The China-EU Business Association released a report on Friday titled “2024 European Business Confidence Survey in China,” showing that despite China reopening its borders in early 2023, European enterprises’ confidence in the Chinese market continues to decline. A record proportion of companies reported that doing business in China has become increasingly challenging.
Contrary to expectations, the report states that the Chinese economy did not experience a robust rebound to drive the development of European businesses in China. Instead, companies are facing more uncertainties. The structural issues in China – including weak demand, exacerbated overcapacity, ongoing challenges in the real estate sector, market access, and regulatory barriers – continue to have a negative impact on European enterprises.
The latest survey by the EU Chamber of Commerce covered 529 surveyed companies, conducted from mid-January to early February. According to the report, 68% of surveyed companies stated that doing business in China has become more difficult, the highest percentage ever recorded. 55% of companies identified the slowdown of the Chinese economy as one of the top three business challenges, a 19% increase from the previous year.
Jens Eskelund, the Chairman of the EU Chamber of Commerce, expressed surprise at the 19% increase in concerns within just one year based on historical data from their surveys.
Furthermore, 58% of surveyed companies missed opportunities due to market entry issues or regulatory obstacles, while 44% expressed pessimism about their profitability in the next two years, reaching a historically high level. Companies with a positive outlook on business prospects decreased significantly compared to the previous year, marking a 23-percentage point drop.
The report highlighted that European companies’ strategies to adapt to the business environment in China could potentially exacerbate economic challenges, leading to a negative cycle. Specifically, 52% of the surveyed companies plan to cut costs, with 26% considering staff reductions. Moreover, 13% of the companies have already shifted their existing investments out of China or decided to do so, while 12% have redirected future investments originally intended for China elsewhere.
Southeast Asia and Europe are the primary beneficiaries of this shift, followed by India and North America.
Yens Eskelund emphasized that it’s not about companies abandoning China but rather witnessing other countries emerging as strong competitors. The business outlook is currently the most pessimistic ever recorded, impacting growth and profit expectations, intensifying competition concerns. European companies are revising their expectations for the Chinese market.
As China’s economic growth slows down and pressure from overcapacity increases, European companies operating in China find it increasingly challenging to attain profits. Carlo D’Andrea, Chairman of the EU Chamber of Commerce in Shanghai, noted that some European companies in Shanghai are experiencing delays in receiving payments.
The Chinese government’s focus on fostering manufacturing without stimulating domestic demand has heightened concerns among companies about declining profit margins due to increasing overcapacity.
More than a third of surveyed companies observed overcapacity in their industries last year, with an additional 10% anticipating overcapacity in the near future. Over 70% of surveyed companies stated that industry overcapacity led to price declines, with 15% reporting losses in their Chinese operations in 2023.
“It’s not only complaints from European companies,” Yens Eskelund said. “For Chinese companies, the situation is equally if not more challenging.”
This year’s survey introduced a new question about transferring dividends back to headquarters faced by member companies. While most businesses reported no issues, approximately 25% of respondents encountered some difficulties or delays, with 4% stating they were unable to proceed with the transfers.
It remains unclear whether the obstructed companies face challenges due to China’s new regulatory stance or typical tax audit requirements.
“Numerous signs suggest that due to challenges outweighing the gains in the Chinese market, some European companies are isolating their Chinese operations or scaling back their ambitions, a worrying trend,” Yens Eskelund stated in a news release. “While the Chinese government has repeatedly expressed intentions to improve the business environment, tangible actions are needed to restore investment confidence.”
Denis Depoux, Co-President of the Global Managing Director of Roland Berger, remarked on the increasing uncertainties European businesses face in China, largely stemming from economic instability and a lack of predictable policy direction.
Despite the Chinese government reporting a 5.3% economic growth in the first three months of this year, much of the growth is attributed to infrastructure spending and investments in manufacturing.
Yens Eskelund highlighted that for foreign companies, what’s crucial is not necessarily the overall GDP figure, such as 5.3% or any other number, but the composition of the GDP.
“If GDP growth is driven by increased investments in manufacturing, it’s not favorable for foreign companies. But if it’s fueled by domestic demand growth, then it’s a positive development,” he said.
Although the Chinese government has pledged to create a friendly business environment, the EU Chamber of Commerce and other business organizations stated that China falls short in implementing the 24 measures to improve the foreign investment environment.
According to CNBC’s compilation, the latest survey by the Chamber found a record proportion of surveyed companies expressing deteriorating conditions:
– A record number of companies indicated skepticism about growth potential in China for the next two years.
– A record percentage of companies believe competitive pressures will intensify.
– A record number of surveyed companies questioned their profitability in China.
– Plans to reduce costs (mainly through layoffs and cutting marketing budgets) reached a record level.
– Expectations of reduced regulatory barriers by the Chinese government hit a historic low.
“Compared to previous years, ongoing concerns regarding the predictability and visibility of the regulatory environment remain largely unchanged,” Yens Eskelund told the media earlier this week. “These concerns have persisted almost unchanged.”
“The current situation indicates that companies are starting to realize some of the pressures observed in the local market, be it competition or declining demand, which may become more enduring,” he continued. “This is beginning to influence investment decisions and the way people consider developing the local market.”