Successfully investing in China

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last updated on 27 May 2020 | reading time approx. 8 minutes

 


 

How do you assess the current economic situation in China?

The current motto is: “Back-to-normal”. The Chinese economy is still in the recovery phase, but it is not alone in this struggle.

 

National supply chains are operating again – at least in part – and are improving on a daily basis, travel restrictions across China have largely been lifted and domestic consumption is slowly picking up again. Still, this does not hide the fact that the economy has not yet returned to normal. Although most companies in China have been able to restart production or offer respective services, they still have a long way to go before they reach the pre-crisis level. Both in the People's Republic of China and elsewhere in the world the outbreak of coronavirus has led to a massive economic slump and not only China’s economy was directly hit by the global lockdown. The rapid and strong global spread of the virus resulted in a pandemic, which led to a sharp drop in global demand and thus, not least, to a massive drop in sales in China. Also the domestic market is directly affected by the pandemic, private consumption is rather subdued – although private consumption in the automotive sector in particular increased strongly again in April and in some cases exceeded the figures for the comparable reference month of 2019.

 

Looking ahead to the coming months it can be assumed that international market players will slowly fight their way back onto the global market and that the global economy will pick up again – albeit with the handbrake on. As soon as the global economic situation eases, demand in the People's Republic of China will also revive, which will positively impact the recovery of the Chinese economy.

 

The Chinese government has already launched its first economic stimulus package worth around 130 billion Euros. Tax relief measures, measures to help overcome liquidity bottlenecks and measures facilitating lending are the main pillars of the package, which can be used by all enterprises affected by the corona pandemic. In addition to the national rescue packages, also governments of individual provinces and administrative regions offer further measures. It is expected that during the meeting of the National People's Congress, which was postponed to the end of May due to the pandemic, new incentives for the economy will be adopted.

 
Although last year's economic growth in the People's Republic of China was still at the level of 6.1 per cent, the year 2020 will be marked, both in China and in other countries, by the reconstruction and reactivation of the economy. The growth target of 5.6 per cent set by the Communist Party for 2020 is no longer valid. Current forecasts by the International Monetary Fund (IMF) predict a 3 per cent slump in global economic output for 2020[1]. For the Chinese economy, however, the IMF is expecting a slight growth rate of around 1.2 per cent. Other forecasts, e.g. by The Economist Intelligence Unit, predict growth of only 1 per cent for China. It would be the historically weakest growth rate. However, the forecasts are very fragile and depend heavily on the further development of the pandemic and its containment. The above estimate may have a chance of materialising if the pandemic can be brought under control in the second half of the year.

 

However, there are also signs that in the course of 2020 the supply chains, some of which are still massively disrupted, will be slowly restored and the movement of goods and products will stabilise. It remains to be seen how this tense global situation will develop and whether China will manage to steer the economy back to the pre-crisis level.

 

In addition to the global corona crisis, the tense relationship between China and the US in the trade conflict has an huge impact on the world economic development. At the beginning of the year 2020, the first stage of de-escalation was reached with the “phase 1 contracts”, however, the relationship cools down again noticeably due to mutual accusations regarding the origin of the novel corona virus.

 

It remains to be seen how this tense global situation will develop and whether China will manage to steer the economy back to the pre-crisis level.

 

How would you describe the investment climate in China? Which sectors offer the largest potential?

The Chinese government is making all efforts to further optimise the investment climate and attract foreign investors, whether for direct or indirect investments. The China Foreign Investment Law (FIL) was passed as far back as March 2019 and has been in force since 1 January 2020, including supplementary implementing provisions. The aim is to further improve the investment climate and investment conditions for foreign investors and companies and to ensure the long sought-after equal treatment of domestic and foreign companies on the Chinese market. In this regard, the FIL contains regulations that are intended to guarantee equal treatment, among other things, by ensuring equal market access conditions. In addition to the regulations facilitating the establishment of foreign investment companies, the new legislation also refers to M&A transactions and project ventures in the People's Republic of China. Also in view of the trade conflict between the USA and the People's Republic of China, which has recently a little faded into the background, there are unfortunately indications that China reserves the right to take restrictive measures against countries, which impose restrictions on or “discriminate” against Chinese investments.

 
In addition to harmonising market access conditions for foreign companies, also other issues, which were repeatedly criticised by German and American politicians, among others, were considered in the legislation. It remains to be seen to what extent the efforts – in particular those concerning the protection of intellectual property of foreign companies – are only lip service or whether they will actually ensure the protection that has long been sought-after and often described as inadequate. Another important issue, which however does not fully meet the expectations of foreign companies, are the new regulations on the transfer of capital from Mainland China to foreign countries. Although key points concerning the free transfer of capital gains and the like have been laid down, these transfers are still subject to restrictive foreign exchange and capital movement controls by the Chinese central bank.

 

At European level, it should be mentioned that the negotiations on the investment agreement are intended to further strengthen economic relations. In September 2020, further results are to be presented and the conclusion of the agreement is to be reached. The EU will push for further market opening and for fair competition or free data transfer to be contractually agreed.

 

We remain optimistic that the virus will not adversely affect the good business relations between China, Germany and Europe to date. We currently assume that the following industries will be able to benefit from the global crisis in the coming months:

  • Medical technology, manufacturers of personal protective equipment (PPE);
  • Medical devices and diagnostics;
  • Pharmaceutical industry;
  • Pharmaceuticals and medical devices;
  • E-commerce;
  • Bio- and chemical industry;
  • Robotics;
  • Logistics;
  • Environmental technology;
  • Electrical mobility and energy storage technologies.

 
China is the largest manufacturer of personal protective equipment (PPE). The capacities will be further expanded in the coming months and production will be further ramped up to meet global demand. Moreover, e-commerce remains on the fast track despite the corona crisis and is considered globally to be one of its biggest beneficiaries.

 

What challenges do German companies face during their business ventures into China?

The second largest economy is undergoing a transition – only in January and February 2020 over 5 million workers and skilled workers lost their jobs due to the crisis[2]. For some companies, this could mean that the pressure resulting from the shortage of skilled workers will ease to some extent. Nevertheless, the shortage of skilled workers and high fluctuation rates still remain the main challenges for German companies in their business ventures into China. Increasing wages, salaries and costs of living in the metropolitan areas lead to stronger competition in the labour market. Despite the additional manpower available, the dilemma of recent years therefore remains: German companies must dig deeper into their pockets if they want to employ qualified personnel; retaining a loyal employee has become a mammoth task. In addition to staff costs, also costs of materials continue to increase, so resource management is growing in importance even more.

 

In addition, there are crisis-related travel and quarantine regulations that make the entry into China difficult or prevent it directly, especially for foreigners. This also applies for Hong Kong (S.A.R.), so that many projects in this region are put on hold or digitized.

 
Another issue that makes it difficult to venture into China is the interpretation of the laws – often formulated using neutral phrases – that does not always correspond to Western standards. Here, great uncertainties continue to exist as to how to interpret and apply laws on a national, local or regional level. This applies in particular to the Social Credit System, the Cybersecurity Law or the Data Protection Act. The much debated lack of transparency often deters foreign investors.

 
In addition to the investment environment, also social factors should not be ignored when considering venturing into China. The language and culture are still considered to be a challenge. Managers are expected to have not least intercultural competence to be able to master this challenge. Tact is often required in order to avoid intercultural blunders. Due to more intensive anti-corruption measures investors should not forget about fostering their business relations and “Guanxi”, however with caution.

 
Nonetheless, China steals investors' hearts due to its huge consumer and sales market and compensates for the reduced cost advantages.

 

What opportunities does the “Belt and Road Initiative” offer to German businesses?

Although the current situation has pushed the major Chinese project into the background, the prospects for German companies within the framework of the “Belt and Road Initiative” remain almost unchanged. In addition to large German corporate groups which can act as general contractors hired for specific projects due to their manpower, the know-how of hidden champions and family businesses is particularly sought-after for special contracts and works. We see considerable potential arising from the participation in the “Belt and Road Initiative” infrastructural project for the following industries:
  • Construction and engineering;
  • Transport and logistics and related services;
  • Mechanical engineering and plant construction;
  • Energy sector; or 
  • Environmental technology.

 
In addition, promising opportunities are offered to the consulting sector with all its facets. As for the transport and logistics sector, attractive opportunities arise e.g. from the already existing railway connection between Duisburg and Chongqing. The Chinese market can be thus supplied much more quickly than when using the Trans-Siberian Railway or container ships leaving from the Port of Hamburg for China.

 

The expansion of the infrastructure in countries such as Turkmenistan or Uzbekistan offers opportunities for opening up the local markets not only for China. Also German and European companies may snap at the opportunity and break into the markets, e.g. by actively participating in the expansion of the infrastructure.

 

At present, these are however Chinese state-owned enterprises that benefit the most from the project. This is mainly due to the currently established tendering procedures and the funding sources provided by the Chinese government. In addition, the strategic policy of the government plays a crucial role. With the slogan “Go-West”, companies are encouraged to actively participate in tenders outside their own national borders.

 
As for German companies which have already built a good network in China, the rule is to appropriately position themselves and not to lose their entrepreneurial spirit. The opportunities for participating in the mega project are as diverse as the countries affected by the infrastructure projects.

 

In your opinion, how will China develop?

Besides many other adverse effects, the bankruptcy of numerous companies, firms and start-ups as a result of the crisis could lead to a sharp decline in innovation, which in turn will affect economic policy strategies such as Made in China 2025 or the mammoth project “Belt and Road Initiative”. Monetary and fiscal policy measures are intended to revive and give stimulus to the economic environment: from small start-ups and SMEs to state-owned and large corporate groups. In the coming months, the Chinese leadership will need to tackle the challenge of properly balancing the development measures and further stimulating the market.

 
This also applies to attracting foreign capital and investors. Although the outflow of capital in March 2020 mainly affected the emerging markets outside China, it caused a domino effect. Faltering markets, whether of major or minor economic importance, are toxic for export-driven countries. Currently, also foreign companies, especially SMEs, are enabled access to a large part of the measures designed to ease the burden on the economy. This applies, among other things, to tax relief measures, subsidies or access to earmarked funding managed in funds.

 
It is currently not possible to predict what the geopolitical power structure will look like after the crisis. The debate on the criticism expressed over China's crisis and communication management is sometimes controversial, and other countries are coming to the fore as prime examples in the fight against the pandemic. It also remains to be seen how the pandemic will develop in the second half of the year and how international cooperation on vaccine production and research will progress. It is also unclear how trade and political relations between the USA and the People's Republic of China will develop given the current situation.

 
The great unknown: How will the virus change the world? Politically, socially and what lessons could the world community learn from the corona crisis?

 


[1] Forecast values of April 2020

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