Why China is still a top location for European companies

Under President Xi Jinping’s much-hyped ‘dual circulation strategy’ (DCS), China will depend mainly on “domestic circulation” for its next phase of development, supported by external resources through “international circulation”.

The former is intended to reduce China’s dependence on overseas markets and technology for its long-term development, a shift brought on by a deepening rift with the US, while the latter entails greater market opening to attract more foreign investment in high-end manufacturing to strengthen its supply chain security and deter foreign countries’ from luring firms away from China.

The DCS is likely to be a key priority in the government’s 14th five-year plan (2021-2025), which is due to be unveiled during the annual parliament session in early 2021.

While recovery from Covid-19 has been faster than expected in China, the global economy’s long ascent back to pre-pandemic levels of activity remains prone to setbacks. So where does this leave Europe and the US?

Covid cases have been rising again in many parts of Europe and, in many cases, these involve the reintroduction of restrictions that had been eased after initial lockdowns. The IMF predicts a contraction in GDP of -8.3% across the whole euro area in 2020, with double-digit drops in Italy and Spain and even German GDP falling by 6%.1 At the same time, it is forecasting only a 5.2% rebound in GDP across the euro area in 2021, leaving a considerable economic deficit.

Meanwhile, the US economy is facing an accelerating surge in coronavirus cases and harsh new restrictions on business activity without the cushion of meaningful fiscal support, raising fears of a blow to the recovery. By mid-November, the US had recorded more than one million new coronavirus cases in the month and lockdown measures were being introduced in a number of states and major cities in an attempt to contain the spread.

Equity markets may have rallied on advances in vaccine development, but the deteriorating health situation across the US presents an imminent threat to the economy as the winter months approach. The IMF prediction for the US economy to contract by 4.3% in 2020, before growing at 3.1% in 2021, is already looking extremely tenuous. And as US President-elect Joe Biden begins to move ahead with the transition to power – making key appointments to his administration and laying out the policy priorities ahead of January’s inauguration – a tough approach on China is one area where there is a broad political agreement in the US.

Europe is often seen as a divided continent but the image of China in Europe is prevailingly negative and has got significantly worse over the last three years. According to a recent survey2 by Palacky University Olomouc in the Czech Republic, countries in the west and north (Sweden, France, the UK and Germany) tend to have the most negative views, while the countries in the east (Russia, Serbia, and Latvia) are predominantly positive. Southern (Italy, Spain) and Central Europe (Czech Republic, Hungary, Poland and Slovakia) can be found somewhere in between, although still decisively negative.

A few factors seem to drive these perceptions. The countries with more negative views tend to be those that have experienced tense diplomatic relations with China in recent years, at least partly due to China’s diplomatic style. The Covid-19 pandemic was also recognised as the most common association with China overall. The only trade was perceived as predominantly positive in most, but not all, countries, while Chinese investments and the ‘Belt and Road’ initiative were perceived more negatively.

This suggests that China is not seen across Europe as simply an ‘economic opportunity’. Human rights are seen as an important issue to be upheld in China policies, while cybersecurity is seen as one of the most severe issues to be addressed in relation to China. However, the most negatively perceived issue in relation to China turned out to be its impact on the global environment.

However, Europe cannot just abandon China; it is too important for that. China is the second-largest economy in the world, but while GDP per capita is USD62,000 in the US, in China it is only just above USD10,000. This means there is still huge potential for internal growth and, of course, it fits perfectly with the DCS, which puts an emphasis on stimulating the domestic market.

The DCS also has a focus on the bringing international business into China and the 19th Central Committee of the Communist Party of China’s recommendations for the 14th Five-Year Plan (FYP), decided at its Fifth Plenary Sessions in Beijing between October 26 to 29, set the outline for the upcoming 14th Five Year Plan (2021-2025). had a bit to say about this. In particular, it has pledged to:

• Improve the management of the ‘negative list’ for foreign investment;
• Further, open up the services industry to foreign investment;
• Protect the legitimate rights and interests of foreign enterprises.

This is great news (if, of course, it backs up words with action) and the Central Committee also offered some recommendations as to the key areas for development. Innovation was hailed as the central concept driving China’s modernisation – with technological independence and self-reliance as strategic supporting pillars to this development model.

Besides this, the Committee renewed emphasis on protecting intellectual property rights, talent attraction, tech infrastructure and establishing mass interdisciplinary and cross-regional innovation centres. Investment in R&D was a resounding theme – with seven frontier fields highlighted for further exploration: artificial intelligence, quantum information, integrated circuits, life and health science, neural science, biological breeding and aerospace technology.

The way forward in China

In other words, while international expansion may not be at the top of your business agenda at present, investing in China may soon become a much more compelling prospect given the potential growth in the Chinese market against prolonged economic problems in the European and US markets. But it will not be easy. Entering China and setting up an entity, either through a joint venture or foreign-invested entity, is a big step that should not be taken lightly. To help you assess your options, please read our ‘Doing Business in China’ handbook. At Sovereign China, our mission is to make China easier

IMF ‘World Economic Outlook, October 2020: A Long and Difficult Ascent’, October 2020

“Survey: Europeans’ views of China in the age of COVID-19”, published by Palacky University Olomouc and the Central European Institute of Asian Studies

This article was originally published on the Sovereing Group Website.