中國歐盟商會商業(yè)信心調(diào)查 European Business in China POSITIONPAPER 2024 2025

EuropeanBusinessinChina

POSITION

PAPER

2024/2025

EuropeanChamber

22ndOctober2024|China

DoingbusinessinChinahasbecomemoredifficultinrecentyears

Source:BusinessConfidenceSurvey2024data

Consecutiverecordhighs

Challengesareproliferatingandintensifying

?COVIDhasledtolastingbehaviouralchangesinthebusinesscommunity

?Long-standingchallengespersist

-Marketaccessandregulatorybarriers

-Ahighlypoliticisedbusinessenvironment

-Prioritisationofnationalsecurityandadvancingself-reliance

?Newchallengeshaveemerged

-China’seconomicslowdown

-Lacklustredomesticconsumption

-Onshoredemand/supply;Overcapacity

-Deflation

Forsome,Risksbeginningtooutweighrewards

Europeancompanies’outlookonprofitabilityhasdeterioratedsubstantially

HowwouldyoudescribethebusinessoutlookforyoursectorinChinaoverthenexttwoyears?

Pessimismabout

profitability

highestlevelonrecord

Source:BusinessConfidenceSurvey2024data

71%reporttheirworldwideEBITmargins≥theirChinaEBITmargins

=>WhyinvestinChinawhenotherregionsofferthesamereturnsforlessrisk?

CompanieshavebegunadjustingtheirapproachestotheChinamarket

FDI&Onshoreinvestments:

?MembershavebegunshiftinginvestmentsplannedforChinatoalternativemarkets

?ThenatureofinvestmentsintoChinaisbecomingincreasingly‘defensive’

ValueofannouncedgreenfieldFDIprojects,2003-2023

Supplychainsandoperations:

?Increasednumbersbothon-andoffshoringand/orlocalisingrepresentsastrategicshifttowardssiloingChinaoperationsfromtherestoftheworld

Source:BusinessConfidenceSurvey2024data

Lackoffollowthroughonreformpledgesledto‘promisefatigue’

2017Davos

Commitmenttomarketreformre-iterated,butmixed

implementation

Early2000s

Almost200,000localregulationsrevisedinperiodimmediately

before/afterChina’sWTOaccession

2013ThirdPlenum

Boldreformplansannounced,implementationverylimited

13thAugust

2023Opinions

Promisefatigue3.0orapathwaytoreform?

TheStateCouncil’s13thAugust2023Opinions

?Whydowecareaboutthisdocument?

-Directedatforeignbusinessesspecifically&RepeatedgovernmentassurancesthattheyaretakingtheOpinionsseriously

?‘Realitycheck’providedbytheChamber,organizedacrosssixthematicareas:

Marketaccessandprocurement,HRandbusinesstravel,Digitalandcyber,Greenenergyaccess,IPR,Investmentpromotionandfacilitation

?Keyfindings:

?Opinionscontainseveralbig-ticketitemsthatcouldreallymovetheneedle

?ProgresshasbeenmadeonHR/travelissues

?Fortherest,concreatemeasureshavelargelybeentooshallowtomeaningfullyimproveChina’sbusinessenvironment

?Moreneededtorestoreforeigninvestorconfidence

RecentChineseGovernmentmeasures

Someelementsofanalysis

“Three"arrows":

1.Monetarystimulus

2.Fiscalstimulus

3.Structuralreforms

1.Boldmonetarystimulus

MeetingofthePolitburo,ledbyChairmanXi,&Sept24thPBOCannouncementsofmonetaryeasing;unprecedentedinformandinsubstance

1.Interestratescuts:PBoC20bpcutof7-dayreporate(vs.10bpmarketexpectation),50bpcutinRequiredReserveRatio(PBoCmightcutRRRbyanother25-50bpbyyearend)

2.Propertysector:50bpcutinoutstandingmortgagerate,downpaymentforsecondhomedownto15%from25%,PBoCincreasedthereimbursementrateofaRMB300bnrelendingprogramsupportinglocalgovttopurchasehousinginventoriesfrom60%to100%.

3.Financialmarkets:RMB500bnswapprogramtoallowinstitutionalequityinvestorstoborrowindirectlyfromthePBoCtobuystocks;RMB300bnrelendingprogramtosupportsharebuybacks.

PBOC:therecouldbeasecondandthirdbatchiftheseprogramsworkwell.

ChineseStockMarket-CSI300Index

8March2021-11Oct.202412Sept-11Oct.2024

China’sStimulusHasBeenGreatforStocks,buttheBenefitsforthe

RealEconomyAreLessCertain

XuGao,chiefeconomist,BankofChinaInternational(Caixin,4Oct.2024)

ThePolitburomeetinghasgiventhemarketaclearerunderstandingoftheleadership’sdeterminationtoholdtothegrowthbaseline.

Thestronger-than-expectedmonetaryeasingwillsignificantlyboostmarketsentiment,butimprovingtherealeconomywillhingeonwhetherthecentralgovernmentcanimplementadequatefiscalmeasures,suchasincreasingbondissuancesandexpandinggovernmentspending.

Becauseoftheliquidityprovidedbythecentralbank’snewstructuralpolicytools,

thedomesticstockmarketcouldrisesomewhatindependentlyoftherealeconomy.Regulatorsmustdomoretopreventtheincreasedliquidityfromcreatingabubble.

2.AdditionalFiscalmeasuresexpected

?Sizeoffiscalpackage:anincrementalapproachoraone-off“bazookapackage”

?Timetable:on12Oct.MoFannouncedsomemeasuresthatwouldneedtobefurtherdetailedandapprovedduringtheNPCinlateOctober.

?MeasuresExpected:

?LocalGovernmentdebtswap:extendtenorandreducecostsoflocalgovtdebts,,refinance“”off-balance-sheet”,and,eventually,repayaccountspayablestosuppliers,etc.

?Recapitalizationof6state-ownedbanks:Banksalreadywellcapitalized…furthersqueezeinNIM,ratecuts;somewrite-offs;morecredittounprofitablepolicy-favoredsectors.

?“MoFisstudyingotherpolicyinstruments,andcentralgovernmentstillhasrelativelylargeroomtoraisedebtsandincreasedeficits”

?Realestate:toissuespecialCGBtopurchaseinventoriesandturnthemintopublichousing(unclearsofar).

?Consumptionsubsidies:sofarlimitedannouncements(moresubsidesandscholarshipsforstudents,etc.)

3.Majorstructuralchallenges

PowerfulfiscalandmonetarystimulinecessarytoprovideChinawithescapevelocity,whilestructuralreformsarevitalforanenduringrecovery

?Chronicunderconsumptionduetoexcessivesaving:socialsafetyreforms(retirement,healthcare),changestructureofthehouseholdwealth(from“goldbarapartments”tolongtermsavings&pensionfunds),Hukoureform,etc.

?Demographic(differentfromEU,Japan,Korea,etc.):notonlylowbirthrateandagingofbutalso50%fallofnumberofbirths(the“onechildpolicy”willhaveverylong-lastingimpactsonconsumerdemand,workingpopulation,etc.)

?Widespreadovercapacitystillbuilding.Cannotbeforeverabsorbedbyexports(tradetensions).Shutdownovercapacitieswillbemorepainful(notanymoreobsolete&zombies).ExpectedgrowingtrendofMerger&acquisitions.Riskoflong-termonshoredeflation.

?Productivity,etc.

China&EUTradeTensions

EUCCCstatementonEU’svoteonadoptingdefinitivetariffsonChina-madebatteryelectricvehicles

?TheEU’stariffstargetbothChineseandforeign-investedEVmakersinChina.

?TheEuropeanChambercontinuestobelievethatdialogueisthepreferredavenueforresolvingtradedisputes.

?TherelationshipbetweenEuropeandChinahascreatedimmensevalueinthepastandhassignificantpotentialforfuturevaluecreation.Assuch,theChambersupportstheEUandChinatoconsideranegotiatedsolutionwithaviewtoensuringalevel-playingfieldintherelationshipandaddressingimbalances.

EuropeanChamberstatementonChina’sannouncementofanti-dumpingmeasuresagainstEUbrandy

?EuropeanChambermembersaredisappointedbytheannouncement.Thisactionrunscontrarytobilateralprogressmadeinthefoodandbeveragesector,asexemplifiedbythesigningoftheEU-ChinaGeographicalIndicationsAgreement,oneofthefewbrightspotsintheEU-Chinarelationshipinrecentyears.

Inanutshell

?OurmembersremainhighlycommittedtoChina,

?butwiththerisksofdoingbusinessincreasingandtherewardsdecreasing,manyarenowconcludingthatadditionalChinainvestmentsrequireastrategicrethink.

?SomemembersalreadybeguntobothshiftinvestmentsplannedforChinatoalternativemarketsandsilotheirChinaoperations.Thistrendwillcontinueifkeybusinessconcernsareleftunaddressed.

?ThepotentialofChinaremainsattractive,butafteroveradecadeoflimitedactionbeingtakentoimplementreformpromises,expectationsofmeaningfulchangehavebeendialeddown.

?PositionPaper:Over1,000recommendationsonhowtorestorebusinessconfidence

EuropeanBusinessinChina

POSITIONPAPER

2024/2025

Q&A

2016:17.9mbirths

2023:9.02mbirths

(officialestimate)

–49.5%in8years

“Birthgap”closeto10m/year,andstillgrowing

China

Pyramid

ofage

Chinadeflation

Marketaccessandprocurement:narrowprogress,big-ticketitemsunaddressed

?Headwaymadeonsectoralinitiativesoflimitedimpactand/orgeographicalscope:

-E.g.,removalofownershiprestrictionsfromsixtypesofVATSinITsector

-E.g.,Shanghaicargorelaypilot

?Limitedprogressmadeon‘bigticketitems’

-E.g.,revisionofGovernmentProcurementLaw

?Europeancompaniescontinuetofacediscriminatorytreatmentinmarketaccessandprocurement

-E.g.,railindustryandthe‘one-pointscoringsystem’

HRandbusinesstravel:welcomeprogressmade,butissuesofmost

importancetobusinessuntouched

?Earlyprogressseenregardingforeigntalentattractionandretention,butnotenoughtosignificantlyboostinvestorconfidence

-E.g.,August2023IITextension:Necessarytostemfurtheroutflowsofforeigntalent,butrepresentsmaintenanceofstatusquoonly

?Policiesonvisa-freetravelgreatlywelcomed–extendingthescopetocoverallEUnationswouldbeaquickwin

-Executivesfrom‘visa-waived’countriescannowvisitChinaat<1week’snotice(previouslytookaround3months)

-Manycompanies’seniorstaffholdpassportsfrom‘non-visa-waived’countries

DigitalandCyber:progressbeingmade,butataslowpace

?InitialmomentumbuiltfollowingtherevisionofChina’sregulationsforCBDT

?IfChina’sdataregulationstofacilitate,nothinderbusiness,thenfurtheractionisrequired.

-Upcomingrulestonotbedefinedinanexpansivemanner

-Industry-specificregulationstobebetteralignedwithChina’srevisedCBDTregulations

Greenenergyaccess:keyareaforbusiness,notemphasizedinOpinions

?WithmostEuropeancompaniesneedingtorapidlydecarbonisetheirChinaoperationstomeetglobalESGpledges,accesstogreenenergyisanimperative

?Accesstogreenenergywasmentionedbutonlyinonesub-measureoftheOpinions.Relatedpolicyactionhasbeentaken.

-Progressseenatthelocal-levelinsomelocations,e.g.Tianjingreenelectricitypilot

?Atthesametime,challengesremain:

-42%reportlimitedaccesstogreenenergyasthekeychallengetheyfaceintheirdecarbonisationefforts(BCS2024)

-Chambermembershavebegunpostponinginvestments,andtheirChinadecarbonisationtargets

Intellectualpropertyrights:enforcementremainsachallenge

?China’swrittenIPRlawsandregulationshavebeensufficientforanumberofyears,butenforcementstillaproblemformany:

-84%,(+4ppy-o-y)reportfindingChina’swrittenlawsandregulationstobeadequateorexcellent;

-46%,(+1ppy-o-y)believethattheyarenotadequatelyenforced

?AmendmentoftheimplementingregulationsofChina’sPatentLaw

?Sectoral-levelchallengespersist:

-E.g.,thelackofeffectiv