China is quickly losing its allure as an investment destination, and the country is now seen as “less predictable, less reliable and less efficient”, says a new report published by the European Union Chamber of Commerce in China.

The report states that regulatory barriers continue to constrain the ambitions of European companies operating in the Chinese market, including Zero Covid policies which have a detrimental effect on the attraction and retention of foreign and Chinese talent. Other external challenges, such as rising geopolitical tensions originating primarily from the trade war with the US, also make China less attractive as a place to invest for European businesses.  

The report warns that “European firms’ engagement in China can no longer be taken for granted” and that China and the EU are “drifting further and further apart”.

As the business environment is increasingly being viewed as less predictable, less reliable and less efficient, European businesses are increasingly looking to relocate investments to other markets that are seen as providing “greater reliability and predictability”. To improve resilience and reduce supply chain risks, companies are increasingly exploring not just the ‘China +1’ strategy but ‘China +1+2+3’ too.

FDI data seem to confirm this statement. In 2020, investment from the EU dropped 11.8% from the previous year, and its proportion of overall FDI fell to 3.8% from a high of 11.1% in 1999. This trend of declining FDI is likely to continue considering that European executives are still restricted from travelling to and from China due to Covid policies.

The report’s findings are the latest in a series of pessimistic forecasts for the Chinese economy. According to DHL’s new Trade Growth Atlas report, China’s share of global trade growth will decline by half over the next five years to 13% as businesses diversify their international production and distribution networks. The report argues that trade growth is spreading out across a wider variety of countries, and ‘new poles of trade growth’ are emerging in Southeast, South Asia and sub-Saharan Africa.

Meanwhile, the EU is reassessing its relationship with China and its latest trade policies aimed at tackling economic threats from countries like China. On September 14th, the European Commission unveiled its plan to ban products made with forced labour from entering the EU market, a measure likely to anger China and damage relations with Beijing. One thing is for sure – EU-China relations are about to get bumpier. 

Source: Transport Intelligence, September 22nd, 2022

Author: Viki Keckarovska

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