The EU-China Business Association, the European Union Chamber of Commerce in China, and BusinessEurope organized a webinar on the occasion of the launch of the 'European Business in China: Position Paper 2021/2022'. This webinar took place online on October 12, 2021. This Position Paper is a culmination of six months of dedicated work by 35 working groups and sub-working groups. This year's Paper looks into the 14th Five-Year Plan and identifies the areas of risk and opportunity, both for European business and China's economy.
Ms Gwenn Sonck, Executive Director of the EU-China Business Association, welcomed the participants to the webinar. Normally we organize this as a live seminar when EUCCC members are coming back to the EU to discuss the Position Paper with the European Commissioners and the European Commission, but due to Covid-19 it has become our second year that we have to do this as an online event. Hopefully we can meet live again at the end of next year in Brussels. Mr Joerg Wuttke is the Chairman of the EUCCC and Vice President and Chief Representative of BASF China in Beijing since 1997. He has lived in China for more than 20 years.
For the full year of 2020 the value of completed European FDI transactions in China reached €9.5 billion, which is a decrease of 21% compared to 2019. For the first two quarters of this year, completed acquisitions and greenfield investments by European companies in China continued to fall. Automotive continued to rank first in the second quarter of 2021, and basic materials and electronics came second and third. One of the largest deals is the ongoing greenfield investment by BASF thanks to the hard work of Mr Wuttke in China. The value of completed Chinese FDI in Europe dropped to USD535 million in the second quarter of 2021 due to the absence of newly announced deals due to the pandemic. Automotive continues to be the top sector for Chinese investment in the EU, followed by health, pharmaceuticals, biotechnology and ICT. One of the big challenges for companies doing business with China is that we still cannot go to China due to the Covid-19 pandemic despite the ongoing vaccinations. During these difficult times the EU-China Business Association acts as an important bridge to promote the economic and trade relations between China and the EU.
Mr Joerg Wuttke said it was sad he could not present the Position Paper in person for a second year and he is not really hopeful about September next year due to travel restrictions given that the zero tolerance policy in China will remain until the Party Congress next year in October or November. China has vaccinated 60% to 70% of the population, although with a vaccine which might be not very good against mutations, but hopefully China will open up faster because the world is reconnecting and China is insular, which is very sad.
The Position Paper is now a more than 400 pages monster in its 20th year and simply doesn't shrink. We now have 930 recommendations – more than ever. You can download the paper from the website of the European Chamber free of charge and you don't need to be a member. The essence of the Paper this year is about self-reliance and China becoming more insular and the economic consequences of this development. China might be punching below its economic weight. Looking at our survey, on the manufacturing side, business was extremely strong. Many companies had record sales in China. The big uncertainty is the energy crunch and the disruption of the supply chain. Until August we were on an incredibly successful ride. European companies are committed to China, there is no intention to leave with just 9% of companies considering it, while 20% of EUCCC members were considering it in 2010, meaning it's less than ever. The market is so important, so big, companies sometimes go through a lot of pain to stay but if you stay you might actually be rewarded. Strong growth prospects are outlined in the Position Paper as we believe that China will account for 20% to 25% of global growth in the next 10 years and in chemicals it is about 60%. In 2030 half of the global market in chemicals will be in China and if you are not in China you will not be a global company.
Why does China have such a growth potential? Because China is still very backward in GDP per capita. The country already now may have the largest GDP in the world, but looking at GDP per capita it is in 86th position between Bosnia and Suriname. There is the claim that China and Europe are the biggest trading partners but it is trading in goods where we are the biggest partner, because China is selling more than two times to Europe of what we are selling into the Chinese economy. Every day China sells €1.1 billion to Europe and we are selling €500 million. China is only the number three market in goods, the U.S. is nearly twice as important and the UK about 20% more important as a market than China. Until four years ago European companies sold more into the Swiss economy than into China. The potential is obvious. In services we sell five times as much into the U.S. economy than into the Chinese one. This shows the closed nature and the potential of the Chinese economy. China is twice as dependent on the European market than we are on the Chinese market. The World Bank looked at the growth of the Chinese economy over the last 30 to 40 years. They put four economies at zero at the date of opening up and then saw how they developed GDP per capita in purchasing power parity terms. First came Japan, then Taiwan and Korea, and China joined in 1978. These four economies in the first 30 years had an identical growth, meaning China was not special. What was special was the size of it. Over the past five years the Japanese and Taiwanese economies are pulling away from China.
Why is that? It is certainly not in our interest having China underperforming. China refuses to globalize more as they promised 20 years ago. China turned inwards. They have good reasons, such as the U.S. sanctions and the insecurity of the supply chains, but this comes at a cost. This includes a decrease in FDI; deceleration of innovation capacity; more challenges for Chinese companies expanding overseas; significant misallocation of resources; reduced access to core technologies; challenges to meet decarbonization goals; and further deterioration of trade and political relations. The borders are closed so that expats cannot come in; we are basically an extinct species. The number of expats in Shanghai, Beijing and Guangzhou put together is less than in Luxembourg, which is unbelievable. This is not very good because diversity brings innovation skills. Shenzhen is by far the most innovative city in China because 60% of the population comes from outside Guangdong. China is producing things it shouldn't be and should rely more on imports. China could easily close the gap in demand for aluminum by importing from Russia. China now has a massive energy crunch and is shutting down industries. China should import more energy-intensive materials.
There is an erosion of China's soft power in Europe and across the world, which makes life more difficult for foreign companies in China because stakeholders are asking why we are doing so many things in China. China managed to become unpopular in a record time from 50% to 60% positive sentiment 20 years ago in the case of Germany to now 75% negative. It is now better for politicians to be tough on China, which means more regulations in Europe and by reciprocity more regulations here. The gap in GDP per capita in different scenarios over the next 25 years between implementing comprehensive reforms and pursuing self-reliance is USD22,000.
National security is driving economic policy there days. China's expanding definition of national security multiplies challenges for European companies. Extensive requirements under the Cybersecurity Law will see some European companies leaving China and even some companies China wants to keep will be forced to leave. Our IT systems might be required to use Chinese hard- and software which might lead companies to have an IT system for China and another one for the rest of the world.
Why should China stay open? Most people underestimate the contributions foreign businesses make to China, They represent 25% of China's growth output; 20% of taxes; 7% of overall employment; and 40% of exports. These figures include Hong Kong and Taiwan.
The Position Paper is written by business for business. Recommendations include:
• Stay away from self-sufficiency and embrace globalization
• Avoid investing in the manufacturing of goods that are already globally available
• Take a proportionate approach to national security and 'CII'
• Continue with market reform and opening
• Build a sound institutional framework
• Avoid politicizing the business environment
• De-escalate sanctions imposed against EU officials and entities
• Rebuild international relationships
Recommendations for the EU:
• Form a coordinated response among all member states to build a robust, united approach to China
• Strengthen European competitiveness by developing a bottom-up industrial policy
• Continue to develop mechanisms to shield European stakeholders from unfair practices, and guarantee a level playing field in the single market
• Continue to cooperate with China in areas of common interest
• Develop a global connectivity strategy based on concrete, transparent and sustainable projects
• Continue to integrate foreign staff into China operations, as well as Chinese staff into global operations
• Strengthen links between China and global teams
• Establish 'decoupling teams' and develop cost/benefit analyses to determine whether and how far to separate China operations from the rest of the world
• Audit supply chains thoroughly and determine potential exposure to sanctions
• Develop flexible decarbonization strategies that can be adjusted: produce clean and green here
Ms Luisa Santos, Deputy Director General of BusinessEurope, moderated the Q&A session. Are we going with China to a similar situation as with Russia with sanctions and a frozen relationship? Mr Wuttke: Sanctions lead nowhere and make things more complex and costly. They are very easy to announce but difficult to take back. Who is going to give in first, it's a very difficult situation. Russification of the relationship is a big worry. A difficult moment will be the Winter Olympics, which might look ugly on TV. The question of forced labor in China might lead to a consumer boycott in Europe and the reaction on China's social media will be very vicious. There is a lot of downside potential. The EUCCC is against sanctions. President Xi Jinping is the only G20 leader who has not traveled outside his own country in more than 700 days to meet face to face with other leaders, which is bad because much information is lost if you do this online. In the EU-China dialogue we will try to take baby steps forward so that the investment agreement might come out of the ICU again. On Chinese media, Europe looks like a mess, but we are not actually a mess. The public opinion on Europe – especially among young people – is absolutely rotten. A dialogue to bridge this is getting more and more difficult. Concerning the China-Australia relationship it was quite amazing to see how China was trying to penalize Australia for criticizing China and then Australia starting to export goods destined for China to other countries.
Could you elaborate on Europe speaking with one voice and on due diligence? Mr Wuttke: For China, European countries individually matter more than the EU. China is more comfortable talking with the member states which is a pity because the European parliament has to ratify the investment agreement and Berlin and Paris can't do much. Due diligence is becoming more important with the supply chain laws. There is a moral value discussion going on about the supply laws. We will need a lot of communication to explain to China why we did it, what might be the benefit for them and explain to our members to take it really serious. Many leaders that have a good grip on the economy and globalization such as Vice Premier Liu He will be stepping down in 2023, and then the question is who will be their successors. There is already an echo chamber in China listening to what the President has to say and this might become even more pronounced. Concerning investing, China means big business. The biggest risk is not being in China. You need to see the problems coming and address them. China is important, it is not Cambodia or the Soviet Union, it is an emerging giant.
How will China further cope with the energy crisis, further opening up and the Covid pandemic? Mr Wuttke: The energy situation is self-inflicted because the toolbox is not there to achieve a green environment. European business is interested in participating because we think we have the toolbox. The energy crisis is coal-based. China imports only about 7% to 8% of its coal consumption, mostly from Indonesia, Russia and Mongolia. There was a corruption scandal in Inner Mongolia and shut downs of coal mines following accidents. We are now facing the heating period and nothing will close the gap at least until April next year. The crisis will ripple through the economy. The powerhouse of this economy – Jiangsu and Guangdong – are hit the worst. The energy crisis in China is unrelated to the one in Europe. More diesel generators are being used, leading to skyrocketing emissions.
How will the Personal Information Protection Law affect companies in China? Mr Wuttke: We worry about the language, which is hazy, but China is looking to Europe. They want to safeguard data protection. They realize that data is power and don't want businesses to have more data than the Communist Party has. But it is not as big a topic as the supply chains decoupling or the energy crisis.
Ms Luisa Santos: It is important that Europe and China keep the dialogue open, despite difficulties with the sanctions. Hopefully we will also have the conditions to unfreeze the CAI, which is not heaven, but a very good road into heaven. It is better to have it than not to have it. It is important that companies remain in China.
