China must prove it still wants European investment by following through on real market reform

Each year, the European Chamber releases a position paper with hundreds of recommendations for improving the business environment across all sectors of China’s economy. Many of the recommendations in the European Business in China Position Paper 2020/2021 remained unchanged from previous editions; but now the imperative for market reform is stronger than ever.

The COVID-19 pandemic has wreaked havoc across the globe. China was the first country to shut down and the first to emerge. Although most of the direct economic fallout was limited to Q1 and Q2, the impact was immense and the disruptions to worldwide supply chains continue. Foreign companies have suffered revenue and sales declines as some expatriate employees were stuck outside of China for nearly half a year. At the same time, trade tensions and talks of decoupling from the Chinese market haunt the European companies who still consider the Chinese market vital for their operations.

As China embarks on its economic recovery, it must account for the participation and commitment of these foreign enterprises. When surveyed for the Chamber’s Business Confidence Survey 2020 in February, only 11 per cent of members were considering moving investments out of China, and China remains a top or top-three destination for investment for the majority. Despite the impact of the virus, subsequent surveys and discussions with members reveal no reason to expect a significant change on these points. However, the Chinese government cannot take the commitment of European enterprises for granted.

Politics has increasingly penetrated the business environment, shaking the core of investor confidence. Although European leaders are still pushing engagement, voters are concerned over the unbalanced economic relationship, allegations of forced labour in Xinjiang and the autonomy of Hong Kong. These issues present a real challenge for the EU and China to find an effective way forward before the window of opportunity closes. Meanwhile, China has doubled down on support for its bloated state-sector, reiterating a bifurcation of the economy in which the market is increasingly open and well-regulated for foreign players and Chinese private firms on one side, while on the other side China’s SOEs are gaining monopolistic power and scale that is impossible to compete with. Continuing down this path would be a grave mistake that flies in the face of the liberalisation China has promised for years.

The Comprehensive Agreement on Investment will be a key tool to restore confidence for European companies in China. As negotiations restart after months of delay due to the pandemic, European and Chinese policymakers must realise that more than ever, a binding and robust CAI is necessary to create a fair, reciprocal investment environment that benefits both economies.

The European Chamber is encouraged that during a recent virtual meeting between the EU and China, European leaders pushed for more ambitious commitments from China on market access; and that both sides have reaffirmed their commitment to conclude the CAI by the end of the year. More than half of Chamber members believe that Chinese companies in their sector enjoy better market access in Europe than European companies enjoy in China, and this discrepancy hides significant potential for a deeper economic relationship. For 44 per cent of members, market access restrictions or regulatory barriers have caused them to miss out on business opportunities, for many exceeding 10 per cent of annual revenue. This means a significant amount of investment that has gone unrealised as Chinese market reform lags.

The good news is that China still has a chance to seize the money that is waiting at the door; according to the BCS2020, 62 per cent of members are likely to increase investment in China if granted more market access. This will be vital to the country’s economic recovery. After all, foreign firms are already major contributors to China’s growth—in Shanghai, for example, foreign-invested enterprises account for about 1/4 of GDP, 1/3 of taxation, 1/3 of industrial output and 2/3 of imports and exports. It is therefore easy to imagine the investment inflows that China could enjoy if it opened more market sectors to foreign participation and expertise, such as information and communications technology as it embarks on extensive new infrastructure building throughout the country.

To harness the willingness of European companies to invest, China must clarify that it really does still want them. While its policy rhetoric says one thing, the lack of real market opening, travel restrictions, and unequal treatment between foreign and domestic companies betray a different sentiment. Recent minor revisions to the Negative List for Foreign Investment and hyping up Shanghai’s third China International Import Expo are not enough to offset the growing calls for a harder stance against China nor the uncertainty and unpredictability plaguing European companies and individuals. European investors need clear, specific signals to be confident that China’s actions will match with its rhetoric on market reforms. Promises are no longer enough.