Part two – Market openness increasing, limited trade war effects

In this two-part article series, we are discussing the results of five business climate surveys, completed by the German, EU, Benelux, US, and UK Chambers of Commerce in China. In part one, we learned that the most common problems that businesses encounter in China are mostly bureaucratic, but the most significant problem is increased competition from domestic Chinese companies.

In part two, we will go deeper into the survey results, looking at business outlooks, market perceptions, and trade policy impacts for respondent businesses. Despite the challenges many respondents perceived, their outlook on China seems quite positive, and the trade war does not appear to have as big an impact as one may expect.

Outlook forecasting – Mostly optimistic

Perhaps the most important take-away from these surveys is the assessment of future business prospects by those currently operating in China.

Figure 1

            Figure 1 paints a somewhat ambiguous picture. While data on industry-specific outlook is unavailable, the general view is neutral or optimistic for the Chinese market, with only ¼ of respondents being pessimistic. With nearly half reporting optimistic views, it appears that the challenges businesses expressed in these surveys are not too detrimental for their perceptions of the Chinese market.

 

When tracking profit expectations over recent years, one sees similar results. While 2018 saw more optimistic views than other years, the profit expectations actually show a seemingly less optimistic picture than the general business outlook. Realistically, this is because, in the surveys, profit expectations within normal bounds of 0-5 percent increases are regarded as a “neutral” outlook. When viewed in this light, 66 percent of companies expect to generate an equal or greater amount of profit in 2019 than 2018, a strong indicator of optimism from the majority of international businesses.

 

 

 

Figure 2

Perception of treatment within the Chinese market is stable

Understanding a business’ perception of their treatment within the market can reveal more insights about the foreign business environment in China. To get a feel for how foreign businesses perceive the Chinese market, we looked at two metrics from the surveys: perceptions of disparate treatment and perceptions of market openness in a year over year format. Basically, respondents were asked to classify their perception of how treatment changed from the previous year, to the year the survey took place.

Figure 3

            Viewing the trends of disparate treatment, one sees that while businesses don’t see themselves as being treated better, the treatment is not getting worse as years go on. It is encouraging to see that international firms are not citing worsening treatment as frequently as even two years ago, especially because some of this pessimism is being replaced with optimism.

Figure 4

            As seen in Figure 4, perceptions of market openness improved from 2016-2017, with a slight stabilization in 2018 amidst more improvement. It appears the improvements from past years were maintained in 2018. This shows promise that despite the perceived challenges for foreign businesses operating in the market, compared to 2017 there are not significant changes in the perceptions of changing market openness.

The relative optimism likely comes from the discussions of the Chinese government’s new foreign direct investment law, which was being discussed at the time of the surveys. We now know that the bill was passed in March 2019, and that it will go into effect on January 1, 2020. This bill certainly will open the market further for foreign companies looking to invest and operate in China, giving more reason to be optimistic in the coming year.

Additionally, this summer the National Development and Reform Commission (NDRC) and the Chinese Ministry of Commerce (MOFCOM) reduced its “negative list” of restricted investment industries, further opening the Chinese market to foreign businesses. These documents went into effect on July 30, 2019, so were not accounted for in these business surveys. However, they also will assuredly have an effect on the perceptions of the Chinese market in next year’s surveys.

Trade impact – Many companies do not feel affected by events

Perhaps the two most significant policy areas in China with an impact on trade are the US-China trade war and the Belt and Road Initiative, or BRI for short. Most surveys ask questions about these trade-related topics, to understand how they affect foreign enterprises.

Figure 5

            The majority of companies are not affected by either the trade war or BRI, but this shouldn’t come as too much of a surprise. Regarding BRI, the countries most likely to be affected are outside the scope of European or American chambers, spare some countries towards the Eastern half of Europe. That most businesses, especially SMEs, would not encounter the BRI projects makes sense because they do not operate in BRI industries, or are not large enough to be considered in BRI initiatives.

Figure 6

            For businesses affected by the US-China trade war, while the extent of the negative effects is unclear, what is clear is that only a small number of companies saw any benefit to the tariff battles between the two countries, with most of them citing increased costs and lost customers as main effects of the trade war. While the implications of the trade war are complex, it is clear that from an individual-business perspective, the trade war has yielded mostly negative results.

For more information about the trade war, you can view these helpful articles on German SMEs involvement in the trade war.

Conclusions – Despite challenges, China viewed as a valuable market

Viewed together, the results of the various business surveys point to positive growth in the Chinese market, but businesses still perceive challenges in the market. The rapid development of China has resulted in more competitive domestic firms. For those familiar with major Chinese companies such as Tencent, Alibaba Group, or Baidu, this should come as no surprise. Yet with strong profit outlook, a perception of non-worsening treatment, and improving market openness for foreign companies, the Chinese market still presents a highly valuable opportunity for foreign companies looking to expand their endeavors. As the foreign chambers are starting another round of business surveys in 2019, with the German Chamber currently collecting input from member firms, we will likewise continue to observe developments in the Chinese business environment.

Ecovis Beijing can assist SMEs, whether currently operating in or considering opening operations in the Chinese market through our tax, legal, accounting and auditing services. Contact us today to learn more about the results of the business climate surveys, or our services. With over 7,500 employees in over 75 countries, our highly experienced team of tax accountants, lawyers, and tax professionals is here to assist your business in its international growth.

Contributions by David Treadwell IV