Foreign firms in China express cautious optimism for 2023, but geopolitical risks, market barriers remain, SCMP, Feb. 15, 2023.
Luna Sun in Beijingand Ralph Jennings
Foreign firms in China remain cautious about regulatory uncertainty, geopolitical tensions and unfair protectionism
Analysts expect an economic rebound in the second quarter and an uptick in visits from foreign CEOs in coming months
Foreign companies are cautiously optimistic about business prospects in China, though rising geopolitical risks, opaque policies, market barriers and diversification trends are complicating the outlook.
“We expect foreign investment to rebound in 2023, given that the elimination of zero-Covid protocols has removed a huge impediment to routine business activities,” said Nick Marro, senior analyst with the Economist Intelligence Unit (EIU).
“A lot of established companies are still betting on the growth potential of the Chinese consumer, given the size of the middle class, as well as the opportunities in sectors like healthcare, finance services and clean technology.”
But most – if not all – companies will retain a cautious outlook on China, he added, owing to lingering concerns around policy opacity, regulatory uncertainty, and unfair protectionism.
These issues have long discouraged foreign firms from devoting more resources to the Chinese market, at least to the same degree as they did over the previous decade.
Geopolitical tensions between China and the United States remain one of the major concerns for Western businesses, especially American companies in China.
US companies still face hurdles due to the strained bilateral relationship between the two countries, said Jack Kamensky, senior director with the US-China Business Council (USCBC), on Saturday.
“Chinese companies often receive preferential support from the government, which can put American firms at a disadvantage,” said Kamensky.
“In addition, companies are concerned by developing Chinese policies around data, privacy, and cybersecurity and their impacts on operations.”
It’s becoming increasingly difficult to be fully compliant and politically correct in both the China and US markets --Joe Mazur
In a survey of the council’s 265 members last year, 87 per cent reported “business impacts” from China-US tensions.
Kamensky said “limited, expensive flights” and the suspension of visas issued before the pandemic remained problems for companies planning on sending executives to China for the first time in several years after quarantine rules were lifted.
Joe Mazur, senior analyst with the Beijing-based Trivium China, said multinationals “risk getting caught in the crossfire” as the US presses on with sanctions and economic pressure and Beijing builds up its counter-sanctions toolkit.
“Certain sectors are, of course, more vulnerable than others, but it’s becoming increasingly difficult to be fully compliant and politically correct in both the China and US markets,” he said.
In general, China should expect to seen an uptick in visits from foreign CEOs in the coming weeks and months.
“Travelling to China in person allows foreign executives to deal directly with their Chinese counterparts which is more conducive to deepening partnerships and striking deals,” said Mazur.
Despite the heightened geopolitical risks, some American companies are less sensitive and vulnerable, including those in the financial services or manufacturing sectors, who have been courted by Chinese authorities and could even expand operations this year, said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.
In regards to diversification, he said companies would not leave China altogether, but were concerned with how to manage supply chain risks.
“After what happened in Ukraine and after Covid, people are more aware of the supply chain risk, so they want to diversify, maybe China plus one, so they could have some production facility in China but also have an alternative production base in Southeast Asia as a backup,” said Zhang.
Marro said the discussion around supply chain diversification would be prominent in corporate boardrooms “primarily to the benefit of new investment destined for Southeast Asia, as multinationals hedge against uncertainty by spreading their risk across different markets”.
As most foreign companies in China have finished their annual budget planning, they are not expected to make any major moves early this year, and many are waiting for economic data in the first couple of quarters to assess recovery and the regulatory environment, analysts said.
Foreign firms operating in China for the past three to four decades, who are committed to the market for the long-term will be more confident, Marro said.
“The discussion among newer companies looking to break into the Chinese market is likely very different, given that barriers to market entry are higher than they were previously, even when benchmarked against the 2010s,” he said.
On Monday, Moody’s said China’s 2023 “growth outturn” is likely to be stronger than previously expected. The ratings agency cited an exit from zero-Covid and a shift in policy focus to growth from regulatory tightening and deleveraging.
The end of zero-Covid is huge for the foreign business community in China --Ker Gibbs
Growth in the first quarter is expected to beat the final three months of 2022 because of the border’s reopening and Lunar New Year holiday activity, Moody’s said.
Market expectations are for China’s economy to start rebounding in the second quarter.
Supply chain disruptions have steadily been mended thanks in part to easing testing and disinfection rules, said Kamensky, from USCBC.
“The end of zero-Covid is huge for the foreign business community in China,” said Ker Gibbs, former president of the American Chamber of Commerce in Shanghai.
“I’m expecting the Chinese economy to bounce back quite well in 2023, with a lot of pent-up consumer demand,” he said. “Foreign companies want to be in position to share the benefits from that.”