The EU-China Business Association (EUCBA) and the European Union Chamber of Commerce in China (EUCCC) organized a webinar focused on European Business in China: Position Paper 2024/2025 on 17 October 2024.
Ms. Gwenn Sonck, Executive Director, EU-China Business Association, welcomed the participants and introduced the speaker and the topic of the webinar. The Position Paper details the challenges European companies operating in China are facing and provides more than a thousand constructive recommendations to the Chinese government on how they can be solved. It provides the blueprint for rebuilding business confidence in the Chinese market and restoring it as the first destination for global investment.
Mr. Adam Dunnett, Secretary General, European Union Chamber of Commerce in China, gave a presentation on the “European Business in China: Position Paper 2024/2025”. Covid seems to be long forgotten, but it has led to lasting behavioral changes in the business community. Businesses were expecting a rebound that never occurred. A tipping point has been reached: for many, the risks are beginning to outweigh the rewards. The argument to headquarters to continue investing in China isn't so obvious as it used to be. The situation is likely to deteriorate unless comprehensive action is taken. Long-standing challenges persist, including market access and regulatory barriers, a highly politicized business environment, and prioritization of national security and advancing self-reliance. Over 50% of EUCCC members say that these issues still affect them. Market access has improved, but the regulatory barriers have increased. New challenges have emerged: China's economic slowdown, lackluster domestic consumption, and overcapacity in many sectors. This environment makes it very difficult for companies to be profitable. Hotel companies' revenues have not yet reached the level of 2019. The average room price for a night in Beijing is still below what it was in 2019. In this tougher economic environment, the idea of companies investing more, is increasingly questioned by headquarters because there are other markets that have higher marginal returns.
In 2024, 68% of Chamber members said the business environment has become more difficult, which was a record high and beat last year's 64%. European companies' outlook on profitability has deteriorated substantially and pessimism about profitability reached 44%, the highest level on record. Members have begun shifting investments planned for China to alternative markets and the nature of FDI into China is becoming increasingly “defensive”. There is an exodus ongoing with less and less Europeans in China, and Chinese taking up more managerial positions. Their views are different from those of headquarters and this gap is growing.
Over the last 20 years, China had four fundamental milestone periods. The early 2000s, when China joined the WTO, was an incredible period in which China revised almost 200,000 local regulations and largely implemented its commitments to the WTO. But the momentum didn't continue, as China felt it had done its part. At the time of the Third Plenum in 2013, there were calls for additional reforms and opening up. The Plenum announced that market forces played a decisive role in the economy, but also that the state sector was becoming “bigger, better and stronger”. The opening for foreign investment happened in 2017, when President Xi Jinping went to Davos and delivered a speech about China continuing to open up and reform. China did drop many of its joint venture requirements and cut a lot of import tariffs. But the majority of our companies saw the continued focus on the state sector and doubled-down on their joint ventures to grow with them in the market. Even with the cut in tariffs, The EU's trade deficit with China kept growing. Despite these announcements and some actions, it was too little too late to make a big difference. The most recent announcement, the 13 August 2023 opinions, is a fantastic document, saying all the things that we want to hear. So the Chamber decided to track implementation during the past year. We saw this as a once-in-a-five-year-period significant commitment. The Chinese government says 60% of the measures have already been implemented and the rest is being implemented.
There were 24 measures and nearly 60 sub-measures, which the Chamber organized across six thematic areas:
• Market access and procurement: narrow progress, big-ticket items unaddressed. Headway was made on sectoral initiatives of limited impact or geographical scope, and limited progress on big-ticket items such as the Government Procurement Law. Our members not only feel the same level of discrimination related to procurement as a year ago, but it has gone much further. The attention on security and self-reliance has reached a new level, and because of that, the level of window-guidance is much stronger than it was before. In this area things have gone backwards.
• HR and business travel: welcome progress, but issues of most importance to business remain untouched. Policies on visa-free travel were greatly welcomed. We have seen more tourists coming, but not the same level of business travel that we expect. The individual income tax (IIT) extension was necessary to stem further outflows of foreign talent, but represents the maintenance of the status quo only.
• Digital and cyber: progress made, but at a slow pace. Data is the new oil and China revised its Cross-Border Data Transfer (CBDT) regulations, making improvements, but there is still a lot of work to be done to clarifythe category of “important data”.
• Green energy access: key area for business, not emphasized in the Opinions. This is one of the most important areas for European companies to meet their ESG pledges and for China and Europe to cooperate. China is a great producer of renewables, but the capacity isn't well connected.
• IPR: enforcement remains a challenge. The 24 measures have strong wording on protecting IPRs. We have seen progress in laws and regulations, but implementation remained basically stable. China needs more capacity to deal with IPR cases. The platforms that have fake products are known, but authorities are not going after them.
• Investment promotion and facilitation: progress made, but more ambition and specificity needed. We don't need more talk and action plans, we need more action. Despite of all the positive wording, there is much more that can be done. Too tight security measures prevent foreign companies bringing their advanced technology to China. If they have to use local alternatives, they don't have a competitive advantage and incentive to invest.
The 2024 Third Plenum leaves little to suggest that a change of course is imminent. The wording of “market forces playing a decisive role in the economy” was very similar to 2013. The focus is still on investment in manufacturing while there is much overcapacity. It is regrettable there wasn't more focus on boosting consumer demand. You need to read both the 24 Measures and the 2024 Third Plenum Decision, two very different documents to make your own decision.
Summary: As a Chamber we are not very focussed on the stimulus measures, which we don't think China needs. It needs to go back to basic principles: markets playing their role in allocating resources and give a lot more clarity that companies need. Left unaddressed, companies will remain on the sidelines and be careful and cautious about making investments.
• Our members remain highly committed to China, but with the risks of doing business increasing and the rewards decreasing, many are now concluding that additional China investments require a strategic rethink.
• A tipping point has been met: some members have already begun to both shift investments planned for China to alternative markets and silo their China operations.
• This trend will continue if key business concerns are left unaddressed.
• The potential of China remains attractive, but after over a decade of limited action being taken to implement reform promises, expectations of meaningful change have been dialed down.
Action is urgently needed to turn the tide.
A Q&A Session concluded the webinar.
The European Business in China: Position Paper 2024/2025 can be downloaded here in PDF format.
