THE LATEST ANNUAL SURVEY survey of its members by the US-China Business Council shows less optimism among US companies operating in China about the business outlook for the country than at any time since the Council started asking.
Barely half of the 117 firms surveyed expressed optimism about the business outlook for the next five years, a record low. One in five said they were pessimistic.
Two points to note: the respondents to the Council’s survey tended to be their members that are large, US multinationals that have operated in China for more than 20 years and thus are committed to the China market for the long-term and have an understanding of its vagaries — ‘in China, for China’ in the argot.
Second, the survey was fielded before the visit of US House Speaker Nancy Pelosi to Taiwan, which prompted a sufficiently belligerent reaction from Beijing that many US-based chief executives started reviewing their China strategies. The timing may explain why zero-Covid pipped US-China tensions as companies’ top concerns. The survey’s key takeaways:
• China’s COVID-19 policies are the top challenge: China’s COVID-19 strategy now poses the top challenge to US companies, displacing US-China relations, which ranked as the top concern for four consecutive years. The looming possibility that companies will again be forced to partially halt operations due to lockdowns and the impacts of local controls on consumer demand have undermined confidence in the business environment.
• Bilateral tensions continue to hurt American companies: Respondents report record-high concern with US-China relations, which continue to deteriorate. Geopolitical pressures are bleeding into the commercial realm, leaving companies—which depend on a stable and predictable trade environment—in increasingly challenging positions. Chinese customers’ real and perceived concerns about ongoing access to US technology due to US-China tensions continue to threaten US companies’ competitiveness in the market, an alarming trend that could be difficult to reverse.
• Little progress on long-standing issues as new barriers emerge: Significant market access barriers remain, even as China assures foreign companies that they will receive equal treatment. Intellectual property (IP) protection has seen limited improvement. Chinese economic planners have expanded industrial policies to bolster Chinese companies, and localization requirements to qualify for state-affiliated procurement are increasing. At the same time, new Chinese data security and privacy rules threaten to disproportionately increase costs for multinational companies.
• Trajectory of commercial relations at another inflection point: The difficult operating and geopolitical environment has impacted company performance, leading to record levels of pessimism and affecting companies’ decisions about their supply chains and future investments. At the same time, companies overwhelmingly remain profitable in China and they continue to recognize China’s importance to their global competitiveness. Whether business sentiment and the pace of future investment rebound or continue to falter will depend on decisions by US and Chinese policymakers in the coming months and years.
Zero-Covid policies, regulatory crackdowns to align business with national goals and tensions with the United States will likely continue for the foreseeable future and have a long-term impact on foreign companies operating in China.
Perhaps most damagingly for firms’ confidence is that they underline the secondary position to the state to which business is relegated. For a handful of companies, that will lead to exiting the market in whole or part, as companies that source products or raw materials, rather than sell into the Chinese market, are starting to do.
However, for those unwilling to give up on the markets offered by the world’s second-largest economy, large enough to segregate their global supply chains, and with the means and will to do so, it will probably mean hunkering down for several uncomfortable and testing years.