European businesses in China have faced significant challenges, with 2023 proving to be a year of reflection for many companies operating in the region. The latest investigation byEuropean Business in China – Business Confidence Survey 2024 of the European Chamber of Commerce in China (1) reveals a complex interplay of factors that are moderating optimism and reorienting investment strategies. The survey highlights a number of challenges, ranging from economic difficulties and regulatory uncertainties to geopolitical tensions and internal decoupling.
Moderate economic pace and regulatory challenges
The slowdown in China’s economy is a major concern for businesses, with 55% of respondents citing it as one of their top three business challenges, a sharp increase from previous years. Added to this slowdown are the weakness of domestic demand, the high levels of debt of local governments and the challenges of the real estate sector, which impact overall profitability and growth prospects.
Regulatory challenges remain a persistent issue. European companies have long faced unclear rules and unpredictable legislative environments in China. In 2023, 46% of respondents identified regulatory ambiguity as their top challenge, marking the eighth consecutive year this issue has topped the list. Additionally, only 16% of respondents expect regulatory barriers to decrease, the lowest level ever recorded.
The business environment in China has become more politicized, with more than half of respondents perceiving an increase in the level over the past year. One of the main reasons is that European businesses have to navigate conflicting legal regimes between the European Union, the United States and China, which places additional pressure on companies. Additionally, geopolitical risks have pushed companies to diversify and separate supply chains. However, finding alternative sources for some components or equipment remains a significant challenge.
All of this is impacting China’s position as a top investment destination, which has seen a decline for European businesses. Only 15% of those interviewed consider China a major destination for current investments and an even lower percentage, 12%, for future investments. This marks a significant decline in confidence, due to a variety of economic and regulatory challenges.
Communications decoupling
While it is clear that European companies, on the whole, remain committed to the Chinese market, a different kind of decoupling is taking place. The disconnect between European companies’ headquarters and their subsidiaries in China has intensified, affecting nearly two-fifths of those surveyed. This detachment has led to reduced communication and less understanding of local context realities by headquarters.
The growing difficulty in accessing reliable information about the Chinese economy accentuates these issues, making it difficult for CEOs to justify maintaining or increasing investments without the necessary transparency and legal certainty.
Evolution of investment strategies
In response to these challenges, European companies are making strategic changes. Many are cutting costs, reducing headcount and toning down expansion plans. 52% of respondents expect to optimize costs in 2024, the highest level ever recorded, with staff reductions the most common measure.
Although market openness has increased significantly in some sectors, this has not translated into a corresponding increase in investment. The percentage of respondents willing to increase investment if given greater market access fell to 53%, a decline of 10 percentage points from the previous year. This suggests that the overall economic environment remains too uncertain, even with improved market access, to attract substantial new investment.
Shanghai: An emblematic example of China’s reopening?
The business confidence survey revealed a fascinating but challenging landscape for European businesses in Shanghai. Known as China’s most international city, Shanghai continues to be a beacon for innovation, hosting the largest number of multinational regional headquarters in the country. In fact, it is often seen as a “symbol” for the rest of China, leading the process of market opening.
However, despite its international reputation, the ease of doing business has declined across all sectors. Over two-thirds of businesses report increased difficulties, particularly with cross-border money transfers, relocation and trade. The survey found that market access restrictions and regulatory barriers have caused significant missed opportunities for 63% of respondents, impacting revenues and dampening optimism. For 62% of these, missed opportunities amounted to more than 10% of their annual revenue. As a result, less than half of Shanghai respondents are considering expanding their operations to China in 2024, and only 10% are considering moving their Asian regional headquarters to the city. The expected economic recovery has not materialized as expected and growing geopolitical tensions add complexity to the situation.
Despite these setbacks, Shanghai’s allure as an innovation hub persists. 63% of respondents recognize that Shanghai’s advantage in research and development makes it a prime destination for setting up R&D facilities. However, to maintain its competitive advantage, concrete actions are needed. European businesses are calling for better coordination between government departments, better communication and greater transparency. They highlight the importance of Shanghai’s intellectual property protections, as fear of intellectual property infringement remains an obstacle to introducing the latest technologies into China. As competitive pressures increase, the city’s promise of innovation and growth risks turning into a story of disillusionment unless authorities “move from words to action” and implement the necessary reforms. Without these crucial changes, Shanghai’s bright future as a magnet for foreign investment could fade, causing European businesses to reconsider their plans in the iconic city.
Opportunities amidst challenges
Despite the challenges, opportunities still exist for European businesses in China. In particular, there was a significant increase in the percentage of interviewees reporting an opening of the market in their sector, which rose to 45%, with an increase of 9 percentage points compared to the previous year. This is particularly encouraging in sectors where the European Chamber has actively supported change. The Chinese government has made several commitments to improve the business environment, such as Views of the State Council on further optimization of the business environment for foreign investment. However, many companies are taking a wait-and-see approach before committing to new investments.
While some sectors are seeing market openings and improved profitability, overall sentiment remains cautious. European businesses are making strategic adjustments, focusing on cost reduction and reevaluating investment plans. Significant improvements in the business environment and regulatory transparency are needed to restore confidence and encourage investment.
For European companies, navigating this complex landscape requires staying informed, maintaining open communication with headquarters and being ready to adapt to evolving regulatory and economic conditions. As they reevaluate their strategies, it is clear that while China remains an important market, the path to renewed confidence will require concerted efforts from both businesses and policymakers to address underlying challenges and capitalize on emerging opportunities.
This in-depth understanding of current European trade sentiment in China highlights the need for strategic adjustments and a robust engagement framework to navigate prevailing uncertainties and exploit areas of potential growth in a changing economic landscape.
By: Attorney Carlo Diego D’Andrea, Vice President of the European Union Chamber of Commerce in China
(1) European Union Chamber of Commerce in China, European Business in China – Business Confidence Survey 2024, 10th May 2024, consulted 12th June 2024, https://www.europeanchamber.com.cn/en/publications-business-confidence-survey.
