China needs deeper reform after coronavirus, European firms say

China needs to reform more and remove barriers for foreign firms if it is going to attract and keep the overseas investment it needs after the coronavirus pandemic, according to the European Chamber of Commerce.

“China now faces an even greater challenge to boost the allure of its market,” according to the annual report of the chamber, which represents more than 1,700 firms doing business in China. Due to the pandemic, companies are prioritizing resiliency and supply-chain diversification and “this could be extremely bad news for China’s economic interests unless it too adapts to the emerging situation.”

The business environment has improved over the past year as China continues with regulatory reform and opening up, although at a marginal and incremental pace, according to the report. Some 49% of the 626 respondents said doing business in China had become more difficult over the past year, lower than the 53% in 2019’s survey.

“While still welcomed by the European business community, the grab-bag of incremental improvements to the regulatory environment that were noted in 2019 yet again failed to adequately counteract the challenges being faced,” the report said. “The reforms are viewed as even more inconsequential in the present climate.”

The survey was conducted in February, when it was unclear just how damaging and widespread the coronavirus outbreak would become. At that time, the top concern was the slowing economy.

Supply Fragility

Since then China’s economy has slumped dramatically, contracting in the first quarter for the first time since official data began in 1992. It is forecast to return to growth in the current three-month period, but is facing both domestic and global headwinds, with retail sales still contracting and the global recession likely to damage export demand.

“Although the Chinese economy is now getting back on its feet, companies are still finding upstream supplies running dry, while demand downstream plummets,” the report said. “The fragility of highly efficient global supply chains has been exposed as economy after economy is hit by rolling outbreaks.”

Other major obstacles seen by European businesses to future commerce in China include the U.S.-China trade war, the global economic slowdown and rising labor costs.

• Some progress on market opening and reform has been made, but more deep and substantial reforms are needed to create a open, fair and competitive playing field.
• State-owned enterprises are expected to continue to gain opportunities at the expense of the private sector in 2020, and that situation is expected to worsen amid the pandemic.
• No decoupling has been seen with European firms yet, with 89% respondents not considering shifting current or planned investments in China to other markets.