The EU-China Business Association, the European Union Chamber of Commerce in China, and BusinessEurope organized a webinar on the 'European Business in China: Position Paper 2022/2023' launch on September 30, 2022.
Ms. Gwenn Sonck, Executive Director, EU-China Business Association & Flanders-China Chamber of Commerce, welcomed the participants to the webinar. This is the third year that the presentation is held online due to the Covid-restrictions. The Position Paper is a flagship publication of the EUCCC and includes the views from 41 industry-specific working groups representing European businesses in China. This year's paper outlines how over the last year there has been a significant shift in focus at headquarters when evaluating China. EUCCC President Wuttke, who is also Vice President and Chief Representative of BASF in China since 1997, will present the Position Paper.
For many of our companies the travel restrictions to China and the sudden lockdowns are one of the biggest difficulties now. Nevertheless, European companies are committed to remain in China and continue to invest. They have more localization strategies involving building up local supply chains and partnerships. Other challenges are due to the slower growth of the Chinese economy, the global economic slowdown and rising geopolitical tensions. European investments in China increased slightly in 2021 to €8.6 billion compared to €8.5 billion in 2020. Most were greenfield investments. European investments in China have already increased by 15% in the first six months of this year. The investments come mainly from a handful of large firms. No new European firms have chosen to enter the Chinese market. However, many companies are waiting for the borders to open again.
Mr. Joerg Wuttke, President of the European Union Chamber of Commerce in China mentioned that China is still extremely locked up and therefore the Position Paper of almost 430 pages is presented from Beijing. In a nutshell, we said that ideology trumps the economy in a break with the successful reform agenda. It is more important to Chinese enterprises as European companies have largely escaped from the Party telling them what to do. But it has challenged the predictability, reliability and efficiency that they used to enjoy on the Chinese market. We see more rapid policy shifts and that has also been challenging our sourcing destinations. The lockdowns shocked all of us. While the rest of the world has been living with Covid, headquarter attitudes toward China are shifting. Our top people cannot come over here, and Taiwan has come on the radar with companies asking what will happen following the recent blockade. The Taiwanese economy is vital to European businesses with the stock of EU businesses in Taiwan amounting to €45 billion, besides the vital importance of semiconductors to our supply chain. There are also the U.S. sanctions on Xinjiang where you need to prove there is no forced labor involved in the products you export, which is very hard to prove as no auditors are willing to go to Xinjiang. The World Bank has lowered its forecast for economic growth to 2.8%, which is incredible because the first quarter of this year was still very good. For the first time since 1990 the rest of Asia is growing much faster than the Chinese economy. Asia's growth was 2.6% last year and now it is 5.3% for this year. We have not yet seen European companies leaving China, but China now opens the doors of other countries for investments, which is not a good sign for those representing business in China.
The Rhodium Group showed that the European top 10 of investors made up 75% to 80% of European investments and four German companies make up 34% of investments, which is not very natural. This means SMEs running on autopilot and no new companies coming to China because it is too much trouble. In the first quarter, European investments in China did quite well but of this €4.3 billion, €3.6 billion was coming from only one company: BMW buying out Brilliance. In the second quarter, European investments in China fell to €1.2 billion. There is something wrong about attracting European companies. European investment in the U.S. was 20 times more. It is very difficult to make acquisitions in China.
Five factors are eroding China's standing as an investment destination:
1. Change in approach to policymaking. There is a constant turning to SOEs to make them become “stronger, better and bigger”. China has 150,000 SOEs. Sometimes they are good for us as partners, but sometimes they are real challenges for Chinese private enterprises. Their payment terms are shocking, turning private enterprises into little banks. Policy making is less coordinated, such as the dual control policy implementation and the technology and education sector crackdowns.
2. Entrenched Covid-19 challenges. China had success managing the first two years of the pandemic. Until the end of 2021, zero-tolerance bought time and security and China looked so much better than most of the other nations. But they missed the train when Omicron came. They should have continued the vaccinations, 80% have two shots but less than 60% – particularly in the age group above 60 – are under-vaccinated. Policy implementation was inconsistent with in Shenyang 28 days of quarantine and 7+3 in Beijing. If you are traveling in China, it is very challenging to the point that you don't dare to leave the city. Traveling from Chengdu to Chongqing for a meeting of two hours, you need to be quarantined for two times two days. In China the hospital system is loaded with people that are actually going to be fine. Uncertainty is here to stay as there is no clear exit strategy. The solution is more vaccination. The Singapore model did much better with international passenger numbers rising again. In July China had 146,000 passengers coming in and going out compared to 3.3 million in Singapore. The one-week number for Singapore equals seven months in China.
3. Loss of diversity and knowledge-exchanges. Back home, negative attitudes towards China are at an all time high. China's reputation is sinking like a stone. The percentage of people having an unfavorable opinion of China goes from 87% in Japan to 50% in Greece. Democratically elected leaders have less policy space to engage positively with China because China is viewed as a problem. This is also challenging for us. It is also a problem for the future perception of China. There is a steep decline of people wanting to study Chinese compared to a sizable increase in other Asian languages. We are bound to lose a generation of people who understand China because they speak the language and possibly could have lived here, but also as an interlocutor with China.
4. Increased politicization of business. Companies get penalized for policy actions in their home countries which they cannot control. The good news is that we haven't yet seen consumer boycotts of Chinese companies in Europe.
5. Supply chain strategies are shifting from a focus on efficiency to resilience. There is more onshoring and creation of divergent supply chains and headquarters are evaluating friendshoring, nearshoring and reshoring. China's position at the center of global supply chains is challenged.
EU-China trade is far below its potential. In the first half China was a tremendous success story, selling about USD300 billion into the European economy, while the EU has only been selling USD112 billion into the Chinese economy. Measured in containers, it is 3.5 to 1. We were selling 2.5 times more to the U.S. economy. China relies on European consumers to employ 14 million people in China, or 2.2% of GDP. China should be really worried about the EU having a recession. We are actually underrepresented in China. We are trying to get the message across to China that they are a very closed market.
GDP per capita in China was USD17,000 last year and will end up with USD46,000 by 2050 if staying on the same course. With limited reforms they would undershoot all the other markets. European businesses would like China to refocus on reform and opening up and being part of our global system. In this case China would reach USD55,000 in 2050. The question is do you really want to sacrifice USD21,000 of per capita GDP on the altar of ideology?
The EUCCC has 967 tangible recommendations. There are also recommendations on carbon neutrality and research and development for Europe.
The webinar concluded with a Q&A session, moderated by Ms Luisa Santos, Deputy Director General of BusinessEurope. Is China's political leadership aware of the situation and how much are they prepared to do? Mr Wuttke: We met Minister of Commerce Wang Wentao. Two organizations have been really helping us: MOFCOM and the CCPIT. There are people who not only understand what the problems are, but also act in order to fix it. There are also those that don't like what we say, taking criticism as an offense. We are trying to be as specific as possible outlining the facts. All this comes when China is facing a real estate crisis, is aging, and is subject to incredible sanctions from the U.S. Sometimes it seems like a perfect storm. We point out where there is room for improvement. Chinese companies are laying off people and not hiring enough. We tell the government that maybe they should change the policies because they hurt their own economy.
How do you see the future of investment between the EU and China. Is there really decoupling? Mr Wuttke: For many companies China is a must and we actually underinvested. In the chemical sector, China is 50% of the global marketplace. In that segment, if you're not at the table, you're gonna be on the menu. You have to be here. It is similar in the car industry, not only because China is 30% of the global market, but also because the Chinese are very demanding consumers. They don't want cars, they want computers on wheels, and are driving companies to come up with the best products. The Chinese machinery market is as big as the U.S., Europe and Japan together. If you are not here, you are not a global player. But currently China risks a rerouting of foreign investment, which is going to last until China fixes its vaccination problem, which according to my guess will be late summer next year.
Are European companies worried about due diligence and the forced labor ban? Mr Wuttke: You need to comply or you might end up with a huge legal bill. Awareness here in China is not as high as in headquarters. That means that other countries that don't need to prove they are not using forced labor are looking better.
Has decarbonization in China been negatively impacted by the current situation? Mr Wuttke: Last year they liberated coal prices and capped electricity prices and there was an energy crisis which was however fixed surprisingly fast. This summer there was a mass climate change challenge in China with more coal-fired power stations coming online. We have an energy crisis in China which requires more coal-fired power stations while at the same time the economy is taking a hit. European companies are moving from the Northeast more to the South because there is more wind energy to meet their goals. Energy consumption has been going down, alleviating the pressure on the system. Emissions in China between April and August went down by 8% due to the real estate crisis.
How much is China tightening capital outflows? Mr Wuttke: Not at present, we are more struggling with the renminbi, which is incredibly weak right now. We have never seen so fast a depreciation of the currency. But we are in the same boat like Europe and Japan.
Will we become more dependent on China in the future? Mr Wuttke: We are dependent on APIs, antibiotics, certain metals and printed circuit boards. We are dependent on about 10 to 15 products only. Value-wise the dependency is very little, but the impact is very high. We should distinguish between the import which is nice to have and import where we should do something about it.
How do you see China-EU relations from a political perspective? Is Europe moving closer to the U.S. regarding China? Mr Wuttke: We fought seven years for the CAI and were happy when it was signed and were disappointed when it was killed by the sanctions. The political environment is not good. The question China doesn't get is what the Ukraine war does to us. I hope that when Macron and others meets Xi Jinping they can explain this and also why we are willing to take such an economic pain. We have to engage with China, not only on climate change, but also politically.
If you have one wish, what would you like to see from the Party Congress? Mr Wuttke: One measure would be: vaccination, vaccination, vaccination. There is no other way to open this society. Tell people that we can live with Omicron and reconnect with the world. As long as there is no vaccination, China remains closed-off.
Mr. Jochum Haakma, Chairman, EU-China Business Association, discerned a cry of the heart not to let China down as it is extremely important to have a good relationship. We should keep our attention on China and try to engage as much as we can. Face-to-face contacts are extremely important, because by Zoom and Teams meetings you miss the psychological touch.
Mr Wuttke: We still believe in China's ability to reform.
The Position Paper 2022/2023 can be downloaded from the website of the European Union Chamber of Commerce in China.
