European Chamber of Commerce warns ‘Ideology trumps economy’ in China, as China loses its allure as investment destination due to ‘zero COVID’ policy, and geopolitical tensions

European Union Chamber of Commerce in China (EUCCC) has said that European businesses in China are reassessing their market plans after China’s zero-COVID policy further isolated the country from the rest of the world. Joerg Wuttke, chamber’s President, at the release of its annual position paper on China warned European businesses to brace for a worst-case scenario in their China investments, as Covid-related disruptions and geopolitical tensions this year have rapidly eroded the county’s standing as an investment destination. It said, China’s predictability, reliability and efficiency may continue to erode as China’s COVID policy which was successful two years ago has become inflexible now and is being inconsistently implemented at present. China’s move away from the rest of the world – embodied by the restrictions imposed under its COVID-19 policy – indicates that, at the moment, ‘ideology is trumping the economy, the position paper said. If China persists with such an approach, the business environment will continue to become more challenging, it said.

Inbound investment flows from the European Union (EU) are declining, the bulk of which is contributed by a handful of large companies, and prevalent access barriers deter potential newcomers to the market, the paper further said. European Companies operating in China are increasingly weighing up the possibility of shifting planned or future investments to other markets that are perceived to provide greater reliability and predictability, it added. Widespread regulatory barriers—both visible and invisible—continue to constrain the ambitions of European companies operating in the Chinese market. Puzzling COVID-related quarantine and even disinfection rules for imported parcels and goods act as an additional dampener, it added.

The report urged China’s leadership to be more pragmatic than ideological in its decision-making, to avoid erratic policy shifts, and focus on rebuilding investor confidence via comprehensive reforms and opening up. Europe and China, it seems, are drifting further and further apart. The rest of the world has largely resumed pre-pandemic levels of ‘normality’, but China remains reluctant to open its doors, Mr. Wuttke said adding that China’s ‘splendid isolation’ has led to a reduction in engagement between Europe and China.
A recent rise in negative sentiment toward China among European citizens and governments is reshaping bilateral ties and China’s relations with the West. Relations between EU and China have been strained over the situation in Xinjiang, Hong Kong’s national security law, and Taiwan, resulting in heightened political risks and concerns in the foreign business community. The EU chamber in its position paper clearly expressed its worries over tensions across the Taiwan Strait, as the EU is looking to maintain strong trade and investment relations with Taiwan, which is a leading producer of semiconductors and assumes strategic importance in global supply chains. “Wary of becoming victims of a political dispute, European companies are monitoring this increasingly sensitive issue and are assessing the potential risks very carefully,” the chamber’s paper said. “It is important that the EU and China work together to de-escalate tensions over Taiwan,” it said.

The policy recommendations of the 1,800-member chamber come at a crucial time as China will hold its most important party congress in less than a month on October 16th and Chinese leadership will try to show that all is well in its domestic and foreign affairs. China is now having to confront mounting internal and external challenges that seem to have drawn the government’s attention away from its reform agenda, it said.

One of the most immediate internal challenges the country faces is justifying its stringent COVID policy at the expense of economic growth and stability. Mass lockdowns and strict quarantines saw China’s economic slump in 2022, the report said. China’s National Bureau of Statistics reported 0.4 per cent year-on-year growth for the second quarter, the lowest since the first quarter of 2020 when China closed down almost completely, and its economy contracted for the first time in nearly three decades.

In July 2022, the unemployment rate reached 19.9 per cent among 16- to 24-year-olds; and the Purchasing Managers Index (PMI) employment index was 48.6 per cent for manufacturing and 46.7 per cent for services, down 0.1 and 0.2 percentage points respectively from the previous month. Other significant internal challenges include China’s debt crisis, which has been exacerbated by the COVID-19 pandemic as lending accelerated to help businesses recover; the unravelling of the real estate sector, with property sales forecast to drop by around 30 per cent in 2022; demographic headwinds; and stalling consumption growth. On top of this, local government finances are being drained as they remain under pressure to continue with the continuous mass testing of their citizens in the pursuit of ‘zero COVID’.

The main external challenges facing the country include rising geopolitical tensions, stemming primarily from the trade war with the United States (US), and a growing number of calls from several countries for China to address alleged human rights abuses, with changes in consumer demand and increasing global regulations having played their part in this regard. Companies operating in China are facing more public pressure to demonstrate a greater degree of transparency in their operations to avoid reputational damage in their home markets. Due to new and emerging legislation, they must now demonstrate that their supply chains, both up and downstream, are free of forced labour in order to uphold corporate pledges and maintain their licence to operate, as well as to remain globally compliant.

With China staying largely closed, European companies see the need to make their global supply chains more resilient. This presents opportunities to other emerging markets that are ready to welcome new investment and jobs, and has seen companies evaluate reshoring, nearshoring or ‘friend-shoring’ as possible solutions, chamber President Joerg Wuttke said.

The EU is the second-largest destination for Chinese exports, with trade amounting to US$828 billion last year. It is also the third-largest source of foreign direct investment (FDI) in China following Hong Kong and Singapore, investing US$5.1 billion in 2021, or 3.5 per cent of China’s total receipt. The European business community still believes that China, as the world’s largest consumer goods market, has significant growth potential and that its manufacturing base and world-class industrial clusters would be difficult – if not impossible – to replicate elsewhere, the paper said.