A quarter of European companies in China have considered withdrawing their investments from the country due to severe lockdowns disrupting business activity. This figure was the highest in the last ten years. Instead of China, they can redirect cash injections to other countries. How such a decision will affect Chinese business and where Beijing will be able to get an influx of new investments – Izvestia figured it out.
China is not waiting
“Nearly one in four European companies operating in China have considered moving their investments out of that country and redirecting them elsewhere due to the ongoing coronavirus outbreaks and lockdowns that are hurting the world’s second largest economy.,” the agency said. Bloomberg with reference to data from a survey conducted by the European Chamber of Commerce.
The study, which involved various companies, showed that the number of firms reconsidering their activities in the PRC has reached a record high in the past ten years.
According to House Vice President Bettina Schon-Behanzin, Beijing’s current course, which does not imply a departure from the “zero tolerance” policy for the coronavirus, “leaves headquarters no choice but to look for other places.” “The world is not waiting for China,” she concluded.
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The publication notes that 16% of the surveyed companies are considering moving to Southeast Asia, 18% – to the countries of the Asia-Pacific region, another 19% are looking for places in Europe, 12% – in North America, and 11% – in South Asia .
Foreign companies have had a hard time due to covid restrictions in China. Industrial firms experienced a 16.2% drop in profits from January to April. By the way, the problems affected not only Europeans, but also Americans. Thus, only 31% of companies operating in Shanghai reported that they were operating at full capacity.
Nearly 60% of European respondents said they expect their revenues to drop this year due to China’s coronavirus restrictions. At the same time, 78% of respondents complained that the business environment in China has become less attractive due to anti-COVID restrictions.
Leave or not
Recently, Beijing has begun easing some coronavirus restrictions, although the economic recovery is taking place in stages. For example, industrial production rose unexpectedly in May, while consumer spending and the real estate market continued to contract.
In turn, the European Union’s ambassador to China, Nicolas Chapuis, said that “no one is leaving China.” At the same time, he noted that the problem lies in the fact that European companies “delay making decisions” about new investments. According to the politician, now everyone is waiting for a strategy from Beijing to abandon coronavirus restrictions.
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“We will have to wait if the Chinese authorities decide to join the rest of the world”Chapuis explained.
In particular, according to him, it is not clear when the real estate market and the automotive sector, the two main engines of the economy, will recover.
Not the first try
In the midst of the coronavirus pandemic, in August 2020, American and European companies were already raising the issue of a possible transfer of capacities from China.
Thus, analysts from Bank of America calculated that it would cost them a trillion dollars. Former US President Donald Trump promised tax breaks and possible priority orders to companies returning production from China to the US. However, this caused discontent among other companies in the sector.
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Recently, China has not been the most popular state for locating production, so more and more new factories are being opened or some are being transferred to the countries of South and Southeast Asia. For example, to Vietnam, Malaysia, India, Indonesia, Pakistan. Therefore, it is possible that Western countries will consider emerging markets that can provide competitive advantages at the expense of low costs.
At the same time, China was preparing for the departure of Western companies. In recent years, Beijing has either completely bought out Western and joint ventures or expanded its share.
Relations have become complicated
In addition, relations between the EU and China have become more complicated amid the Ukrainian crisis. European countries and the PRC are connected by a close partnership. Relations have always been calm and predictable.
However, in the spring of last year, Brussels imposed restrictive measures against Beijing, accusing it of “systematic violation of human rights.” China has snapped sanctions against 10 European politicians and scientists, as well as four EU entities, criticizing Brussels for interfering in the affairs of the Xinjiang Uygur Autonomous Region.
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This spring, the EU and China postponed the signing of an investment agreement that was economically beneficial for both parties. Brussels demanded that Beijing take the side of the West and promise not to help Moscow circumvent sanctions. In China, such pressure caused bewilderment. China, which has always adhered to neutrality, continues to follow this course even now. At the same time, Beijing notes the need to create a security system that would take into account the interests of Moscow.
Afraid of the Russian scenario
— The EU Chamber of Commerce report says that European companies are considering withdrawing their investments from China. And they are definitely going to withdraw money because of covid? I have big doubts. Lockdowns are one of the reasons that have worsened their return on investment, but there are other reasons for fleeing the country. After all, the coronavirus has spread to all countries, and a new strain may appear in a new place where the Europeans are going to redirect capital. The outflow of foreign capital from China was affected by the increase in the interest rate by the US Federal Reserve System (FRS), as well as the collapse of the stock markets. In addition to the Fed, sanctions against Russia added to the negative markets. China did not support anti-Russian sanctions, increasing the desire of European participants to leave China. And the icing on the cake is that China itself may be subject to sanctions due to the development of the situation with Taiwan.– Vladislav Antonov, financial analyst at BitRiver, explained in an interview with Izvestia.
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According to the expert, investors are afraid of the development of events according to the Russian scenario, so they want to leave early.
– Some investors will leave, their places will be taken by others from friendly countries. Market conditions have changed. In this regard, new laws are being adopted that will change the rules of the game. The departure of the Europeans will not hurt business. Sooner or later the situation will stabilize in China. The investment will return. A month ago, China developed measures to stimulate foreign investment, it is actively optimizing and expanding investment for domestic and foreign capital markets. So fixed capital investment in the Chinese economy will continue to grow, but it is starting to slam on the brakes, – the specialist is sure.
The departure of capital from emerging markets in waves is a common practice in the global economy, but it was China that managed to attract $ 500 million into the shares of its companies this spring, Antonov noted.
– Today, China’s national capital market is unlikely to be threatened, new risks will not affect its stability. China is implementing a “zero tolerance” strategy for the coronavirus, which, according to Western investors, puts the most pressure on China’s technology sector. Overall, from the point of view of foreign investors, the US Fed’s rate hike and China’s regulatory repression could indeed encourage the removal of risky assets from this country.the expert believes.
In turn, Aleksey Fedorov, a leading economist at the TeleTrade information and analytical center, in a conversation with Izvestia, notes that foreign direct investment (FDI) on average gives China an increase of 1.5–2.0 percentage points. in year.
— Based on the estimate that the share of Europe in total FDI is about 20%, then the complete cessation of new investment in China by European countries will subtract about 0.4 percentage points from the total growth. Considering that half of 2022 has already passed, and with record FDI in China, in the worst case, if European investors refuse new injections into the Chinese economy, it will grow slightly less than the consensus estimate of GDP this year, that is, not by 4.9% , and by 4.7%, – the specialist explained.
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According to him, it is noticeable, but not critical.
— By itself, the demarche against the most attractive direction for investment cannot last long, otherwise European investment firms will start losing competition to their counterparts from the US, Britain, Japan, South Korea, Singapore and other countries. In addition, the real number of European “refuseniks” will be much less, because, according to a Bloomberg survey, no more than 25% of European companies reported a desire to suspend new investment in China, that is, the final losses of the Chinese economy if their desire is realized will be even more. less – no more than 0.05 p.p. GDP growth. Much more fearful are the risks of a global recession, because in this case, the growth rate of FDI in the Chinese economy may fall from the current 17.4% to almost zero, as it was already in 2020, or even go negative, as it was in 2009 year during the global crisisthe expert predicted.