European businesses in Shanghai are calling on the Chinese government to restore foreign business confidence and take steps toward repairing fraught international ties now that Covid Zero is over.
(Bloomberg) — European businesses in Shanghai are calling on the Chinese government to restore foreign business confidence and take steps toward repairing fraught international ties now that Covid Zero is over.
China should eliminate barriers to investment faced by foreign firms, as well as promote the yuan’s internationalization and strengthen financial support for smaller companies, the European Chamber of Commerce’s Shanghai chapter wrote in its annual report published Tuesday.
“Much more remains to be done to restore Shanghai’s reputation as a great place to live and conduct business” following last year’s spring Covid lockdown, Bettina Schoen-Behanzin, chair of the chapter, wrote in the report. The citywide restrictions brought business to a standstill and confined residents to their homes for months.
Companies “are not leaving China because the market is simply too big and too important,” Schoen-Behanzin said Tuesday in Shanghai. However, “with everything that happened with the Covid policies during the last three years, they are putting a fence around China” – on-shoring supply chains and localizing staff so that if another lockdown or something else happens it won’t impact other regions in the world, she said.
The European chamber has more than 620 member companies in Shanghai, which is almost a third of its total membership in China.
Foreign businesses slowed down their investments in or even pulled money out of China last year as a housing slump and the government’s stringent virus controls pushed economic growth to its second-slowest pace since the 1970s. Rising geopolitical tensions added to the uncertainty, and the amount of new utilized foreign direct investment in both November and December fell more than 20% below the same months in 2021, according to data from the Ministry of Commerce.
There’s been other indications of a broad dropoff in investment as well, with net foreign direct investment into China falling in the second half of 2022, according to newly released central bank data. Portfolio investment into financial markets fell in the first nine months of the year, too.
Foreign investors pulled money out of Chinese bonds and equities all year, according to separate central bank data, with the stock of investment down 17% from the high point at the end of 2021.
Some EU firms actually ran contrary to those trends, with actually utilized FDI from the European Union rising about 92% in 2022, according to China’s Ministry of Commerce. However, much of that was likely due to a few big investments by German car and chemical manufacturers early in the year.
The commerce ministry has called the foreign investment outlook “very complex and severe,” suggesting the Chinese government is concerned about the prospect of a rebound. Officials have expressed confidence that an improvement can happen, though, and in recent months announced plans to boost manufacturing investment and introduced a policy to encourage foreign businesses to set up R&D centers in China.
In Tuesday’s report, European firms raised the fact that companies found it difficult to get staff to work in China, or even to visit to see operations in the country due to the quarantine rules on inbound travelers that existed through December.
The uncertainty over the resumption of cross-border travel that existed at that time — the borders have since reopened and quarantine was eliminated — combined with “negative media coverage, heightened geopolitical tensions and a lack of transparency of what is happening on the ground have left European HQs frustrated and placed an increasing strain on their relationship with their China operations,” according to the report.
“Many companies want to get expats to China, but they don’t find anybody who’s willing to go,” said Schoen-Behanzin,. “Before it was a super attractive place and now actually nobody wants to go back because people feel not sure what will happen.”
The decline in the number of foreign residents living in China was also listed as a concern in the report, which said that 25% of Germans living in Shanghai left the city after the 2022 lockdown. The number of French and Italian citizens in Shanghai who were registered with their governments each fell by 20%.
Companies aren’t leaving the market but investing in China has become much more complex, with firms needing to keen an eye on geopolitics and sanctions, as well as business conditions and markets, according to Joerg Wuttke, the president of the chamber in China.
“The days when China was number one, number two, number three — these are gone. And the days where Shanghai was unquestionably the place to go has also gone,” said Wuttke.
–With assistance from Lin Zhu.
(Updates with more comments throughout.)
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