European businesses are rethinking their plans for a ‘closed’ China

BEIJING — European companies in China are rethinking 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 Chamber of Commerce in China.

China’s strict Covid policy has restricted international travel and business activities – particularly after a two-month lockdown in Shanghai this year.

The tough measures taken over the past two years initially helped China to recover from the shock of the pandemic more quickly than other countries.

But politics are increasingly contrasting in a world that is increasingly easing many Covid restrictions.

For European companies, “we’re talking about a complete realignment of how we look at China over the past six months,” Wuttke told reporters at a briefing for the chamber’s annual China position paper released on Wednesday.

He said the lockdowns and uncertainty for businesses have made China a “closed” and “unmistakably different” country that could prompt businesses to leave the country.

So far, most companies have not gone, only a few very small ones, Wuttke said. However, he pointed out that the chamber cannot interview companies that have decided not to enter China at all.

According to the Chamber’s position paper, foreign direct investment from the EU in China fell by 11.8% in 2020 compared to the previous year. More recent figures were not available.

“While there is still ‘a select group of high-profile multinationals ready to make billion-dollar splashes’, the trend of declining foreign direct investment is unlikely to reverse, while European executives are severely constrained to move in and out of China to travel to develop potential greenfield projects,” the newspaper said.

China’s economy grew by 2.5% in the first half of the year, well below the official target of around 5.5%. Beijing hinted at the end of July that the country might not meet that target.

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

China has shortened the quarantine period for both international and domestic travelers. But sporadic lockdowns, whether on the tourist island of Hainan or in the city of Chengdu, have increased business uncertainty.

Wuttke said he doesn’t expect China to be able to open its borders until late 2023 at the earliest, based on the time it takes to vaccinate enough population.

European companies that have remained in China increasingly face an environment where “ideology trumps business,” the chamber’s position paper said in its summary.

“I’ve been here from time to time for 40 years and have never seen anything like it, where ideological decisions are suddenly more important than economic decisions,” said Wuttke. “And perhaps that will be amplified by outside voices, America[n] Sanctions, America cuts off China, so I can partially understand why self-reliance is so high on the agenda.”

He was referring to China’s push to build its own technology and other industries in recent years.

Meanwhile, the US has, among other things, blocked its companies from supplying key components to Chinese tech companies like Huawei.

The chamber did not specifically explain what that ideology consisted of, but said China’s Covid policy embodied the country’s “turning away from the rest of the world.”

According to Wuttke, the policy has not changed despite many long, open talks with Chinese government officials.

“I think these people are torn between what they think needs to be done and what could be done,” he said. “Then [there’s] a very strict, very clear instruction from above, that’s the way it has to be, that’s the ideology. And how can you challenge the ideology?”

Chinese President Xi Jinping said earlier this month that the country “continues to respond to Covid-19 and promote economic and social development in a well-coordinated manner,” paraphrasing his remarks, shared by China’s Foreign Ministry.

While Xi said “China has entered a new phase of development,” he asserted that “China’s door of opening up and friendly cooperation will always be open to the world,” the release said. His comments came during his first trip abroad since the pandemic began – to Kazakhstan and Uzbekistan – during which he met with leaders of several countries in the region.

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

Foreign companies already in China generally remain for the time being.

Even if China’s economy is growing more slowly, its size and low base are actually compelling [for foreign businesses]we can still do that,” said Wuttke.

Some, especially German car giants, are investing more.

In the first eight months of the year, foreign direct investment from Germany rose about 30% year-on-year – faster than the 23.5% recorded in the first seven months, China’s Commerce Ministry said on Monday.

However, the ministry did not release updated figures for investments from the US, which, according to official data, rose about 36% in the first seven months of the year.

Foreign companies can still find certain areas of opportunity.

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