European companies rethink their plans for a ‘closed’ China

Germany’s foreign direct investment to China is up about 30% in the first eight months of the year from a year ago, China’s Commerce Ministry said Monday.

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BEIJING — European companies in China are reassessing their market plans after this year’s Covid controls further isolated the country from the rest of the world, said Joerg Wuttke, president of the European Union’s Chamber of Commerce in China.

China’s strict Covid policies have restricted international travel and business activity – especially after a two-month lockdown in Shanghai this year.

The harsh measures of the past two years initially helped China to recover more quickly from the shock of the pandemic compared to other countries.

But the policy is increasingly contrasting with a world that is easing more and more Covid restrictions.

For European companies, “we’re talking about a complete overhaul of our view of China over the past six months,” Wuttke told reporters during a briefing for the chamber’s annual China position paper, released Wednesday.

He said the lockdowns and uncertainty for businesses have turned China into a “closed” and “distinctly different” country that could push businesses to leave.

So far, most companies haven’t left — just some very small ones, Wuttke said. But he pointed out that the chamber cannot investigate companies that decided not to enter China at all.

I’ve been here 40 years and I’ve never seen anything like it, where suddenly ideological decision-making is more important than economic decision-making.

Joerg Wuttke

President, EU Chamber of Commerce in China

EU foreign direct investment in China fell by 11.8% in 2020 from a year earlier, according to the chamber’s position. More recent figures were not available.

While there is still ‘a select group of high profile multinationals poised to make billions of dollars’, the trend of declining FDI is unlikely to reverse, as European executives are severely restricted from traveling to and from China to explore potential greenfields. projects,” the paper said.

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The Chinese economy grew by 2.5% in the first half of the year, well below the official target of about 5.5%. Beijing indicated at the end of July that the country may not meet that target.

Meanwhile, authorities have shown little sign of abolishing the so-called dynamic zero-covid policy.

China has reduced quarantine time for international and domestic travelers. But sporadic lockdowns, whether in the tourist island of Hainan or the city of Chengdu, have heightened business uncertainty.

Wuttke said he expects China to open its borders by the end of 2023 at the earliest, based on the time it will take to vaccinate enough of the population.

‘Ideology trumps the economy’

European companies that have stayed in China are increasingly faced with an environment where “ideology trumps the economy,” the chamber said in the summary.

“I’ve been here for 40 years and I’ve never seen anything like it, where suddenly ideological decision-making is more important than economic decision-making,” Wuttke said. “And maybe that will also be reinforced by outside voices, America[n] sanctions, America is cutting off China, so I can partly understand why self-reliance is so high on the agenda.”

He referred to China’s pressure in recent years to build its own engineering and other industries.

Meanwhile, among other measures, the US has restricted its companies from supplying key components to Chinese tech companies such as Huawei.

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The chamber did not specifically specify what this ideology consisted of, but said China’s Covid policy embodies the country’s “way of the rest of the world”.

The policy has not changed despite many long, frank conversations with Chinese government officials, Wuttke said.

“I think these people, they’re torn between what they see that needs to be done, can be done,” he said. “Then [there’s] a very strict, very clear directive from the top of, this is how it should be, that is the ideology. And how can you challenge ideology?”

Chinese President Xi Jinping said earlier this month that the country has “continued to respond to Covid-19 in a well-coordinated manner and promote economic and social development,” according to a paraphrase of his comments from China’s Foreign Ministry.

While Xi said that “China has entered a new stage of development,” he claimed that “China’s door to openness and friendly cooperation will always be open to the world,” the release said. His comments came during his first foreign trip since the start of the pandemic — to Kazakhstan and Uzbekistan — where he met leaders from several countries in the region.

In recent years, the Chinese leader has sought to unite the country around the ruling Communist Party and its plans for the “great rejuvenation of the Chinese nation.” Xi will consolidate his power at a major political rally next month.

China’s big market

Foreign companies that are already in China generally stay put for the time being.

Even if China’s economy grows slower, its size and low base are “actually a compelling argument” [for foreign businesses]we’re still going to make it,” Wuttke said.

Some, especially German car giants, are investing more.

During the first eight months of the year, foreign direct investment from Germany rose about 30% from a year earlier — faster than the 23.5% rate recorded for the first seven months, China’s Commerce Ministry said. Monday.

However, the ministry has not released updated figures on investment from the US, which was up about 36% in the first seven months of the year, according to official data.

Foreign companies can still find specific opportunities.

China is improving access to the local market, albeit in areas where locals already dominate or are “desperate” for foreign investment, Wuttke said. “Otherwise I would honestly stop producing this paper.”

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