China’s coronavirus controls top concern for European firms, who may ‘vote with their feet’ if uncertainty persists
- Beijing’s stringent approach to containing Omicron outbreaks is the biggest challenge for European businesses in China, a new survey shows
- Some 23 per cent of European firms are considering shifting current or planned investments out of the country, the highest proportion in a decade
Strict coronavirus controls have surpassed rising labour costs, slowing economic growth and tensions with the United States to become the top concern for European businesses in China for a second year running, according to a report released on Monday.
The uncertainty generated by recent lockdowns in cities across China has also forced many to rethink future investment in the world’s No 2 economy, the European Union Chamber of Commerce in China said.
“The current situation has given many pause for thought, and some may vote with their feet should the current wave of uncertainty continue, especially when other markets offer more predictability,” the chamber said.
More than three quarters of respondents said that virus control measures have reduced China’s attractiveness as an investment destination, while a third viewed the market as less desirable due to geopolitical tensions.
Around 69 per cent of the respondents ranked the coronavirus as the biggest challenge for businesses in China, an increase of 5 percentage points from a year earlier.
Some 46 per cent said rising labour costs were the most pressing issue, followed by 42 per cent who chose China’s economic slowdown, 30 per cent who thought market access barriers were the biggest obstacle and 25 per cent who were most concerned about decoupling.
The warning from the European chamber comes amid growing concern about the health of China’s economy, with retail sales dropping for the third straight month in May and the youth unemployment rate hitting 18.4 per cent.
Overseas companies have been instrumental in China’s technological advancement over the past four decades, but relations with many of its largest trading partners have deteriorated sharply in the past two years.
The European chamber said doing business in China became more difficult last year, with 60 per cent of respondents reporting this to be the case – the highest level on record.
European firms also said China’s business environment was becoming increasingly politicised, while long-term issues like market access, an unlevel playing field and regulatory inefficiencies remain.
Many expected political pressure on business to increase after China and the European Union sanctioned each other in relation to alleged human rights abuses in Xinjiang. There have already been consumer boycotts of European brands, such as H&M.
“Covid has exacerbated uncertainty, with businesses being unsure if their operations will be shut down in case a Covid-19 case is detected. So this risk is actually hanging over our heads here every day,” said Bettina Schoen-Behanzin, vice-chair of the European chamber.
“That does not mean that we expect most members to leave China entirely, but the form they take is changing.”
The newest survey found that two thirds of European companies reported revenue increases last year, up 22 percentage points from a year earlier.
Meanwhile, their earnings before interest and tax took a turn for the better, with four out of five companies reporting positive results.
Chinese authorities have organised dozens of meetings with foreign-funded firms and commerce chambers in the past two months, part of their endeavour to stabilise foreign trade and investment.
They have also relaxed virus control measures and prioritised business resumption nationwide.
Klaus Zenkel, chair of the chamber’s south China chapter, said 94 per cent of its members have no plan to relocate away from the region despite higher manufacturing costs.
“Most companies would like to promote automation optimisation and lean manufacturing to contend with this situation,” he said.
China’s actual utilised foreign direct investment reached US$87.8 billion in the first five months of this year, an increase of 22.6 per cent, commerce ministry data showed.