BEIJING – On 21st June, the European Union Chamber of Commerce in China, in partnership with Roland Berger, released its European Business in China Business Confidence Survey 2023 (BCS). The 20th edition of the annual survey shows that there has been a significant deterioration of business sentiment. Faced with growing risks and a more volatile operating environment, European companies have started reviewing their investment and operational strategies, and ensuring their supply chains are fit for more uncertain conditions.

What are the reasons for this deterioration?

The reasons for the deterioration of business sentiment include growing risks and a more volatile operating environment. 64% of respondents reported that doing business in China became more difficult in the past year, the highest on record. 30% of respondents reported year-on-year revenue decreases, an increase of 20 percentage points, and the highest on record.

Other reasons include uncertainties in China’s policy environment, rising geopolitical tensions, and the persistence of long-standing market access barriers.

What are the long-standing market access barriers?

According to the European Union Chamber, regulatory barriers are still resulting in missed business opportunities, with 42% of firms reporting this to be the case. These long-standing market access barriers are one of the reasons for the deterioration of business sentiment among European companies in China.

What are the other findings of the survey?

While most European companies in China posted positive revenues and were profitable in 2021, doing business became more difficult for the majority. Two-thirds of European businesses saw revenue increases during 2021, however doing business also became more difficult year-on-year for 60%. COVID-19 was the top issue faced by businesses in 2021, ranking as a top-three challenge for 49%; China’s economic slowdown, a top-three issue for 24%, ranked second. 50% reported that the business environment became more politicized in 2021.

What are the implications of these findings for European businesses in China?

Faced with growing risks and a more volatile operating environment, European companies have started reviewing their investment and operational strategies, and ensuring their supply chains are fit for more uncertain conditions. 64% of respondents reported that doing business in China became more difficult in the past year, the highest on record. 30% of respondents reported year-on-year (y-o-y) revenue decreases, an increase of 20 percentage points, and the highest on record. 11% of respondents have shifted existing investments out of China, and 8% have taken the decision to move future investments previously planned for China elsewhere.

One in ten report they have already shifted, or plan to shift, their Asia headquarters (HQ) or business unit HQ out of Mainland China. There has been a 13-percentage point reduction y-o-y in the number of respondents that view China as a top-three destination for future investments.

What are the implications of these findings for China’s economy?

These developments come at a considerable cost to companies and to China. The need to create divergent systems for China and the rest of the world means that the overall efficiency brought by global economies of scale is lost; and the reduction of foreign nationals is resulting in the reduced transfer of know-how and best practices, communication difficulties, deferred investment plans, and even China operations being closed.

What is the impact of US-China trade tensions on foreign businesses in China?

US-China trade tensions have had an impact on foreign businesses operating in China. In a survey among U.S. companies operating in China conducted in June 2022, around 87 percent of respondents stated that their businesses in China were impacted by the US-China trade tensions. Lost sales and shifts in suppliers or sourcing due to uncertainty of continued supply were leading concerns facing such companies.

What is the outlook for foreign investment in China?

The outlook for foreign investment in China is mixed. On one hand, China has introduced a new Foreign Investment Law and related regulations that mark the beginning of a new era for foreign investment in China, underscoring the commitment to continue to open up industry sectors to FDI, level the playing field for foreign businesses and protect the IP of Chinese and international companies alike. On the other hand, there are concerns about the impact of US-China trade tensions on foreign businesses operating in China.

How do Chinese companies view their business prospects in Europe?

Chinese companies view their business prospects in Europe with a mix of optimism and concern. On one hand, Chinese overseas investments in the EU have been steadily increasing in recent years, with Germany being one of the major destinations for mergers and acquisitions (M&A). Germany’s strong industrial manufacturing, computer hardware, and automotive industries offer attractive investment opportunities for Chinese companies seeking growth and know-how. On the other hand, a recent survey showed that Chinese companies in the EU grow rapidly in the 27-country EU, but business sentiment drops to a three-year low.