Doing Business in South China in 2023: Insights from AmCham South China and Our Opinion
On February 27, 2023, the American Chamber of Commerce (AmCham) in South China, released two papers: the 2023 White Paper on the Business Environment in China and the 2023 Special Report on the State of Business in South China.
233 foreign and domestic companies participated in the survey and responses from 210 companies were eventually adopted. Among 233 companies participating in the survey this year, 38 percent are in primary sectors (such as agriculture and mining) and secondary sectors (such as manufacturing and construction), 35 percent are in professional services, and 22 percent are in consumer products and services sectors.
To be noted, the survey was closed a few days before China’s shift away from the zero-COVID policy. However, AmCham South China held that their study and research still represent the actual views of business as they are not tainted by the immediate impact of the policy change and China’s reopening policy will only start to impact business decisions in the second half of 2023.
The two AmCham papers tried to answer some key questions about doing business in South China in 2023, such as
- What is the overall trend of China’s economy in the post-pandemic era? How will China’s economic rebound boost the world’s economic recovery?
- What opportunities and challenges does the three-year pandemic bring to the development of multinational enterprises in China?
- In the context of China’s reopening, how can enterprises take advantage of the situation and make development plans?
- How can companies in the Greater Bay Area strengthen (Environmental social governance) and climate change management to seize opportunities, withstand risks and gain constant competitiveness?
Meanwhile, the document discusses the uncertainties and the business development of enterprises in China It provides constructive suggestions for enterprises in terms of future development strategy and investment layout.
In this article, we look into some of the key findings in the AmCham reports and provide some of our on-the-ground experience and insights.
Key takeaways of the AmCham papers
In a nutshell, the below key findings are most relevant to doing business in South China:
- Despite a moderate decrease in the proportion of companies reporting to have increased headcount in 2022, most companies are confident about their employment expansion plans, with 44% of them planning to augment their headcount significantly or slightly in 2023.
- More than half of the participating companies gained over 30% of their global revenue from China, an increase of 4%. 45% of the participating companies registered a significant or slight increase in their revenue from China, including 43% of American companies and 49% of manufacturing companies.
- Companies’ profitability has shown signs of improvement in 2022. 88% of the participating companies are reported to have gained profits in China, an increase of 6%. Up to 90% of American companies have achieved profitability. Moreover, 54% of those who are profitable in China reported having met their budget expectations.
- There is a greater sense of optimism among the participating companies toward their expected time to reach profitability. A vast majority of them expect to attain profitability within two years, while only 4% believe that it will take over six years to reach that goal, three times less than that of a year earlier.
- China is believed to enjoy a high return on investment (ROI) with 76% of the participating companies reporting a positive overall ROI in China. 49% of the companies consider their overall ROI in China to be higher than their global overall ROI.
- Although the confidence of American companies in the business outlook in China oscillates to some extent, over 50% of them still stay sanguine about the Chinese market.
- China is still the most attractive destination for foreign investment. More than 90% of the participating companies select China as one of the most important investment destinations. Although the proportion of foreign companies that regard China as the first choice for investment has declined for the second consecutive year, more than 50% still list China as the top three investment destinations.
- The investment enthusiasm of companies is on an upward trajectory, with four-fifths of companies t actually reinvesting in China in 2022.
- In 2022, 74% of the participating companies chose not to shift their investments out of China. Not a single company has the intention to leave China entirely.
- Most companies still consider China as a critical part of their future strategic development plans. 75% of the participating companies plan to reinvest in China in 2023, including 68% of American companies that are determined to dig deeper into the Chinese market.
- It is estimated that companies will reserve US$18.3 billion from profits for reinvestment in China in 2023 and the next three to five years, a sharp fall of approximately 30.98% compared with the previous year.
- Companies are slowing down their business expansion in China, with 3% fewer companies (69%) planning to expand over the next three years.
- Guangzhou has been recognized as the top preferred investment destination in China for six years in a row, followed by Shenzhen, Shanghai, and Beijing.
- Regarding the business environment, rising operation costs and rising labor costs are identified as the two biggest challenges that companies face in South China in 2022.
- Research this year reveals a trace of pessimism over the business environment in South China. 9% fewer companies rate the business environment as “excellent” or “good” while 11% more companies see a deterioration in the business environment. Rising operation costs and rising labor costs are identified as the two biggest challenges that companies face in South China in 2022.
Economic overview and outlook of the South China region
The economy of South China, particularly the Guangdong and the Greater Bay Area region (which includes Hong Kong and Macao SAR) has been for decades the wealthiest region in China.
The report sustains that this trend is bound to continue, due to the Chinese mainland and Hong Kong remaining the most attractive destinations for foreign investment in 2021 with capital inflows have reached US$181 billion and US$141 billion respectively.
Also, in June 2022, Guangdong unveiled 131specific measures on six fronts to further stabilize the economy and to attract further investment and now that the whole country is open again, after the government’s measures concerning the relaxation of the anti-covid measures, it is expected that the GDP growth rate will be higher.
The report states that South China is set to become a major powerhouse that leverages each city’s strengths in a synergistic manner to drive China’s trade and economic growth, particularly in technology and innovation, finance, shipping and trade, advanced manufacturing and
Hospitality (which has been an area that the government has focused on in past recent years). Meanwhile, regional connectivity and rising demand for an improved quality of life will also support the development of modern services across the region. This could thereby create a more developed and interconnected South China with the Pearl River Delta (PRD) at its center.
Our observation: Why can the GBA become one of the most important destinations for foreign investment in China?
The Guangdong-Hong Kong-Macao Greater Bay Area (Greater Bay Area) comprises the two Special Administrative Regions of Hong Kong and Macao, and the nine municipalities of Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong Province.
Given our presence and experience in the area, as well as the future plans for the region, it is our belief that not only will Guangdong continue to be the wealthiest region in China, but also that foreign investment will grow exponentially into Guangdong and GBA.
The region has been subject to high praise by the media and subject to much-increased attention from investors in part due to the recent policies outlined by the 14th five-year plan (2021-2025) laid out by the Chinese government for Guangdong economic and social development and the long-range objectives through the year 2035:
Some of the measures and targets are:
- Guangdong’s GDP shall grow at an average annual growth of about 5.0%, and by 2025 the GDP will reach about RMB14 trillion.
- science and technology infrastructure and other major innovation platforms will be accelerated, the research and development (R&D) investment continues to increase, and the digital economy will account for 20% of GDP.
- Guangdong will proactively participate in the Belt and Road Initiative, further explore higher-level reform and opening up and maintaining stable and high-quality import and export trade, significantly improve the quality of domestic and international investment, and enhance the level of open economic development.
- Achieve lower energy consumption and faster decarbonization progress.
Financial measures and targets:
- Cooperate with Hong Kong and Macao, through financial opening-up and interaction to promote cooperation among the GBA and accelerate the establishment of an international financial hub.
- Make the best utilization of the interaction of the “twin cities” Guangzhou and Shenzhen, to create an international first-class financial business environment. Develop FinTech, high-level financial research, and a well-known financial culture to enhance Guangdong’s financial impact domestically and globally
- Take the opportunity of reforming the Shenzhen Stock Exchange to improve the innovative capital chain and make full use of the construction of the Guangzhou Futures Exchange to foster the futures industry chain. With the “30•60” decarbonization target11, to speed up the growth of the green finance industry.
- By 2025, the domestic and foreign currency deposit balance to reach RMB40 trillion, and the loan balance to reach RMB30 trillion, including RMB3 trillion manufacturing loan balance, RMB3 trillion green credit balance, RMB3.5 trillion inclusive loan balance, and RMB2 trillion agriculture-related loan balance.
Manufacturing measures and targets
- Continue to move upward to the middle and high-end of the value-added in the global industrial chain and become the global advanced manufacturing base.
- Promote a larger, deeper, and wider opening up to optimize the supply chain that can provide mutual benefits for global cooperation. Expand international trade and investment.
- By 2025, the value-added of manufacturing will account for more than 30% of local GDP, and the value-added of high-tech manufacturing will take a 33% share of the value added of manufacturing overall.
- By 2025, 2.3% of the revenue of manufacturing enterprises will be invested in the R&D sector, and the number of effective invention patents of manufacturing industries will reach 230,000.
- Digital industrialization and industrial digitalization will both achieve new breakthroughs. Guangdong will lead the industrial digitalization, intelligent network, and IoT’s development in China. By 2025, the number of enterprises that implement IoT digital transformation will reach 50,000.
Why are all these measures important? By investing in R&D and scientific investigation, the government will ensure that the region will grow, considering the correlation that scientific development has with GDP growth and innovation. In the case of financial measures, the support of the financial services industry and cooperation between the mainland and Hong Kong/Macao will generate a lot of opportunities for companies in this sector. As for manufacturing, as China and especially the GBA continues to invest in high-end manufacturing will ensure that China maintains its title of “factory of the world” but by focusing solely or mostly on complex and high-detail manufacturing, rather than cheap goods. Something that most countries cannot do.
In addition to the measures outlined above, let us not forget that the GBA is home to the Guangdong Pilot Free trade Zone. In the first half of 2022, which recently, 2022, accomplished RMB200 billion of import and export trade and attracted US$4 billion in FDI inflows, accounting for one-fourth of the whole province.
In September 2021, the government of Guangdong announced the first Five-Year Plan for GDFTZ, the specific planning for the next five years, which includes:
- The GDFTZ will take a leading position in the evaluation from the World Bank business environment index.
- By 2025, the total import and export trade will reach RMB400 billion and the accumulated FDI inflows will be about US$40 billion and tax revenue will increase by about 5% annually.
- Direct investment from Hong Kong and Macao will reach about US$35 billion, and the total number of registered Hong Kong and Macao-invested enterprises will be 30,000.
Nansha area of Guangzhou
Nansha is one of the three parts of the GDFTZ. It is an administrative district of the city of Guangzhou in Guangdong province, located at Guangzhou’s southern tip and the center of the
Pearl River estuary, in 2015, an area of 60km2 in Nansha was incorporated into China (Guangdong) Pilot Free Trade Zone,
In the 14th Five-Year Plan, the Nansha area will focus on:
- Continuously enhance the role of international shipping and trade hubs
- Deepen the integration and development of strategic emerging industries and modern service industries.
- Support building a national science center, a special zone for international talent, a demonstration zone for global trade, and a cooperation zone for the GBA.
All of these measures will enhance the growth of the region and further attract foreign investment, considering the improvement of the infrastructure.
Qianhai and Shekou Areas of Shenzhen
Another of the areas of the GDFTZ, On 27 April 2015, the Qianhai and Shekou areas of Shenzhen were officially established.
In 2021, Qianhai’s GDP reached RMB175.6 billion, up 10.5% YoY. FDI inflows into the area were US$5.8.
billion, up to 14.9% from the previous year, and the total import and export volume reached RMB1.7 trillion, a YoY increase of 20.3%20. So far, Qianhai has rolled out 725 institutional innovations in the fields of investment, trade, finance, and rule of law, among which 65 have been duplicated for use nationwide.
In the 14th Five-Year Plan, the Qianhai and Shekou areas of Shenzhen will focus on:
- Cooperate with Hong Kong to build a new international trade center, a high-end shipping service center, an international legal service center, and a commercial dispute resolution center.
- Upgrade the opening-up and functions of the national financial industry and cross-border RMB business innovation.
- Create a reform and innovation pilot platform in the GBA.
- Also, the government recently announced the expansion of the Ainhai area, which will be expanded by eight times, from 14.9km2 to 120.6km2.
The growth and expansion of the Qianhai and Shekou regions will mean that more companies will be set up in the area, as the region continues to become more attractive from a logistic and cost-benefit point of view.
Hengqin New Area of Zhuhai
Hengqin, the third area of the GDFTZ, is an island located at the western tip of Macao and the southern tip of Zhuhai. The GDP of the Hengqin co-operation zone went up by 8.5% YoY to RMB45.5 billion (US$7.2 billion) in
- Fixed-asset investments grew by 12.9% YoY during the same period, of note is that investments for education expanded by 76.2%, contributing to its high-quality development
Its major measures and targets are:
- Augmenting the growth of scientific and high-end manufacturing sectors like integrated circuits, electronic components, new materials, new energy, big data, artificial intelligence, the internet of things, and biomedicine.
- Developing trade in traditional Chinese medicine (TCM) services and a platform for innovative TCM research and transformation with self-owned intellectual property rights and Chinese characteristics.
Despite not being as popular as a destination for foreign investment as Shenzhen and Guangzhou, the potential of Zhuhai and of the Hengqing area can be further realized, by promoting the region locally and internationally.
Shenzhen at the forefront of development
As the first special economic zone in China, Shenzhen has seen rapid development since the reform and opening up in 1979 and is now seeking to reinvent itself as the home of Chinese innovation.
Shenzhen is the third wealthiest city in China, after Shanghai and Beijing. Shenzhen’s GDP grew 6.7% YoY in 2021, and the city’s export volume has ranked first among the cities in the Chinese mainland for 29 consecutive years. The export hit RMB1.9 trillion, up 13.5% YoY. Significantly, the output value of new energy vehicles, industrial robots, smartphones, and 3D printing equipment increased by 173.9%, 60.5%, 40.9%, and 21.2%, respectively.
Its long-term targets until 2035 are:
- By 2022, the government will make important progress in the building of systems in all aspects, form a number of major institutional achievements that can be replicated and popularized, and achieve phased results in the pilot reform.
- By 2025, the city’s GDP will surpass RMB4 trillion and the added value of strategic emerging industries reaching more than RMB1.5 trillion. The government will accomplish landmark achievements in the reform of important fields and critical links, complete the tasks of the pilot reform, and provide an important demonstration for institutional building for the whole country.
- By 2035, the city will be built into a city of innovation, entrepreneurship and creativity with global influence, become a model city for China to build itself into a powerful modern socialist country, and take the lead in realizing socialist modernization.
- By 2035, Shenzhen’s economic output and per capita GDP will double from 2020.
The 40 years of domestic and foreign investment in the GBA are finally giving its fruits and turning the region into a global powerhouse, with ambitious long-term goals, and already notable accomplishments.
Despite the opinion on the state of the business by American companies in the South of China region ranging from optimistic, positive, to conservative and at times pessimistic, now that the disruption and uncertainty caused by the pandemic are over, it is broadly believed that China will witness considerable economic growth in 2023 and the years to follow. Businesses operating in China or planning to enter the China market should get well prepared for the coming opportunities.
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