For the past 22 years, the American Chamber of Commerce in the People’s Republic of China (Shanghai, China) has conducted a survey of its members in order to gather perspectives from businesspersons currently trading with or operating businesses in China. As trade tensions between the US and China increase, American businesses have first-hand experience of the changing business climate in China. Their valuable insights are reflected in this year’s survey.
I created an infographic as an easy reference to what I think are key and interesting data points. Importantly, the survey data was gathered before COVID-19 became a pandemic and this will no doubt effect the reliability of the survey. One worry is that the pandemic will change the direction of economic trends and change business focus. In actuality, pandemics tend to accelerate trends and emphasize the ongoing focus on efficiency. Thus, data relating trends still yield useful insights.
Summary and Short Analysis of Key Data
In general, the survey results indicate that American businesses have a cautious attitude towards further investment in China due to three factors. Overall, there is decreased expectation of profitability in 2020 resulting mainly from three factors. First, businesses point to an uncertain policy environment in China and deteriorating industry conditions. Second, the slowing of China’s economy has naturally also slowed business growth. Third, American businesses are concerned that US-China trade relations will continue to deteriorate and increase bilateral tariffs already in place.
At face value, this information appears to indicate China’s waning appeal to investors. However, further survey questions regarding American companies’ earnings in global operations reveals that, in fact, 68% reported that earnings (EBIT) margins in China are either comparable or higher than global margins. This indicates the importance of evaluating China’s investment appeal in light of the global economy, rather than as a singular economy.
Two notable opportunities perceived by the respondents are domestic consumption growth (an increasingly sizeable and affluent middle class) and market access (official Chinese policy of ongoing economic and “opening-up” market reforms).
State of the Industries
Businesses in the Consumer industry are most optimistic about revenue growth. This is especially true of importers of foreign-made goods. Revenue growth is also expected by producers of new-and-improved, innovative products. The number of middle-class families will continue to increase and provide opportunities for businesses that provide domestic travel, education, and lifestyle goods. A possible explanation is that cutting-edge and foreign goods claim higher prestige and are valuable social signifiers of wealth.
In the Technology industry, growth is expected due to further integration of digital technologies (e.g. AI, Cloud, 5G) and the expansion potential for reaching more of China’s domestic market. The survey indicates that American businesses in China regard it as an advanced player in adoption of digital technologies and more advanced than other markets. The survey results are corroborated by the fact that Chinese consumers and the government are early adopters of the latest technology whenever the benefit outweighs the cost.
The outlook for Resources & Industrial was by far the bleakest of the four industries surveyed (Services, Technology, Consumer, Resources & Industrial). More than two-fifths of R&I businesses expect stagnant or negative growth.
Companies are more optimistic in 2020 (than 2019) about profitability, possibly because of the expectation of improved US-China trade agreements. However, when surveyed about the extent of investment increases, a third of companies indicated only small (1-10%) increases. This indicates that optimism is cautious and coupled with a wait-and-see approach. Further survey responses revealed that difficulties caused by tariffs have prompted relocations from China to “Developing Asia” (unnamed by the survey, but presumably countries such as Vietnam, Thailand, Philippines, and Indonesia).
Notable Risks and Concerns
The survey contains specific data highlighting the political, economic, legal, and social risks faced by foreign businesses in China. The survey corroborates business research about the areas where American businesses would like to see improvement to the business environment, such as:
Risk of inconsistent regulatory interpretation and enforcement; new laws create compliance costs, disruptions or even shutdowns; businesses risk fines and voided contracts.
Goal: Increase the transparency, predictability, and fairness of the regulatory environment
Inadequate laws or lack of enforcement; employee theft
Goal: Ensure greater protection of intellectual property in a local environment that sometimes requires transfer of IP to government or local partners
UNEQUAL PLAYING FIELD
Domestic businesses receive government subsidies and preferential treatment
Goal: Provide recourse for unfair treatment of the investments of foreign businesses
PUBLIC PROCURMENT POLICY
Priority given to domestic suppliers; guanxi as basis for awarding contracts; lack of standardized central electronic bidding system which makes bidding time-consuming and difficult for foreign companies
Goal: transparency on how contracts are awarded and a standardized, national electronic bidding system
Legal or political structures create barriers to establishing business; market share targets set by government industrial policies; structural problems in governance and cyber-security laws prevent progress on these policies
Goal: open industries to foreign companies, instead of limiting opening to industries in which domestic players already dominate the market; provide transparency of regulations, policies, and enforcement
Unique Concerns for Operations in China
AmCham’s survey asked their members to evaluate some business concerns arising from China’s political environment. One concern is that China encourages businesses to create Party cells as part of their local operations. The downside of the Party cells is the cost in time and money, although most companies found that having Party cells is either neutral (no effect on business) or even slightly advantageous as a direct connection to government and protection from government.
The new Social Credit System is an unknown risk, with one-third of respondents unable to form an opinion and 40% speculating that the SCS will have a positive impact of increasing ethical behavior.
Finally, respondents named increased concern for non-tariff barriers to trade. Non-tariff barriers mostly referred to “foot-dragging”: bureaucratic oversight or regulatory scrutiny, slower customs clearance and increased inspections, and slow or rejected approval for licenses. This indicates an area of importance in the US government’s advocacy for American businesses and consideration as an unpredictable area of consequence in trade negotiations.
The intention behind this post was to provide an easily understandable summary of the data contained in AmCham’s Report and supplement it with analysis. Comments and discussion of alternative interpretations are welcome.
2020 China Business Climate Survey Report published by AmCham (the American Chamber of Commerce in the People’s Republic of China)