China Business Sentiment Surveys: Foreign Companies Remain Committed Despite Headwinds
Company surveys conducted by foreign chambers of commerce in China have shown that while business confidence is shaken by the recent disruptions, most foreign companies still view the country to be an essential market, key to global competitiveness. Meanwhile, China’s government has announced various measures to address challenges caused by the lockdowns due to the zero-COVID strategy and supply chain blockages. In this article, we discuss key concerns highlighted by foreign businesses and what factors will shape the long-term outlook. There continues to be underlying confidence in doing business in China – illustrated by high FDI inflows and better than expected Q1 results posted by some export-facing businesses.
Recent surveys conducted by foreign business chambers in China show that foreign companies have increasingly negative outlooks for business prospects in China, with many citing the impact of COVID-19 containment measures, rising operational costs, and worsening geopolitical tensions as major anxieties.
However, despite the current headwinds, a majority of foreign businesses are still opting to remain in China and view the country as an essential market to remain competitive on the global stage. Meanwhile, strong FDI numbers from the previous year indicate that China, thanks to its significant economic strength and growth potential, is still one of the most attractive destinations in the world for overseas investors.
In this article, we look at the results of recent business surveys and discuss some of the issues causing concern to foreign companies. Finally, we look at how China is responding to the disruptions and discuss why the country continues to attract foreign capital.
How has China business confidence been impacted by COVID-19 and geopolitical factors?
Several surveys released by foreign business chambers in China show that foreign companies have been heavily impacted by the ongoing COVID-19 outbreak, as well as international geopolitical and macroeconomic factors. We break down key points below.
COVID-19 outbreaks and lockdowns
A flash survey conducted by the American Chamber of Commerce (AmCham) Shanghai and AmCham China on the impact of COVID-19 from March 29 showed that 99 percent of respondents reported that they had been impacted by the recent outbreaks, 60 percent had experienced slower production, and 57 percent had experienced supply chain disruptions. In addition, 54 percent of companies participating in the survey stated that they had reduced revenue projections for 2022 as a result of the outbreak.
Meanwhile, a flash survey conducted by the German Chamber of Commerce in China showed that “German companies are increasingly anxious about their business”. Over half of the German companies surveyed said that their logistics and warehousing had been impacted, while 46 percent of their supply changes had been severely disrupted by the COVID-19 outbreak. The survey was conducted at the end of March.
A flash survey from the European Chamber of Commerce, conducted from April 21 to 27, showed that 75 percent of surveyed European companies were negatively impacted by the COVID-19 containment measures. 92 percent reported that supply chains had been negatively impacted, with 85 percent reporting difficulties obtaining raw materials and 89 percent reporting difficulties transporting raw materials and components for production.
In addition, 87 percent said they had trouble delivering finished products within China and 83 percent reported issues delivering finished products outside of China. Moreover, 60 percent of respondents said they were decreasing their 2022 revenue projections, and 23 percent said they were considering moving planned or current investments outside of China due to the COVID-19 containment measures.
The Russia-Ukraine conflict
While not the primary concern for companies, the Russia-Ukraine conflict was also cited as another major factor impacting business outlook. Over half of the respondents to the German Chamber survey said that the conflict had impacted their headquarters’ China strategy, and 46 percent stated that their logistics chains through Europe to China were “completely or severely impacted by the current geopolitical crisis”.
In the European Chamber Survey, meanwhile, which was conducted later in April, 65 percent of respondents reported that logistics to and from Europe had been negatively impacted. Businesses have also had to restructure their logistics chains as both rail and air transport routes between China and Europe have been disrupted by the conflict, which in turn has also made freight more expensive.
Another issue cited in the European Chamber survey is the possibility of worsening EU-China relations as a result of the geopolitical tensions, which could increase risk for companies. According to the survey, seven percent of companies have already considered ending current or planned projects due to the risks associated with the geopolitical tensions.
Rising operational costs
Rising operational costs from the high price of shipping and materials were a further headwind for foreign companies in China. Whereas this issue has been a major concern ever since the COVID-19 pandemic first placed much of the world into lockdown in 2020, the recent COVID-19 containment measures and disruption of the Russo-Ukrainian conflict on supply chains have further exacerbated issues.
The European Chamber asked participants about the impact of rising material costs and energy on businesses. To this, 63 percent of the respondents replied that they had been negatively impacted by rising material costs and 58 percent by rising energy costs as a result of the Russo-Ukrainian conflict. In addition, over half of the companies reported that sanctions on Russia had a negative impact on logistics, materials costs, and energy costs – in particular.
The German Chamber report, meanwhile, shows the effect of the COVID-19 containment measures on operational costs, with 55 percent of German companies saying that operations have been severely impacted by rising energy and material costs.
Staffing and employment
The ability to retain staff under the COVID-19 lockdown has been another headache for foreign companies, in particular retaining foreign staff. In the AmCham survey, 81 percent of respondents said that the COVID-19 containment measures had impacted their ability to retain staff. Meanwhile, in the German Chamber survey, 28 percent of German companies responded that COVID-19 had negatively impacted staffing.
In the European Chamber survey, however, 67 percent of respondents stated that they had been able to retain staff, and 27 percent reported they had experienced a decrease in staff. The staffing decrease was the most pronounced in the education sector, with 80 percent reporting a decline. In addition, seven out of 10 companies surveyed said that the COVID-19 containment measures had impacted their ability to staff operations that required employees to be on-site.
How has China responded to the challenges in the business environment and why do we remain optimistic in our outlook?
Long-term COVID-19 containment measures
We have high confidence that China will be able to contain the current COVID-19 outbreaks across the country. At the time of writing, Shanghai last reported just 193 new confirmed cases, a significant drop from the peak of over 3,500 in mid-April. Meanwhile, although Beijing’s COVID-19 numbers are still rising, they are still far from the amount we saw in Shanghai in March, and considering that the city took steps to curb the spread of the virus earlier than Shanghai, it is unlikely that a weeks-long city-wide lockdown will be imposed.
However, we also recognize that foreign companies’ concerns with regard to COVID-19 go beyond the current outbreak, with anxiety stemming in part from the possibility of continued disruption as a result of continued containment measures.
When discussing the impact of the COVID-19 prevention measures implemented in China, it is also important to consider the impact that the complete removal of restrictions would have on businesses.
First of all, having largely lived in a virus-free society since the initial outbreak was brought under control in 2020, Chinese people are in general less used to – and less comfortable with – the idea of living with the virus, and have a greater fear of catching COVID-19 than people in other countries. The Chinese media have also been active in communicating the dangers of the virus, and media reports of high death rates in other countries have been widely circulated.
Therefore, it is probable that an unchecked outbreak would disincentivize people from social activity and even prompt voluntary social isolation, which would have a negative impact on consumption.
Secondly, the move to living with COVID in other countries has not been a smooth process. The rapid spread of the virus meant many businesses were left short-staffed as employees went on sick leave en masse in what was dubbed “the great sickout” by the media. Especially as China has a very low level of herd immunity due to its low historical case numbers, we would likely see very high rates of transmission, especially among workers in sectors that require on-site work and face-to-face interactions, such as catering, retail, manufacturing, and government services.
Multiple cities in China are now introducing the concept of “normalized” COVID-19 containment measures. This will include setting up ubiquitous COVID-19 test points around the city so that people can easily get tested and quickly get negative test results, as well as routinely quarantining positive cases from the rest of the population.
These are measures that the government hope will prevent the same kind of wide-scale lockdown imposed in Shanghai from happening again and maintain a level of stability without allowing the virus to spread freely throughout the population.
The European Chamber report also noted that the so-called “decoupling” of the EU and China had not resulted in the mass exodus of European companies from China, but rather led more companies to adapt, stating that “companies are re-evaluating how they can optimize their operations in China while minimizing the impact of geopolitical disruptions”.
One such way is hiring more local staff. 65 percent of surveyed companies said they were planning localizing mid-level positions and 62 percent plan on localizing senior positions. A further 60 percent also planned on hiring more local junior staff.
Local governments are also providing support for companies to implement COVID-19 containment measures for staff members, which could be beneficial for companies that rely on staff being on-site to maintain operations. This support includes subsidies for staff in the catering industry to get regular COVID-19 tests, as well as disinfectants and other COVID-19 prevention measures.
Moreover, local governments have also issued policies to help businesses retain staff, including waiving or refunding unemployment insurance for businesses that do not lay off staff.
China has also recently loosened travel restrictions for inbound travelers, requiring fewer COVID-19 tests and shorter COVID-19 screening periods prior to boarding flights. Beijing has also reduced the length of quarantine for international arrivals from two weeks to 10 days. This indicates that the country is gradually lowering the barriers to entering the country, which would facilitate foreign staff members traveling to China.
It is also clear from the surveys that the majority of foreign companies in China support continued cooperation between China and their respective governments. AmCham China recently once again urged for cooperation between China and the U.S.
The All-China Board of the German Chamber of Commerce in China echoed this sentiment, stating that “we encourage the Chinese and European leaders to send positive signals at the upcoming EU-China Summit in contributing to world peace”.
Cost of operations
While the rising cost of shipping and raw materials and components is in part out of the control of the Chinese government, officials are aware of the pressure these issues put on companies and have rolled out measures to alleviate the impact.
Shanghai recently announced the creation of a “green channel” to facilitate the import of certain goods and materials. The green channel will help alleviate the strain on certain industries by accelerating and simplifying customs procedures for goods from finished products to raw materials and equipment needed for production in industries, such as biomedicine, automotive manufacturing, and integrated circuits.
Meanwhile, local governments in China have also implemented several supportive policies for small and medium-sized enterprises, including VAT rebates, and many more. Foreign companies and their subsidiaries are also eligible for some of these supportive policies. You can see a full overview of the supportive policies available to companies in Shanghai here, an overview of the relief measures available to SMEs here, and an overview of relief measures for catering and services companies here.
The persistent allure of the China market
Despite the issues facing foreign companies in China, there are also indications that they remain committed to the China market.
AmCham’s 24th annual Business Climate Survey (BCS) Report found that China “remains a top global priority for many members” and companies “continue to be optimistic about their opportunities in China”. In addition, 83 percent of companies surveyed stated that they are not considering relocating manufacturing or sourcing to another country.
Prior surveys done of foreign companies found similar results. AmCham South China’s 2022 “White Paper” on the Business Environment in China (PDF download) also revealed that the outlook of businesses in China going into 2022 was net positive, with 77 percent of companies reporting a positive outlook.
There have also been some notable success cases, with some large multinational corporations defying the economic headwinds to report positive revenue growth in 2022. The contract manufacturing giant Foxconn, for instance, reported record quarterly revenue in the first quarter of 2022. Certain industries have also fared well, notably home appliances, home fitness apps and equipment, office software, and other industries that serve the so-called “home” economy.
It is also worth noting that foreign direct investment saw record numbers in 2021 despite disruptions caused by the pandemic, supply chain congestion, and power crunches. Specifically, FDI grew 20.2 percent year on year in US dollar terms, according to the Ministry of Commerce (MOFCOM). This was considered especially remarkable considering the relatively high base in 2020.
China has also been shown to consistently attract foreign capital even in the face of global economic downturns. In 2020, China registered positive FDI growth of 5.7 percent at a time when global FDI plunged by 34.7 percent.
This trend has continued into the beginning of 2022. In the first quarter of 2022, MOFCOM reported a new record net inflow of direct investment into China, reaching US$107 billion, up from US$93.1 billion in the same period a year earlier.
All of this goes to show the continuing allure of the China market for foreign investors and companies. A reason for continued optimism is that China’s economic prowess makes it an undeniably attractive destination for investors and is unlikely to be toppled by another country any time soon. China’s economy was the only one in the world to grow in 2020 and achieved 8.1 percent growth in 2021.
While we do expect FDI to take a hit in 2022, it is also likely that we will see a rebound after the current containment measures are loosened, much as we saw in 2021 following the turmoil of 2020.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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