Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
European companies in China have ranked a domestic slowdown in the world’s second-largest economy as a bigger challenge for them than the trade war, underlining the hurdles for Beijing as it negotiates with the US on tariffs.
A record number of the 503 companies surveyed by the EU Chamber of Commerce in China also said doing business in the world’s second-largest economy had become more difficult and were pessimistic about future profitability.
“Now, by a wide margin, it is China’s economic slowdown that is seen as having the greatest impact on future business,” said Jens Eskelund, EU Chamber of Commerce in China president, ahead of the launch of the survey on Wednesday.
China’s economy lost a big growth driver during the pandemic when Beijing cracked down on the property sector, leading to a slump in domestic demand and persistent deflationary pressures.
The country’s producers have increased exports to offset weak onshore demand but tensions with trading partners, particularly the US, which has imposed tariffs of more than 40 per cent on Chinese goods, are threatening to curtail growth in the sector.
Over the past decade, China has also extensively pursued industrial policies that have led producers to expand in sectors where European manufacturers were among the world leaders, ranging from machine tools to industrial robots, shipping and automotives.
The EU study found that 73 per cent of members reported that doing business in China became more difficult in the past year — the fourth year in a row of deterioration.
Of the survey respondents, 71 per cent cited China’s economic slowdown as having the largest impact on their businesses, followed by US-China tensions at 47 per cent.
Optimism about near-term future growth and profitability in China reached record low levels, of 29 per cent and 12 per cent respectively.
The importance of China for European businesses’ global profits also diminished. Seven of 10 respondents said earnings before interest and tax (Ebit) margins in China were less than or equal to their worldwide average.
Despite this, many said they were still sourcing a growing number of components from China because of its highly competitive pricing.
“So it’s a little bit counter-intuitive that you have this movement where companies are super pessimistic, they are not earning money, there is a politicisation, there are market access barriers, but for economic reasons we are beginning to see that you simply need to have a presence in China to source components in order to stay competitive,” said Eskelund.
Despite government pledges to improve the business environment for foreign investors, a record 63 per cent said they had missed business opportunities last year owing to regulatory and market barriers.
Over the next five years, 44 per cent expected the number of regulatory obstacles they faced to increase.
The findings mirror some of those from other foreign chambers of commerce. The British Chamber of Commerce in China in a recent position paper said “major market access challenges remain”.
It cited factors including China’s lack of recognition of professional qualifications to its licensing regimes and cross-border data rules as in need of reform.
But British business had seen “an increased willingness on both sides to engage” to discuss the commercial relationship, said Chris Torrens, vice chair of the British chamber.