of retaliation, since in these areas alternative providers could usually be found. Most vulnerable sectors and companies are those deemed to be of little value to the strategic goals of central and local governments in China, it said.

“Foreign companies of high strategic relevance, such as hi-tech firms with a large investment presence in China, are likely to be more secure. Those companies can be outspoken on issues which do not align with the positions of China’s government and are unlikely to face severe repercussions,” it said.

-- Contact us at [email protected]

Mark O'Neill

A Hong Kong-based writer, teacher and speaker.