China’s Charm Offensive Post Zero-COVID: Restoring Shanghai’s Allure
Carlo Diego D’Andrea- Vice President and Shanghai Chair of the European Union Chamber of Commerce in China
Since China ended its ‘zero-COVID’ strategy early this year, Chinese officials have been on a charm offensive in an attempt to restore the country’s allure as an investment destination. Given the flurry of diplomatic visits from the EU in recent months, renewed efforts to reengage and rebuild economic ties with China have been intensified. However, more will need to be done if China is to reverse the deterioration of business sentiment over the past three years and heal the scars of COVID-induced lockdowns.
2022 was a particularly challenging year: due to the tightening of zero-COVID and the Russian invasion of Ukraine, the existing difficulties of doing business in China have intensified. Based on the results of the annual European Union Chamber of Commerce in China’s Business Confidence Survey 2023, 64 percent of European Chamber members found doing business in China became more difficult year-on-year, the largest total on record. Faced with an increasingly volatile business environment, European companies have already begun shifting investments overseas and decoupling their supply chains in China from those across the rest of the world to increase resilience. Many are now thinking twice about leaving their eggs in one basket, resulting in China losing its spot as a top foreign investment destination for over half of the surveyed members. Despite worrying rhetoric of European dependency on China, the trend of EU investment in China being below its potential is poised to continue. To illustrate this, the total stock of EU FDI in China invested over the past two decades is equivalent to the amount that EU businesses invest in the US every 12 months. Given the global economic slowdown and China’s weak economic forecasts for 2023, this trend appears set to continue at least into the medium-term.
With one in ten members having already moved or planning to move their regional headquarters in the Asia Pacific region out of China, the outlook doesn’t look as bright as initially hoped in the wake of China’s sudden opening up at the beginning of the year. For Shanghai as China’s ‘gateway to the west’ and home to highest number of MNC headquarters, the erosion of the city’s allure as a regional headquarters hub is increasingly apparent. This year, only 33 percent of the European Chamber companies surveyed reported they had an Asia-Pacific headquarters in Shanghai compared to 40 percent in 2022. Meanwhile, for companies who do not currently have Shanghai-based APAC regional headquarters, less than one in ten are considering Shanghai as a potential location. Singapore, has become the leading beneficiary, attracting not only European multinationals but also an increasing number of Chinese companies that are making a strategic shift out of Shanghai.
Is clear that the lingering scars created by the zero-COVID policy, particularly Shanghai’s draconian 2-month lockdown, are a major factor in these shifts. While Shanghai has long been perceived as the most business-friendly city in mainland China, many of China’s COVID-19 management policies implemented over the past three years have left businesses questioning whether other disruptive policies, be this in relation to renewable energy targets or demands to localise supply chains, will be enforced again without warning. This further undermines Shanghai’s efforts to build a HQ economy over the past decade. Escalating US-China geopolitical tensions, particularly on technology, has also contributed to the uncertainty and politicisation of business. So why does this matter for the rest of the world? From the 2022 Shanghai lockdown, two global economic consequences stand out: first, given that Shanghai is home to the busiest container port in the world, supply chain bottlenecks eventually result in an inflationary shock in Europe; second, the global economic domino effect from China’s potential economic stagnation – and companies taking Shanghai off the HQ cards does not bring good news.
Finally, restoring Shanghai’s reputation as an internationally competitive city requires ensuring a predictable business environment and providing businesses with essential support on high costs of living and uncompetitive tax policies. This will be essential to encouraging FDI and in addressing the increasing EU-China trade deficit. All eyes are now on Shanghai and what the city does next in a post zero-COVID world. The question is, does Shanghai act to rebuild the trust eroded to help China become a leading investment destination again, or does it do nothing and show that the challenging business environment of the past three years is here to stay? Now we wait and see the next move of Shanghai.
