US businesses in China are finding it difficult to operate due to strained bilateral relations, but still find significant growth opportunities in the country, according to a new report from the American Chamber of Commerce in China.
On May 11, the Chamber released the 2021 American Business in China White Paper, which explores the experiences, challenges, and opportunities felt by US businesses in China in 2020 and early 2021, and sets out recommendations for American and Chinese policymakers.
This year’s report was especially notable due to the unique circumstances brought about by the COVID-19 pandemic, first in China and then in the US and worldwide.
Here, we look at some of the White Paper’s findings and insights about the state of US foreign direct investment in China, recommendations for reform efforts, and prospects for the future.
The COVID-19 pandemic strongly disrupted businesses operating in China in the first quarter of 2020, when the country’s outbreaks – and associated lockdown measures – were most intense. In the first quarter of 2020, China’s GDP contracted by 6.8 percent year-on-year.
Yet, overall the country’s GDP increased by 2.3 percent in 2020, making it the only major world economy to grow that year.
The American Chamber’s China Business Climate Survey Report, which was conducted in October and November 2020, found that COVID-19 was the most significant reason for weaker financial performance, especially in consumer and service sectors. In the survey, 25 percent of respondents said that the pandemic led to hiring freezes, 18 percent said the pandemic caused decreased demand for their products, and 14 percent said it prevented suppliers from being able to provide components or parts.
Additionally, over 52 percent of respondents said that they were still affected by travel disruptions at the time of the survey. For example, 37 percent of respondents said that they had hired expatriate staff who have been unable to relocate to China due to COVID-19. China still has strict travel restrictions in place that make it difficult for employees to visit the country or travel internationally, and many other countries have their own restrictions in place as well.
The report called on the US and China to cooperate on addressing the COVID-19 pandemic worldwide, including via the production, distribution, and dissemination of vaccines. It recommended that Chinese authorities share more data on domestically-produced vaccines so that they can be approved and distributed in other countries.
Further, the report recommended that the US and China invest in global health infrastructure to prepare for a better response to future pandemics, and to create an environment amenable to bilateral trade and FDI to encourage an economic recovery.
The Business Climate Survey Report found that rising US-China tensions was the biggest challenge for US businesses in China in 2020, with 78 percent of companies citing this issue. In comparison, the second biggest challenge, rising labor costs, was only cited by 40 percent of respondents.
The survey results come within the context of a multi-year decline in US-China relations. In 2020, the two countries continued to impose significant tariffs on many of each other’s products, and relations were further frayed by arguments about the origins of the COVID-19 virus and a heated US presidential election.
In addition to trade tariffs, political tensions contributed to cautious investments in technology and R&D. US-China tensions were cited as one of the biggest barriers to innovation in China, as 23 percent of respondents cited concerns about US-China technology decoupling.
While 38 percent of respondents said they wanted the US government to advocate more strongly for a level playing field for US businesses in China, 46 percent stated that they would like to see the US government refrain from aggressive rhetoric and tit-for-tat actions.
To restore bilateral ties, the White Paper suggested the two sides increase communication at all levels and establish results-oriented dialogues, and for the Chinese government to ensure its commitments to foreign-invested enterprises are implemented in practice. Moreover, the White Paper recommended that the US and China increase their collaboration on international issues like security, climate change, and COVID-19 relief.
Most US businesses are dissatisfied with the pace of market opening in China, as 77 percent said that market access barriers inhibit their operations. If market access was at US levels, two-thirds said they would increase their investments in China.
Some businesses perceive themselves to be unfairly treated by authorities compared to their domestic counterparts. In the survey, 30 percent of respondents said they had been treated unfairly in regulatory enforcement, which was six percentage points higher than the year before.
The White Paper also expressed US businesses’ concerns about the Chinese government’s perceived turn towards self-reliance, such as via the Dual Circulation Policy, which aims to increase domestic consumption and innovation while reducing reliance on foreign trade and investment. The White Paper said that the Dual Circulation Policy “has created concerns among the business community that China will prioritize the acquisition of critical technology without allowing FIEs to compete with their technology in China on a level playing field.”
In addition to macro-level policy developments, the White Paper criticized restrictions on foreign investment in a number of industries where Chinese companies do not face similar restrictions in the US, despite the fact that the Negative List for foreign investment has been shortening continuously in the past few years. For example, the White Paper noted that foreign investment in most value-added ICT industries, such as cloud computing, is capped at 50 percent ownership, and foreign investment into medical institutions is capped at 70 percent ownership.
While US businesses give Chinese reforms mixed reviews, the majority are optimistic about the overall direction. Close to 61 percent stated that they expect the country to further open to foreign direct investment in the future.
Further, some of the government’s reforms have been positively received by US businesses, such as the Foreign Investment Law, which came into effect on January 1, 2020. 28 percent of survey respondents said that the law improved the operating environment for their businesses, while 39 percent said it improved IP protection.
Despite ongoing US-China tensions and displeasure with some of China’s reforms, most businesses are optimistic about growth opportunities.
About two-thirds of survey respondents said that they plan to increase investments in China in 2021, most frequently citing reprioritization of the China market and expectations of faster growth in the market as their reasoning. Despite rising labor costs and trade tensions, 85 percent of respondents said that they are not considering relocating manufacturing or sourcing outside of China.
One major reason for optimism is the growing spending power of Chinese consumers. The growth in domestic consumption and the rise of an increasingly sizeable and affluent middle class was cited by 52 percent of respondents as the number one opportunity in China.
Further, respondents referred to policies like the Hainan Free Trade Zone as evidence that the government will continue to open its markets to foreign investors and create a level playing field with domestic Chinese companies.
The White Paper highlighted areas of progress in China’s reforms of a number of industries, noting high progress in sectors, such as commercial banking, credit rating, and insurance, as the country gradually opens its financial markets. According to the White Paper, China also recorded moderate progress in a number of other industries, including in food and beverage, pharmaceuticals, medical devices, healthcare services, energy, and e-commerce, among other areas.
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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