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China: What comes next when ideology trumps the economy?
China’s economy may be coming back to life, but many headaches remain for foreign business in the country, says Joerg Wuttke, president of the EU Chamber of Commerce in China until May this year.
Last summer, when China’s COVID-19 lockdown was at its height, China seemed to have abandoned pragmatism. Since switching policy abruptly late last year, you can see that exiting COVID has lifted the economy tremendously. This year, I’m guessing China will pass 6% GDP growth. But there are still a lot of uncertainties. We see Li Qiang, the new prime minister, trying to restart the economy again, but there are a lot of problems to fix. One that will be very hard is the real estate sector. Things might be doing well in Shenzhen, Guangzhou, or Shanghai. But many third-tier cities are severely affected, with some 80 to 90 million apartments lying empty.
Then you have China’s debt burden, which was made worse by COVID – China spent $230bn on testing and labs last year. Many cities are burdened with debts on which they can barely service the interest payments, let alone repay the capital. Li has a lot to deal with. We’re all hoping he can at least stabilize the ship.
Ideology trumps the economy
Politics has made China a more difficult place to do business. Last September, we headlined our annual position paper “Ideology trumps the economy”. We’re still seeing a massive politicization of business. But we’re also seeing attempts from the prime minister to reach out to private Chinese entrepreneurs. For us, how they treat Chinese private enterprises will be a test case for how they might treat foreign companies. Recently, with leaders once again stressing the importance of the private sector, we have seen a bit of a charm offensive – not only for European business but for business as a whole.
So far, though, nothing on the ground has changed . Of course, now we have come out of travel restrictions and closed-loop factories – where staff lived in their workplaces – things are moving in the right direction, but at a very slow speed. Our members always talk about promise fatigue. When can we have more market access? Can we have more exports into China? Last year, China sent 6.4 million containers to Europe, but we only shipped 1.6 million containers to China, and overall, the EU sold only 23% more to China than we sold to Switzerland. That imbalance is problematic for us.
European investment into China stumbling
European investment in China was around $9 billion last year, which looks good – the best ever. But if you take one deal out – BMW’s acquisition of local car-maker Brilliance in Shenyang for 4.2bn euros – our investment actually went down. And we haven’t really seen any significant commitments beyond the three areas where there has always been big investment – chemicals, cars, and machinery. So, we’re still in a ‘wait and see’ situation. But China doesn’t have that much time left. Companies are looking elsewhere.
Derisking over decoupling
All the same, decoupling is impossible, as EU President Ursula von der Leyen has said, and I’m grateful she has made that point very clearly. But derisking is something we need to learn from China. It started derisking 20 years ago when it pushed out foreign internet companies. Behind the Great Firewall, Chinese companies built up their own capabilities and did very well.
During COVID, we learned how dependent we were on Chinese pharmaceutical precursors and that China might threaten to cut us off from rare earths. We also have a tremendous dependency on its magnesium and vitamin B1. These items are of not much value, but China supplies 80-90% of our needs. It’s prudent to see where we are excessively exposed. As the European Commission said in April 2019, we are partners as well as competitors and rivals, so we need to be in touch. That’s why I’m grateful when our leaders come here. But we should not kid ourselves that relations are good.
Fading optimism
We’ve made it clear what we want. We put 967 assessments and recommendations into our annual report – for legislation, for opening up customs, for opening equity possibilities. But will China do this? I don’t know. I have had good meetings with local and regional leaders and again in Beijing, but nothing changes.
“However, because of COVID, young European managers have stopped coming to China so are missing out on learning how to do things Chinese style.”
In our annual business confidence survey , we asked our members whether they planned to do more in China. Last year 20% said yes, and this year it was also 20%. But when we asked if they were willing to stay in China, the share fell from 41% to 35%.
And while just 11% of respondents reported they were considering moving their current or planned investments out of China in 2022, that number has risen to 15%. Of those leaving, 27% said they were going to ASEAN countries, 21% said they were going to Europe, and 15% to India. Businesses aren’t waiting for China to make up its mind. They are actively looking for alternatives.
A risk-taking mindset
I’ve learned a lot from China – especially about risk taking and speed. It’s a great place for learning how to do new stuff. The different mindset here is something that our managers always enjoy working with. However, because of COVID, young European managers have stopped coming to China so are missing out on learning how to do things Chinese style.
If we don’t watch out, Chinese companies will be doing a lot of things much earlier and better than us. In batteries and digital communications for cars, for example, they are already some years ahead. Not having managers exposed to all this will harm headquarters’ understanding of how China operates. We need more Chinese managers in our headquarters and more of our young staff getting exposed to China’s risk-taking DNA.
I came to China for the first time in 1982, and since then the country has developed so much. I’ve now lived here straight for 30 years, for three years before that, and I’ve also had the privilege of enjoying life in Taiwan for a year. My adult life has been very Chinese. But over the last six months I’ve seen a very strong emphasis on ideology. Xi now mentions Marx far more than markets. It saddens me to see the diversity of opinion in Chinese society lessening, along with the open discussions that I enjoyed, particularly during the era of Prime Minister Zhu Rongji from the late 1990s to the early 2000s, as they have now largely gone.
Since its establishment in 2000, the EU Chamber of Commerce in China has seen its membership rise from 51 to more than 1,800. Joerg Wuttke has served as the Chamber’s president on three occasions: 2007-10, 2014-17 and 2019-2023.
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