The EU-China Buiness Association, the European Union Chamber of Commerce in China and BusinessEurope presented the launch of the ‘European Business in China – Position Paper 2020/2021’ online on 6 October 2020.

Ms. Gwenn Sonck, Executive Director, Flanders-China Chamber of Commerce, explained that the Position Paper includes the views from more than 30 working groups representing European businesses in China. The Paper describes the structural challenges in the China market and provides constructive recommendations to both Chinese and European authorities.

Mr. Joerg Wuttke, Chairman of the European Union Chamber of Commerce in China joined the webinar from Beijing. He is Vice President and Chief Representative of BASF China in Beijing since 1997. He lived in China for more than 20 years and since 2019 is Vice Chairman of the International Committee at the China Chemical Association. From 2011 to 2019, he served as Chairman of the Business and Industry Advisory Committee to the OECD’s China Task Force. The Position Paper was launched about a month ago, just before the EU-China Summit. It counts 400 pages and is freely downloadable from the Chamber’s website. In some areas 5% to 10% of the recommendations get done, about 90% is carried forward and new things are coming up. The essence of the Paper is combined in the Executive Summary with the focus this year on the growing sense of urgency for China to reform. There are the old headwinds in the economy, such as the debt burden, which is growing due to the stimulus that Beijing has instigated; the demographics, as China is one of the fastest ageing societies in the world; and of course the new challenges the economy is facing, such as Covid-19 and decoupling. The Chamber will cover decoupling in a survey to be launched on January 14. As headwinds are rising, China has to get moving. China is falling behind Taiwan, South Korea, and Japan. China could have done better.

The World Bank examined three scenarios. In the baseline scenario of “muddling through”, China will catch up with Japan in about 15 to 20 years, but will be behind Taiwan and Korea on GDP per capita. In a second scenario, if China focusses on the domestic side, it will not catch up with any of these economies until about 30 years from now. If China implements comprehensive reforms, it would overtake Japan in the next five years already and overtake Korea and Taiwan in 30 years. China is performing below its potential right now, which is related to the state-owned enterprises. The Chinese Communist Party wants to have control mechanisms in order to stay on top of the economy, energy, banking, insurance and so on. They pay for it with a lagging success story. At the same time they have a brilliant and innovative foreign enterprise landscape, which – unleashed more with reforms – would make China bounce much faster. The Communist system is based on control, and control has to be paid for. The revenues of SOEs were stable over the last six months compared to last year, but profits were down 9% or 10%. But private enterprises listed in Shanghai and Shenzhen increased their profits by 22% and revenues by 9%. This shows that even in a crisis the Chinese economy has players that are extremely well positioned and resilient.

In the Position Paper, China’s productivity issue is also emphasized. Productivity has been going down, as 12 years ago one renminbi of credit generated one renminbi of GDP growth, but now it is 0.28 renminbi. China needs much more money to generate what it did more efficiently 12 years ago. Institution building is another important point to be able to get out of the middle-income trap. The Position Paper could easily run to a thousand pages, but nobody would read it, so we have to delete about half of what we collect. Another point is how important are foreign companies to the Chinese economy? There are 87,000 foreign-invested companies registered in Shanghai, including 17,00 American, 10,400 European companies and others. The largest direct foreign investor is the British Virgin Islands. The 87,000 foreign companies generate 25% of Shanghai’s GDP, 33% of local taxation, and 11% of employment. Import-export is 66% and industrial output 30%. There is a huge impact from few players, which should be a reminder of how beneficial foreign investment is to the Chinese economy.

The Paper concluded with one economy, two systems, being state-owned enterprises versus private Chinese enterprises, but also including foreign enterprises. There is no doubt that China is the growth story for the next years to come. China is to account for 30% of global growth until 2030. We are constantly told that China is opening up, but very little happens. The issue of business versus politics is really very worrisome because the politicization of business is increasing, such as in the Taiwan, Hong Kong and Xinjiang issues, where we are between a rock and a hard place. If foreign companies are trying to accommodate the Chinese version, they have problems back home. It is a time of soul searching, standing up for European values such as human rights and open dialogue and at the same time operating in an autocratic system. How to bridge this is a real challenge more than ever.

China used to be the charming point in the economy but recently China has been dropping a lot of soft power. In Europe we need goodwill for Chinese investors in order to get the investment agreement done and passed in parliament. In countries like Poland, the Czech Republic, Slovakia, and Sweden there is much resentment. China realizes that it needs a genuine friend and the Chinese leadership is taking time to care about foreign businesses. The Chamber hopes that China will change tack in language and opening up, to have a better atmosphere between Europe and China.

Mr. Jochum Haakma, Chairman of the EU-China Business Association, remarked that not much is heard anymore about the Made in China 2025 program. How much does China really need foreign investors to outcompete Korea and Japan? Mr. Wuttke: To many Chinese reformers, Made in China 2025 stood for overcapacity, and that is the reason it has disappeared, not necessarily because of foreign concerns. The Chinese realized they were going down the same road as solar panels and wind turbines, where they created huge overcapacity. Made in China 2025 was indicating that China had to catch up, as it was not proficient in engineering, nor in sales and marketing, but in the low-profit area of production. China is importing about USD300 billion worth of semiconductors a year, which they need in their digital wonderland, but the motor is still coming from the U.S., Taiwan, Japan or Holland. They are now throwing money again at everything that moves. It remains to be seen whether they can close the gap. Decoupling comes with price increases and we see a splintering of the world. There is anxiety in China in getting ahead in some technologies, but this has been build up over decades in Europe and it turns out it is more difficult than the Chinese thought. If the U.S. tighten sanctions, and the Europeans and others join the club to whatever extent, China might find it very difficult to follow the path into the promised land.

Ms. Luisa Santos, Deputy Director General of BusinessEurope, moderated the Q&A. The big question is what will happen with China in the coming months and years. Mr. Wuttke: Many in the Chinese leadership are worried how the technology war is shaping the world. Some however realize that China started decoupling and was very aggressive with countries that were not complying and the companies associated with these countries. After all these years, companies are not speaking up for China anymore, and the ending of naivety that Europe had towards China is good, but Europe has to be careful not to cross red lines and become protectionist. It is going to be a real challenge to have the investment agreement passed before the end of the year. Mr. Wuttke is more worried than he was six months ago because the Chinese leadership seems to be more driven by catering to a domestic audience.

How has the business environment for European companies in China changed? Mr. Wuttke: The business climate is good as the Chamber’s members have more business opportunities, but most of the members are already successful in China. Production has seen incredible increases to the point were consumption is lacking in China. The export data are incredible, but this also means that people in China don’t buy the stuff. China has been roaring back particularly in areas of interest for European business, such as the car industry, chemicals and luxury items. But there is no level playing field: it is Chinese private and foreign companies against SOEs. Private enterprises in China have a really tough time and it’s not getting better due to the introduction of party cells. There is still the issue of market access for technology transfer, but they realize that there is a problem with attracting new technologies if they are being seen as ripping it off. Dual circulation and a strong domestic focus is going to be theme of the 14th Five Year Plan. It is not clear yet how this will translate into opportunities for foreign companies. The social credit system is still in the making but again it is a tool in the toolbox of the Communist Party.

Is a dispute settlement clause really needed in the investment agreement? Mr. Wuttke: Nobody has any illusions that you can take the Chinese government to court and the Chamber has not taken any position on it although there is a big discussion on it in Brussels. Not only European companies have requirements concerning the investment treaty, the Chinese also have, such as participation in the setting up of power and water treatment plants. Concerning the Green Deal, China pledged to have the peak of emissions in 2030 and being neutral in 2060. It is a commitment from the President which we welcome, but we will hold China accountable to it. To say goodbye to coal is going to be less likely than it was two or three years ago. China is still building coal-fired power stations and is one of the big financing parties in power stations based on coal outside China. But let’s not forget that things also get done between China and Europe, we now have a geographic indications by which European and Chinese products are safeguarded in each others markets.

Ms Santos: In the first six months of this year, China has become the main trading partner of the EU, passing the U.S. It is a very important relationship and we want to keep it that way. Business Europe will be focussing on the Green Deal and the digitalization, because there are potential conflicts.