2019 Review & Analysis
China is a land of opportunity for European companies, but it is not without its challenges. This article examines the business realities, trends, and changing conditions of the Chinese market that have been analyzed by the European Chamber of Commerce in the Business Confidence Survey 2019.
- Regulatory Reforms in China
- Regulatory Obstacles in China
- Difficulties when doing Business in China
- European Companies still Commit to China
- Industries with High Revenue Increase
Macro-economic challenges in China
As the Chinese market continues to grow and mature, there has been a slowing-down of the growth rate of the country’s economy. The International Monetary Fund (IMF), has tracked the pace of China’s growth carefully over recent years. In a recent report, the IMF forecasted a 6.2% annual growth rate for the Chinese economy. This is much lower than historical averages above 10%. Some challenges facing companies include:
Ambiguous rules and regulations
Many Chinese laws contain language that makes precise legal interpretation difficult
Market access restrictions
Certain parts of the Chinese economy are closed off or limited to foreign firms;
Slow regulatory reform
The government has been slow in implementing promised reforms;
Unpredictable legislative environment
Because of the closed doors to most of the Chinese government’s decision-making process, it is hard for firms to know in advance what form new laws will take;
Variation between Chinese and international standards
There is still a high number of differences between the Chinese and international systems, creating confusion for international firms.
To counter this trend and to boost the economy, the government has turned to various measures to promote foreign investment, giving European companies a greater ability to compete. Some of these new measures include increasing the central government budget deficit target, reducing businesses’ tax and social insurance contributions, and cutting value-added tax (VAT) rates. Although these policies are certainly a positive move from temporary, stimulus measures used in the past, their affects will take time to mature. However, in the long run, they will unlock increasingly sustainable, high-quality growth.
Regulatory Reforms in China
For foreign businesses operating in China, ambiguous rules and regulations rank among the greatest challenges facing future expansion. There are other obstacles such as macroeconomic risks, rising labor costs, and the U.S. – China Trade War, which are largely out of Chinese policy makers’ control. Therefore, it is imperative for China to address issues directly within its control. European companies expect that stable, transparent, and mature institutions will be on the forefront of the Chinese government’s strategy to make the environment easier for foreign companies to operate. See new Foreign Direct Investment Rules in China here.
43% of European firms report losing business opportunities due to regulatory barriers or market access restrictions.
– Business Confidence Survey 2019 by EU Chamber of Commerce
As demonstration of the slow pace of regulatory reform, this is an improvement of just seven percentage points over the past five years. Out of those affected, more than 10% said the missed opportunities were worth more than a quarter of their revenue in China.
If the Chinese government continues to standardize the regulatory environment to international norms, it will give businesses more confidence and productivity, and open new areas of the economy previously unavailable for foreign investment. This increased opening-up would foster choice and better outcomes for consumers and counterbalance the effects of the economic slowdown.
Source: Business Confidence Survey 2019 (EU Chamber of Commerce)
Regulatory Obstacles in China
Many foreign companies feel limited with regulatory obstacles encountered while trying to do business in China.
What are the top regulatory obstacles in China?
- Ambiguous rules and regulations
- Unpredictable legislative environment
- Administrative issues
One example of ambiguity is the ‘opening clause’ of many normative documents, concluding with the phrase
“[…] and others, as provided by other/relevant laws and regulations.”
This sense of vagueness makes it difficult for businesses to ensure they are fully compliant and gives government officials leeway to enforce the laws in different ways.
Passed by the National People’s Congress (NPC) on the 15th of March 2019, another example of ambiguity in legislation is found in the new Foreign Investment Law (FIL). It is filled with vague language and broad terms. A sample of this is found in Article 14, where…
“needs of national economic and social development”
Does not have a clear definition. This damages business confidence through creating uncertainty.
Difficulties when doing business in China
In the World Bank’s 2018 report on Doing Business in China, China moved up to a global ranking of 46, up from 78 the previous years. New rules created to ease businesses’ burdens largely caused this improvement. That being said, in the recent BCS 2019 report, European companies’ ratings of doing business suggest they have not experienced as many improvements as natively Chinese companies have.
72% of respondents deemed cross-border monetary transfers challenging. Other operations integral to daily operations, such as dealing with construction permits and enforcing contracts, are also reported to be particularly difficult.
Setup time to open a company in China
Examining the average setup time for new businesses reveals the strong difference between the treatment of international and local companies. The 2018 Doing Business report revealed that it takes nine days on average for local firms. In contrast, 89% of European companies said setting up an entity this past year took longer than 15 days. A third of respondents reported it taking three months or longer.
European Companies still Commit to China
Although European companies face a large amount of deeply complex issues when doing business, the allure of the Chinese market is strong, and companies see it as integral to their future. They are always seeking new ways to expand. Also, EU companies report that despite strong competition and challenging conditions, they still recorded record profits in 2018.
European investments in China Vs. USA
Furthermore, if European companies were not hampered by regulatory obstacles, restricted market access, and generally unequal treatment, they could contribute a lot more to the Chinese market. European investment into China in 2018 was EUR 6.1 billion, while European investment in the US was EUR 149 billion in 2017. Therefore, China has the potential to unlock a huge stream of investment if it fulfills its reform commitments.
China still has strong untapped growth potential, and with its already huge size, European companies are dedicated to expanding business operations there.
62% of EU companies stated that China remains in their top-three of current and future investment locations.
– Business Confidence Survey 2019 by EU Chamber of Commerce
Additionally, 56% of respondents plan on expanding their China operations in 2019.
Industries with High Revenue Increase
Despite the trade war fears, European companies have proved their resilience. There was only a 7% drop in the y-o-y respondents who reported an increase in revenue. Accounting for the fact that 2018 was a record year in revenue increase for many companies, the significance of this drop diminishes further.
The professional services industry in China has recently been a large driver of economic growth. A growing push for higher standards in doing business has prompted a growing welcome of foreign companies in the accounting and tax auditing fields. This trend will only continue, as the Chinese government seeks to clarify and update Chinese businesses laws to international standards.
The medical devices sector has also been performing well with China’s rapidly aging population rapidly gaining access to advanced medical equipment. Also, as Chinese peoples’ lifestyles become increasingly unhealthy, it has created greater demand for this industry.
This sector in the economy saw a large increase in demand during 2018 compared to 2017. This was largely due to firms trying to profitably navigate the U.S.-China trade war. Additionally, with the Chinese government’s increasing crack down on polluting entities, many firms have been forced to close factories, and must seek legal advice.
As the global economy is increasingly integrated with China, it is natural that the hospitality industry has boomed. More and more, Chinese domestic customers are driving demand for this sector as well. There is still a lot of room for growth, with China currently only having four hotel rooms per 1,000 of their population. In comparison, the United States has around 20 per 1,000. High quality restaurants, convention centers, and entertainment will continue grow in number.
Food and beverage
According to a recent survey by PEW Research, 62% of consumers in China are willing to pay more for top products, and 52% trust foreign brands. With the Chinese middle class rising, there is more disposable income available to consumers to purchase higher-quality food. This represents an enormous opportunity for the European food and beverage industry.
Similar with the medical devices industry seeing strong growth, European companies are experiencing growth due to China’s aging population. Additionally, the China Food and Drug Administration (CFDA) recently passed legislation prioritizing drug innovations and ensuring that clinical trials and information provided to the public are of a high standard.
Chemicals and petroleum
In the first nine months of 2019, the petroleum and chemical industry in China was up 45% from the previous year. This sector of the economy has continued to grow, partly due to rising petroleum prices around the globe, and partly because of other factors such as additional freeing-up of this sector for international companies by the Chinese government.
Despite the challenging environment in China, European firms have continued to thrive. Although they have faced declining revenue growth, the Doing Business Report revealed that 75% of respondents reported that they had positive earnings before interest and tax (EBIT) for 2018. This is only down two percentage points from 2017 and holds the second highest level in the last decade. This shows the agility of European firms as they successfully managed costs in a challenging market. Most importantly, European firms hope they can become increasingly involved in the Chinese market. 65% of respondents stated they would be likely to increase investment in the government granted international businesses greater market access. There is much potential for European companies.