Restructuring Your China Company to Survive, Stabilize, and Succeed

Posted by Written by Qian Zhou Reading Time: 10 minutes

In the context of China’s continued growth story despite COVID-19, we look at how businesses invested in the region can strategize to survive and succeed.

The purpose of restructuring in China should go beyond survival from the health crisis. Enterprises in all sectors and industries in China must plan for the next phase when choosing to restructure their business – to adapt to a more competitive market, to be a stronger player in a niche sector, to enter a promising sector more speedily, to reshape the market strategy of the group company, to be in better control of the business, and to keep the corporate structure more nimble and flexible to be more resilient in case of any future setbacks.

The last year and a half has been challenging for businesses around the world. With the COVID-19 pandemic recorded early in 2020, and still ongoing as several countries confront new waves of the outbreak, companies around the world are having to make difficult decisions.

An unpredictable global business environment, supply chain disruptions, cash flow concerns, and matters relating to staff management – collectively put pressure on companies who are likely planning for their survival during what is now an extended crisis period.

While some businesses have given up and filed for bankruptcy, many others are exploring strategies to address their sustainability, such as through restructuring their company and operations. In fact, a surge of restructuring activity is expected to continue through the year.

What is meant by company restructuring?

Restructuring can be simply understood as a combination of corporate actions taken to modify the company’s debt exposure and liabilities, operations, and/or the entity structure – to limit financial harm and improve the business’ viability. Restructuring can help companies in many aspects, such as reducing and consolidating their debt, ensuring talent retention, adoption of new technologies, focus on key products or accounts, and establishing strategies to cut costs, etc.

Following a restructuring, the company should be left with a more streamlined and economically sound business operation, which is risk resilient and competitive in the market. This is not only important for businesses to get through the immediate challenges posed by financial and operational pressures, but also so that they can take advantage of new opportunities that emerge during crises, particularly relevant in the context of China.

In the next sections, we will discuss how the Chinese economy has rebounded from the disruption caused by the initial outbreak of the disease and witnessed the resurgence of economic activity and has presented one of the few centers of growth in a bleak world economy. That has made it even more important for businesses invested in the region to strategize to survive and succeed.

The China context

After businesses and factories reopened and internal movement relaxed following the successful implementation of COVID-19 control measures, China proved itself to be a reliable investment destination.

According to official data released by China’s National Statistic Bureau, foreign direct investment (FDI) into China rose by 6.2 percent year-on-year to RMB 999.98 billion (US$154.58 billion) in 2020, with 38,570 foreign-invested enterprises (FIE) having newly established. China has overtaken the US to become the world’s largest FDI destination. Leading multinational companies, such as ExxoMobil, BMW, Toyota, and Invista, increased their investment into China.

This is in great contrast to the 35 percent plunge in global FDI inflows in 2020, to US$1 trillion from US$1.5 trillion the previous year, according to the World Investment Report 2021, released by the United Nations Conference on Trade and Development (UNCTAD) in June 2021. The report projects that global FDI flows will bottom out in 2021 and recover some lost ground with an increase of 10 to 15 percent. Lockdowns implemented around the world to control the pandemic slowed down existing investment projects, and the prospects of a recession led multinational enterprises to reassess new projects. FDI into developed economies fell by 58 percent partly due to corporate restructuring and intrafirm financial flows. While FDI in developing economies was relatively resilient, declining by eight percent, mainly because of robust flows in Asia, the number of newly announced greenfield projects fell by 42 percent and international project finance deals – important for infrastructure – by 14 percent in developing countries. As per UNCTAD’s World Investment Report 2020, FDI into the US declined 64.5 percent in the first half of 2020, while Germany suffered a 23.5 percent FDI decline in the same period. Even Vietnam, the new favorite destination for foreign investors, saw its FDI inflow fall by 5.1 percent in the first eight months of 2020.

The most straightforward reason behind China’s relatively quick stabilization and move to recovery has been its management of the COVID-19 outbreak, and most recently, its inoculation strategy. Beijing aims to fully inoculate 40 percent of the country’s 1.4 billion people by the end of June this year, and health authorities said on Sunday (June 20) that more than a billion vaccine doses have already been administered. Globally, as of June 19, more than 2.5 billion doses have been administered. Reuters reported Thursday morning that yesterday, June 23, China had administered 24.1 million doses, bringing the official national total to 1.096 billion.

Last year, China’s COVID spread was overwhelmingly brought into control in February, around two months after the virus was first recognized. In April 2020, Wuhan, the epicenter of the pandemic, lifted its 2.5 months-long lockdown. Despite new clusters emerging across the country from time to time, China has shown its capability in the rapid containment and control of the infectious outbreaks. Most remarkably, it has been able to implement massive test and trace operations wherever the clusters happen, to expose any asymptomatic cases and expel chances of a wider spread of the virus. Such effectiveness in controlling the spread of the virus provides security and confidence to the people living in China, as well as businesses and foreign investors.

By April 2020, 99 percent of large-scale industrial enterprises and 84 percent of small- and medium- sized enterprises had restored their production nationwide. The rate of personnel returning to work was 94 percent by this time. The general public also gradually returned to their pre-epidemic lifestyle, with 637 million people hitting the road for domestic trips during the National Day Golden Week in early October, 79 percent of the numbers recorded in 2019. Consequently, China took the lead, globally, in achieving an economic rebound, having benefited from the early restart of production activity and reopening of logistic links. In the second quarter of 2020, China’s economy bottomed out and rose by 3.2 percent, making it the only G20 country showing positive growth indicators. In the third quarter, China achieved a 4.9 percent year-on-year growth, in line with market projections.

Cut to 2021 – and the Asian Development Bank projects that China’s economic growth will surge by 8.1 percent in 2021 from 2.3 percent in 2020, before stabilizing at around 5.5 percent in 2022. A median forecast by Bloomberg, based on its survey of economists, put China’s growth at 8.5 percent in 2021. This growth will be powered by strong exports and gradual recovery in household consumption; nevertheless, market watchers warn that port delays, supply chain disruptions, and declines in consumption activity could easily temper rebound trends.

In comparison, though, most other countries are still struggling to contain the spread of COVID-19 and are experimenting with extended home quarantines, social distancing in public spaces, travel curbs, and constant monitoring of public health. This keeps China in a uniquely advantageous position. With period waves of the pandemic hitting several countries, and new variants of COVID-19, like the latest Delta variant, introducing more severe threats, the proven capability of China’s central and provincial governments to manage repercussions from unforeseen events and adapt to fast-changing scenarios is appealing to foreign investors.

China is therefore projected to play a bigger role in facilitating the survival of businesses in the global market as well as the rise of new and innovative ventures. Foreign investors who had seriously considered moving out of the country due to the US-China trade war, rising labor and compliance costs, and market competition, are now back to the drawing table to reassess their China strategy. And even if geopolitics play spoiler to regional agreements, like the EU-China CAI, global businesses remain insistent on strengthening and diversifying their China base and market exposure. This is reflected, for instance, in the 2021 American Business in China White Paper released by the American Chamber of Commerce in China on May 11. According to the White Paper, a majority of US businesses remain optimistic about growth opportunities in China and intend to increase their investments. They believe China will steadily increase the pace of its market opening and the focus is turning to China’s domestic consumption power.

Understanding China’s appeal: Infrastructure, market size, reforms

Beyond the swift measures taken to contain the economic fallout of COVID-19, China has other accumulated advantages to back up its outstanding position in the global market and maintain investor confidence.

Supply chain

China’s sophisticated manufacturing and logistics infrastructure ensures it will not get replaced in the global supply chain easily. According to Xinhua, the state-run press agency, China is the only country that possesses all the industrial categories in the United Nations industrial classification, which allows firms to source goods easily. China also boasts of the largest network of high-speed rail and expressways in terms of mileage, which allows products to be transported efficiently.

The importance of these transport advantages became fully clear during the epidemic when overseas supply chains were seriously disrupted due to the implementation of infection control measures. From the production and supply of masks, protective suits, and medical equipment in the early stage of the epidemic, to consumer electronics, household goods, and festival products during later months, China’s exports have made up for overseas shortages in all kinds of product segments.

Domestic market

Being the world’s second largest economy, China’s rising purchasing power, expanding middle class, and a population approaching 1.4 billion, touts it to become the largest retail market in the near future. In 2019, for example, total retail sales of consumer goods hit RMB 41.17 trillion (US$5.97 trillion), according to the National Bureau of Statistics. This trend has remained in the wake of COVID-19. China’s retail sales of consumer goods grew 17.7 percent year-on-year in April to reach RMB 3.32 trillion (US$515.9 billion), and up 0.32 percent month-on-month, according to the National Bureau of Statistics. In the first four months of 2021, China’s retail sales of consumer goods grew 29.6 percent year-on-year to reach RMB 13.84 trillion; e-commerce during this period saw 27.6 percent year-on-year growth. While retail sales grew by 12.4 percent year-on-year in May, weaker than expected, it still shows that China’s consumer and business confidences is picking up as a result of pent-up demand and widespread vaccination. This holds promising for the tourism, hospitality, and recreation industries as well.

The strong domestic market performance will benefit from China’s dual circulation strategy, which intends to spur China’s domestic demand, on one hand, and simultaneously create conditions to increase foreign investment and boost production for exports, on the other. The focus on tapping into China’s internal consumption patterns and domestic markets aims to buffer the impact of global headwinds on the country’s economic and financial stability. This is why China’s government – at the central and provincial levels – have sped up market opening reforms to make it easier for businesses to scale up, innovate, and boost economic activity, and as a result, fuel consumption growth.

Bearing this in mind, it is not hard to understand why foreign investors are once again betting big on China. Many have started to produce goods specifically for local consumption in the country, rather than only use China as a production base for export-led manufacturing as in the past. For many companies, China is now their largest market for growth.

China’s upgrade and further opening up

China has endeavored to attract foreign investment by further relaxing market access restrictions and by continuously introducing improvements to the business and regulatory environment.

Among others, the negative lists, which indicates industries that are subject to special administrative measures for foreign investors, were shortened again this year. The 2020 National Negative List cut the number of restrictive measures by 17.5 percent, from 40 to 33, and the 2020 FTZ Negative List (covering free trade zones) cut restrictive measures by 18.9 percent, from 37 to 30. The 2020 Market Access Negative List, announced December 2020, has been shortened to 123 items from 131 in 2019 – relaxing requirements in sectors, such as oil and gas, resource management, and trading and financial services.

Taking auto manufacturing as an example, the restrictions on the share ratio of foreign investment in commercial vehicle manufacturing has been liberalized. Before, the Chinese party shareholding percentage in commercial automobile manufacturing shall not be less than 50 percent.

Besides, with the Foreign Investment Law and supporting regulations coming into effect 2020, together with other reforms in the areas of company establishment, tax, finance, reporting and compliance management, foreign investors are playing on a more even ground with domestic competitors. Moreover, China has publicly stated its intentions to accelerate market opening reforms. More FTZs were announced to diversify scope and access to preferential incentives, test sector and region-based relaxation of entry norms. On September 21, 2020, China announced it will establish pilot FTZs in Beijing, Tianjin, and Anhui, raising the country’s FTZ tally to 21.

This also constitutes part of China’s efforts to transform into a more innovative, service, and consumption-driven economy with high-end manufacturing capacity to attract international businesses. This trends towards high-tech innovation and market opening – that was initially an outcome of US-China trade tensions – will pave the ground for future and sustainable patterns of growth.

Restructuring your China company to take advantage of new opportunities

To summarize, China’s containment of the coronavirus outbreak within its borders enabled the quick recovery of its economy. This was helped by China’s stable social environment, integrated industrial system, efficient and advanced service and logistic networks, well-educated human resources, as well as a sizeable domestic market.

Cumulatively, these factors and outcomes helped the country avoid large-scale relocation of foreign and local companies. Given that COVID-19 is ongoing as the world battles new variants and waves of outbreaks as economies attempt to reopen, disease prevention is the new normal. China’s performance in navigating this new normal adds to its potential to attract continued FDI.

Despite the upsides, it must be noted that businesses on the ground still face a highly competitive market, with a much smaller window of survival due to global economic turbulence. This is evident when we scrutinize the data more closely – while China is leading the world in economic recovery, its growth rate is still vulnerable to global shocks and new outbreaks, such as the one experienced in the southern export powerhouse of Guangdong since May (see our coverage of the coronavirus outbreak in the country here: China Coronavirus Updates: Latest Developments and Business Advisory).

In addition, it can also be observed that large scale enterprises and state-owned enterprises will continue to be at a more advantageous position than smaller and privately-owned businesses. In this context, the purpose of restructuring in China should go beyond survival from the health crisis. Enterprises in all sectors and industries in China must plan for the next phase when choosing to restructure their business – to adapt to a more competitive market, to be a stronger player in a niche sector, to enter a promising sector more speedily, to reshape the market strategy of the group company, to be in better control of the business, and to keep the corporate structure more nimble and flexible to be more resilient in case of any future setbacks.

External and internal restructuring

Correspondingly, businesses that want to optimize their operations and resources should consider both external restructuring, that involves more than one party, and internal restructuring.

External restructuring usually refers to the restructuring of the company equity, control rights, and assets to achieve relevant business purposes, such as entering a niche market without directly setting up from scratch. Typical strategies under external restructuring include equity acquisition, asset transfer, merger, split-up, divestiture, etc.

Internal restructuring, in contrast, focuses on alterations in operations, procedures, departments, supply chains, human resources, legal frameworks, locations, computer systems and networks, etc. to enable the business to become more integrated, streamlined, and profitable. At the operational level, it could lead to reducing or eliminating production or service lines, closing facilities, relocating businesses and employees, adjustment of the company divisions, and adoption of new rules and advanced systems, such as supply chain management system (SCM), human capital management system (HCM), back office automation, and so on. Professional advisory services are often engaged in this process to ensure the effectiveness of the company restructuring.

Restructuring can be a challenging and painful process as the internal and external structure of a company is adjusted and human capital is affected. But a successful restructuring plan will result in smoother, more economically viable business operations. This is vitally important for businesses to survive, and to outperform in the new normal.

About Us

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

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.