Facing a “perfect storm” that has battered foreign investors’ confidence in the world’s second-largest economy, Beijing can still weather the downturn if it takes decisive action, according to the new head of the European business association in China.
To restore that lost confidence, the Chinese government must foster much greater certainty in its business environment, said Jens Eskelund, who was elected on May 24 as president of the European Union Chamber of Commerce.
And he said that steps toward that goal should include increasing information transparency and data reliability, as well as reducing policy ambiguity and removing unfair market restrictions to foreign business.
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Short of such strong, concrete actions, Eskelund warned that while EU businesses are still interested in China’s huge market, they would remain reluctant to bet on its sputtering economy, which has become a matter of global concern.
“What we see now in the economy is a crisis of confidence,” Eskelund said, adding that “insecurity about what the future would hold” has weakened business sentiment while weighing on the outlook for foreign-direct-investment (FDI) inflows in geopolitically onerous times.
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His urgings come as an economic slowdown has persisted in China since the second quarter, leading to an across-the-board weakening in July as external demand shrank and the property crisis deepened. Such factors are weighing heavily on Beijing’s goal of growing China’s economy by “around 5 per cent” this year.
Further igniting concerns over data transparency and economic ramifications, the National Bureau of Statistics this week suspended the release of the youth-unemployment rate after it rose to record highs in recent months.
Eskelund said the central government should respond by rebuilding that shattered faith with concrete moves to improve policy transparency and access to information – issues of increasingly paramount importance among foreign investors as they try to gauge and operate in the Chinese market.
“From an FDI perspective, China is experiencing a perfect storm in which there are many factors now conspiring,” Eskelund said, pointing to supply-chain upheavals, manufacturing relocations, geopolitical tensions, weakened economic growth both domestic and abroad, and a rise in Europeans’ negative sentiment toward China – all of which “affect investor sentiment”.
Instead of a big-bang monetary stimulus, Beijing has unfolded action plans targeting the private sector, foreign businesses and consumption, which are considered crucial areas for driving economic growth and creating jobs.
But as policymakers and financial officials have called for the public to be patient as the economy bottoms out, many people are reluctant to dip into their savings, which further suppresses consumption. And foreign firms continue to clamour for long-sought-after market access and greater transparency – issues that frequently appear in foreign chamber of commerce position papers.
“The Chinese government should create certainty about the investment environment and its relations with Europe, and re-establish the faith in predictability and efficiency of the Chinese market,” Eskelund said. “It can start by addressing policy ambiguity and limited market access, and by translating the [new] directives into concrete action in the coming months, which would move the needle for European companies and contribute to a change of heart in the business community.”
In the past few years, overseas confidence in China’s growth prospects has been battered by its rigid implementation of a zero-Covid policy, and by rising pressure from Western countries to reshore or “friend-shore” their supply chains.
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In response, China has doubled down on national security amid rising tensions with the US, and has upped the ante on self-reliance, with the cultivation of home-grown industrial champions.
Meanwhile, Beijing also ratcheted up its charm offensive, such as by rolling out a new round-table communication mechanism initiated by the Ministry of Commerce in July, to lure foreign companies and shore up China’s footing in the global supply chain.
But such efforts have fallen on deaf ears among some foreign investors.
“There is a bit of confusion as to what the focus is, as some of these priorities do not go hand in hand,” Eskelund said. “We understand that there is a need to protect national security, but we are concerned that the messages are not particularly welcoming for foreign companies.”
“We want to invest in China and develop our business here,” he added. “But we need to have a line of sight that allows us to feel reasonably assured about how we will develop in the future.
“We hope to see clear definitions about state secrets and critical information infrastructure, and the consistent interpretation [and implementation] among different levels of governments.”
He added that companies are growing more concerned about the type of information that they are allowed to obtain, particularly in the wake of a crackdown on foreign consultancy services in China earlier this year.
“Are companies allowed to study wind patterns off the coast of Fujian if they are investing in offshore wind? If a company is establishing a new factory and taking soil samples to screen for toxins, would that qualify as a state secret? There is insecurity about what would constitute a state secret and the accuracy of the information that companies can gather,” he said, adding that freer access to information would enable companies to perform audits and due diligence on behalf of investors.
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Beijing released a 24-point list of guidelines on Sunday in a bid to reassure foreign investors, pledging more market access, speedier cross-border data flows, and easier visa access with an aim of luring foreign talent.
But Eskelund said that China needs to move quickly in putting these vows into practice if it wants to stem the tide of expats who are leaving and to convince new talent to come.
“The imminent expiring of long-standing tax exemptions will make it prohibitively costly for many companies to send expatriate families to China or keep them on payroll here,” he said. “An immediate step to stem the [talent] outflow would be for the government to extend tax exemptions for international schools, which are among the most expensive in the world, and for rental costs of foreign expats and their families living in China.”
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