Growing concerns of European companies operating in China

Growing concerns of European companies operating in China

European Union companies are more pessimistic about China’s growth prospects than ever before. According to the annual business climate survey conducted by the European Union Chamber of Commerce in Beijing, 23% of companies surveyed are pessimistic about the outlook for growth over the next two years – the highest ever. In last year’s survey, only 9% were pessimistic. Meanwhile, the number of companies positive about growth prospects fell from 55% the previous year to just 32%, also a record.

Low domestic demand, high debt levels

The past year has been marked by “growing uncertainty” for European businesses in the People’s Republic of China, according to the EU Chamber of Commerce. China’s opening up after the pandemic initially sparked a wave of optimism. However, what the chamber describes as “deep structural problems” such as weak domestic demand, high local government debt and ongoing challenges in the real estate sector quickly overshadowed the growth prospects. Business confidence has also been undermined by mixed messages from the Chinese government.

Representatives of European companies consider the economic slowdown in China, as well as the generally weak global economy, to be the biggest challenges for their business. The conflict between the US and China and other geopolitical tensions were also mentioned as major factors. In addition, the increasingly fierce competition with domestic Chinese companies on the Chinese market is a growing problem for EU entrepreneurs.

Economic slowdown is the biggest challenge

While economic challenges are intensifying, other obstacles to doing business in China, such as regulatory requirements and unpredictable legislation, remain high. Only 16% of respondents expected regulatory hurdles to ease, also the lowest on record.

This unfavourable situation in the Chinese market is reflected in companies’ investment decisions. The percentage of respondents who still rate China as the best destination for current and future investments is lower than ever before, at 15% and 12% respectively.

Companies are moving investments

As we can read in the Chamber’s report, companies are constantly moving investments originally planned in China to alternative markets, which are perceived as more predictable, more reliable and more transparent. At the same time, the percentage of respondents planning to expand their current operations in China in the coming year has fallen from 48% to 42%. Many companies are also limiting the reinvestment of their profits in China.

Another growing problem in the country is overcapacity in many sectors of the economy. A total of 36 percent of respondents have observed it in their industries. Another 10 percent expect it to happen in the near future. The largest percentage of respondents (69 percent) reported overcapacity in the construction industry. The second highest percentage was recorded by the automotive industry (62 percent).

Too little demand

Three-fifths of respondents who reported overcapacity in their industry cited over-investment in domestic production as the main cause of the problems, as well as weak demand from both the Chinese and global markets.

European Commission President Ursula von der Leyen made clear last Monday ahead of a meeting with Chinese President Xi Jinping in Paris that the EU would no longer tolerate China’s current subsidies and trade practices. “Due to weak domestic demand, China currently produces more than it sells, partly due to high subsidies,” she said. The European Commission announced last year that it would consider sanctions on electric cars from China.

Source: t-online