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EU firms want China to ease market access as local rivals come on strong

Respondents in the latest survey from the European Union Chamber of Commerce in China see the Asian nation closing the innovation gap with EU firms by 2020

PUBLISHED : Wednesday, 31 May, 2017, 10:32am
UPDATED : Wednesday, 31 May, 2017, 10:32am

European firms operating in China face rising competition from private Chinese companies while continuing to confront limited market access and an uneven playing field in the country, an influential lobby group said on Wednesday

The European Union Chamber of Commerce in China said in its latest Business Confidence Survey that over half of respondents believe Chinese firms will close the innovation gap with European firms by 2020, most likely in the services sector, providing “a wake-up call to the whole of Europe”.

In the annual survey, released just days ahead of the EU-China summit in Brussels, the chamber also called for removing investment barriers in China. EU-China economic relations face new uncertainty after the EU refused to endorse part of China’s proposed trade statement during the Belt and Road Forum in Beijing earlier this month.

“Competition in China has stiffened and respondents feel that Chinese private firms have become a lot more innovative, primarily in the areas of go-to-market and business-model innovation,” the chamber said in the survey.

It said Chinese firms have become strong in consumer goods and services, but European companies still dominate the industrial market.

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“As past experience has shown, it is highly questionable that a state-directed, primarily top-down process [of R&D] that is in part being driven through state-owned enterprises, will lead to breakthroughs in this area [industrial goods],” the chamber said.

In a press conference ahead of the survey’s release, chamber president Mats Harborn amplified that point, stating: “The most innovative sector is the least regulated.”

Chinese President Xi Jinping and Premier Li Keqiang have pinned their hopes on a “new economy” and innovation becoming the new pillars of economic growth and job creation for China. Reflecting the changing times, mobile payments in China have grown to the extent that the market for that segment of the economy is estimated to have surpassed Japan’s GDP last year.

“In addition to China’s slowing economic growth, attracting and retaining talent, and coping with strangled Internet access, competition from Chinese private firms has risen markedly as a challenge that will impact future business,” according to the survey.

EU firms participating in the survey said administrative issues, ambiguous rules and an unpredictable legislative environment continued to be their top three China operating concerns, despite Beijing’s efforts in recent years to cut administrative requirements.

A United Nations report in April ranked China 78th out of 183 countries in making it easy to do business, the survey noted, calling China’s standing “a poor showing, given the economy’s global importance”.

“Reciprocity in bilateral trade and investment relations between Europe and China remains a bone of contention,” according to the survey.

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China’s investment in the EU soared 77 per cent to more than €35 billion (HK$305.97 billion) in 2016 while EU investment in China dropped 23 per cent to €8 billion.

“European investment in China is simply held back,” the survey found. “Meanwhile, Chinese businesses in Europe face few, if any, obstacles to expansion.”

At least one fifth of EU companies participating in the survey said they have had to transfer technology in exchange for market access in aerospace/aviation, machinery, environment, automotive/auto components, utilities and primary energy.

Companies said they felt most welcome in southwest China and in Shenyang in north China, reflecting local officials’ strong effort to attract foreign investment to less developed parts of the country, but felt least welcome in China’s most developed regions - South China, Beijing and Shanghai.

Despite that, Guangdong, the southern province viewed as having the country’s most dynamic market-based economy, was deemed as the top destination for potential investment expansion by European business.

The survey noted that European companies want officials to complete talks on a bilateral EU-China investment agreement, formally known as the EU-China Comprehensive Agreement of Investment, “as early as in the next 12 months”.

EU firms want the freedom to launch new businesses and to more independently control their China businesses amid a simplified regulatory environment, including fewer barriers to acquisitions in China.

European firms in most industries reported 2016 revenue growth in China, thanks to the government’s stimulus measures invoked in the first half of that year to spur growth. But firms are still concerned about the economic outlook, as the growth they experienced last year was “not from major reform efforts or structural changes” and is tested by increasing debt risks, according to the survey.