China’s Expat Exodus: Reversal of the Brain Drain
This article was originally published in Italian in Panorama on 17th July 2023.
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/esodo-espatriati-cina-fuga-cervelli
Home to the country’s largest number of foreign invested company headquarters and a quarter of China’s expatriate population before 2022, Shanghai has seen an expat exodus since the brutal two-month lockdown that crippled the city of 25 million from late last March. Despite some expats calling China home for dozens of years, there is an increasing trend of foreigners leaving, either to return home to Europe or moving to other business hubs in Asia such as Singapore.
While China officially ended its zero-COVID policy in December 2022, what is left in its wake is now a drastically reduced expatriate population. Regarding Shanghai in particular, about 25% of Germans living in the city left after the lockdown, while the number of French and Italian citizens registered with their governments each fell by 20%, according to a report by the Shanghai Chapter of the European Union Chamber of Commerce in China. [1]Even in a country which boasts the world’s largest population at a staggering 1.44 billion and a vast land area of 9.60 million km², the 2020 census in China has indicated that there are no more than 850,000 foreigners in the country, equivalent to the number of foreigners registered in Norway or Serbia.
Of course, while some leave, others arrive. As the European Chamber of Commerce in China’s annual Business Confidence Survey has revealed for several consecutive years, foreign firms still consider China one of the most profitable and promising markets, but the current situation begs the question, will China’s pandemic-era exodus prove a reversible blip, and will the expat brain drain be quelled?
Limited face-to-face exchanges
Suffice to say, the restrictions of the past few years have negatively impacted European business in China, not only in terms of attraction and retention of foreign staff, but also with communication with headquarters, and most importantly, weakening business and people-to-people exchanges between the EU and China.
With limited face-to-face interactions over the past three years, China operations have become increasingly isolated. The exchanges with European headquarters traditionally allowed for more effective information exchanges, networking, training and the sharing of expertise. The decision-makers (as well as future decision makers) from HQ should not be deprived of first-hand China experience, which may result in less understanding of the complex China business environment.
According to the European Chamber of Commerce in China’s Business Confidence Survey conducted last year, almost four out of ten members across all sectors have decreased their foreign employee headcounts over the past 5 years. Almost 10 per cent of respondents indicated that the number of foreign employees decreased by more than half, while 11 per cent indicated the absence of foreign employees completely. This is a looming crisis considering the already limited number of foreign nationals currently in China.[2]
How to Reverse the Brain Drain?
To reverse such a drastic exodus and lure the best and brightest expats back to China’s shore, the country has to act fast with tangible actions . Right now, China has a golden opportunity to do so. Currently, certain allowances for foreign employees, such as children’s education, housing rental, relocation support and language training are exempt from individual income tax. While this tax exemption was further extended for two years in a sudden policy announcement at the end of December 2021, this grace period is due to expire at the end of this year. This existing policy has been very successful in attracting and maintaining foreign investment and as it off-sets some of the higher living costs of working and raising a family in China that are unique to foreign families, like the need to pay for international schooling. A tangible and fast means of not only keeping expats in China but attracting them back, would be an extension of such a grace period for income tax allowances.
With that being said, should the grace period expire at the end of this year, the impact will be significant. Foreign investors would likely reconsider or significantly reduce cross-border assignments to China. Additionally, for potential assignees, the assignment may be financially unsound if they must bear high tax liability for a number of reasons, most notably the fact that Chinese public schools are not an option for the children of foreign employees, coupled with the high price of international schooling.
As a result, the few expat assignments that are placed in China will lean towards either young employees without children, or at the very other end of the spectrum with older assignments with no dependents in need of education. This huge gap has the potential to impact the investment strategy of companies in China over the coming years, as many executive level or senior experts who companies need for strategic development for the local business outside of China.
Conclusions and the Current Status of China’s Expat Exodus
Foreign nationals working in China and young students are some of the best ‘ambassadors’ as they frequently extol the positive aspects of their experiences when back in their home countries—something that is much needed at a time when geopolitical tensions are on the rise and global opinions on China are trending negatively.
In the half year we’ve had since the reopening of the borders, the number of foreign employees in the Chinese marketplace still makes for dire reading. In the newly published Business Confidence Survey 2023[3] by the European Chamber, member companies have indicated significant localisation of company staff which of course has taken place over the last half decade, but now with 16% of respondents reporting their China operations no longer employ any foreign nationals.
The reduction, or in certain situations complete removal, of foreign nationals is still resulting in the issues of reduced transfer of knowhow and best practices, communication difficulties, deferred investment plans, but now stretching as far as European companies closing their China operations. Expats now make up 10% or less of overall staff for 78% of respondent companies, with SMEs particularly impacted: one in five (21%) report employing no foreign nationals in their China operations.
On the ground here in China, we can see a big push from the Chinese authorities to recover the ground lost over the past three years. China will need to boost its economic growth by rebuilding confidence in the business environment and the return of our expat staff to Chinese shores is paramount to this goal.
[1] Estimates provided by European business leaders and Consulate Generals of various Member States
European Business in China: Shanghai Position Paper 2023/2024, European Union Chamber of Commerce in China, published 14th February 2023
[2] Business Confidence Survey 2022, European Union Chamber of Commerce in China, published 20th June 2022, data collected over a 4 week period from February to early March
[3] Business Confidence Survey 2023, European Union Chamber of Commerce in China, published 21st June 2023, survey conducted Feb-March 2023
