”Severe challenges” for EU firms in China due to zero-Covid rules and Ukraine war

”Severe challenges” for EU firms in China due to zero-Covid rules and Ukraine war

The strict zero-Covid controls and Russia’s war in Ukraine have undermined China’s attraction for foreign firms, with more European companies considering cutting investment in the country, according to a survey by the European Union Chamber of Commerce in China (EUCCC). A flash survey by the EUCCC and management consulting firm Roland Berger said 23% of companies polled are considering shifting current or planned investments out of the country due to the Covid-19 controls. That was more than double the number of firms that were considering doing so at the beginning of the year, and marked the highest proportion in a decade, the survey said. Some 75% of respondents said China needs to shift away from the draconian Covid-19 containment measures it uses at the moment, with 91% believing the country should focus on vaccinating the population.

Chamber President Joerg Wuttke said European firms were calling for action from the government. “It is basically a wakeup call for the government, something has to happen,” he told media. “China is 30% of global trade, we need China to be efficient. China has the best infrastructure and the most efficient clusters. If they are not available or hampered by Covid policies, we have big problems globally.” The Chamber also said that 7% of the companies polled were considering moving from China due to the war in Ukraine. “Both factors are creating severe challenges to European business in China,” the EUCCC said. Nearly all European companies have been affected by port closures, a decline in road freight and surging shipping costs. “Supply chains have taken a pounding, both upstream and downstream,” the Chamber said. The survey found that 60% of companies have cut revenue forecasts for 2022 and a third have reduced headcounts due to virus controls.

Wuttke said that if the situation continues European companies would increasingly evaluate alternatives to China. “A predictable, functioning market is better than one that, despite having high growth potential, is volatile and suffers from supply chain paralysis,” he said in a statement accompanying the survey. In a letter to Vice Premier Hu Chunhua, the Chamber called for China to shift away from the “old toolbox” of mass testing and isolation and instead employ “the best mix” of vaccinations and boosters, while allowing positive cases with no or mild symptoms to quarantine at home. But Wuttke said he did not expect Beijing to adjust its zero-Covid policy any time soon. “The predictability of the Chinese market was always one of its strengths, that has gone out the window,” he told reporters.

“As long as China does not signal that it is learning how to live with Omicron, we have to assume that China will not change the zero tolerance policy. Though the hardline policy worked well initially, China runs the risk of becoming a victim of its past success,” Wuttke said: “What our survey is indicating is there will possibly be less investment into China and the substitutes will be in Southeast Asia,” he said. “And that is very easy.”

Adding to challenges for foreign firms was Russia’s invasion of Ukraine. The survey showed 78% of companies think China is a less attractive investment destination due to its hardline pandemic containment, while the Ukraine war led to a similar response. “The war is exacerbating challenges faced by businesses as supply chains disintegrate,” the Chamber said. “Nearly two-thirds of respondents have faced disruptions transporting goods to and from Europe.”

Rising material and energy prices have also affected more than half of European companies polled. Denis Depoux, Global Managing Director of Roland Berger, said the virus controls have affected companies’ ability to make sound business decisions in an overall deteriorating economic environment due to the Ukraine war. “A clearer crisis exit strategy would help maintain confidence in a European business community still highly committed to Chinese markets,” said Depoux.

Despite the frustrations of foreign businesses, China is still conducting a charm offensive to woo more overseas investors. “We should actively respond to demands of foreign-funded enterprises for ease of doing business in China, to stabilize the bedrock of foreign trade and foreign investment,” the 25-member Politburo said in a statement. Wuttke said the message was welcomed, but more work was needed. “The core of what we are saying today is that we cannot make a decision if we cannot enter the country, we cannot get our goods moving within China, and we don’t know when that is going to happen, because no one tells us when China changes policy,” he said, adding the attitude does not work any more, the South China Morning Post reports.

According to a commentary in The Global Times, the “ditch China” claim has been refuted by many foreign firms and industry players, who reasserted their confidence in the world's second-largest economy and its key role in the global industrial chain, and also appreciated the government's efforts of striking a balance between epidemic control and work resumption. Observers and experts are also calling for foreign investors to ride out the temporary difficulties together with the Chinese, believing in its ability to fight against the virus, and once this round of outbreaks ebbs away, those sticking to their vision will have a lot to gain. From a global perspective, China is still one of the world's fastest-growing major economies and home to the world's largest population, which are conditions attractive to many multinationals, ranging from auto companies and financial institutions, analysts said. The Global Times added that also refuting the “investor flight” claim is official data showing that foreign direct investment (FDI) flowing into China rose by 25.6% to CNY379.87 billion year-on-year in the first quarter of this year.

In Hong Kong, all overseas travelers flying into the city's airport will be required to undergo rapid testing in addition to a PCR screening after the EUCCC complained in a letter to former Chief Executive Carrie Lam that the entry regime remained a “nightmare”. “Almost daily, our members and other residents have been reporting that they are unable to find their way back to Hong Kong or see their business travel being cancelled,” it said. The Chamber urged authorities to use rapid antigen tests (RAT) instead of PCR tests at the airport and called for the removal of the flight suspension mechanism. Inbound travelers, both Hong Kong residents and visitors, who have been inoculated twice outside the city, can now also declare their non-local vaccinations or recovery records to authorities to receive a provisional vaccine pass.