The EU Chamber’s annual Business Confidence Survey highlights key trends in the business environment in China, monitoring companies’ sentiments toward the Chinese economy, market access, policy implementation, and more. This article delves into the survey’s findings, exploring the evolving sentiments and challenges to business confidence in China, as well as the country’s efforts to enhance its business environment and attract foreign investment.

The European Chamber of Commerce in China (EU Chamber) recently released its annual European Business in China: Business Confidence Survey 2024, offering a comprehensive snapshot of European companies’ experiences and outlooks within the Chinese business landscape. This survey, conducted among 529 European businesses, serves as a crucial barometer of sentiments towards doing business in China, covering a spectrum of topics, including business and investment outlook, perceptions of the business and policy environment, and key operational challenges.

Among the prominent trends highlighted in the survey is a heightened concern among European businesses regarding the state of the Chinese economy. Notably, economic issues have taken center stage in 2024, with a significant percentage of respondents citing China’s economic slowdown as a primary challenge impacting future business prospects. Despite these concerns, the survey also reveals some positive developments, including improvements in market access for foreign companies operating in China.

In this article, we look at the latest findings from the EU Chamber survey, examining the evolving sentiments and challenges faced by European businesses in China. Additionally, we explore the concerted efforts made by China to enhance its business environment and attract foreign investment amidst evolving economic dynamics.

Business environment – key concerns for European businesses

Economic concerns have taken center stage for European businesses operating in China in 2024. Among the main business challenges cited by respondents, 39 percent identified China’s economic slowdown as the most significant factor impacting future business in mainland China, followed by 15 percent who highlighted the global economic slowdown, and only 6 percent who pointed to US-China tensions.

2024 has also seen a notable shift in terms of attitudes toward the business environment. Of the surveyed companies, only 6 percent stated that business has become easier, down from 8 percent in 2023. Conversely, 68 percent indicated that it had become harder, up from 64 percent the previous year.  Moreover, over half of the respondents noted increased politicization of the business environment, although the number decreased slightly from 2023.

Attitudes toward the business environment vary across different regions of China. In Shanghai, businesses reported the ease of doing business has declined across various aspects, with notable decreases in percentages of companies reporting ease in enforcing contracts, registering property, relocating, cross-border trade, cross-border money transfer, and accessing power supplies. Meanwhile, the percentage of companies reporting business as “somewhat difficult” increased across these factors.

However, in Southwest China, profitability has been on the rise, with the region boasting the highest national rates in several metrics. These include increased revenues and EBITs compared to 2022, along with higher EBIT margins, surpassing the company average worldwide in 2023. South China, meanwhile, had the highest rate of respondents reporting revenue decreases and lower EBIT margins in 2023 compared to the previous year. Slow economic growth and demand factors primarily impact respondents in South China, according to the report.

Competition and market opening

The competitive landscape and market opening pose significant challenges for businesses operating in China, reflecting shifting dynamics and perceptions within the industry.

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Regarding overcapacity, 36 percent of respondents noted its prevalence in their industry over the past year, with 71 percent of those businesses reporting decreased prices as a consequence, and 42 percent indicating significant price reductions. Additionally, changes in market share reveal a competitive environment, with 42 percent of businesses experiencing losses to domestic competitors over the past five years, particularly evident in the pharmaceutical, IT, telecom, and machinery sectors.

Despite these challenges, there are reported improvements in market opening, albeit modest. 45 percent of respondents reported market opening, marking the highest level in nine years. Nineteen percent noted significant opening for foreign companies in their industry, an increase from the previous year, while 26 percent reported some opening, unchanged from the previous year.

In Southwest China, there’s a positive outlook on market opening, boasting the highest national rate at 74 percent, suggesting a relatively favorable environment for foreign investment. Conversely, South China respondents expressed the most negative perceptions about the treatment of foreign invested enterprises (FIEs), with 37 percent indicating that FIEs tend to receive unfavorable treatment compared to domestic companies. Additionally, the region reported the highest rate of respondents reporting market closing, further indicating challenges in market access and competition.

Business and investment outlook

The business and investment outlook in China reflects a shift towards greater pessimism among respondents, signaling potential challenges for the country’s economic trajectory. Fifteen percent expressed optimism about profitability in 2024, down from 23 percent in the previous year, while 41 percent indicated pessimism, up from 26 percent. Similarly, optimism about growth decreased to 32 percent from 55 percent in 2023, with 26 percent expressing pessimism, up from 9 percent in the previous year.

This growing pessimism among businesses raises concerns as it could lead to actions that would further reduce foreign investment in the country. Indeed, 52 percent of respondents stated plans to cut costs in 2024, a notable increase from 41 percent in 2023, with 26 percent intending to achieve this through reducing headcounts.

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Furthermore, there is some modest evidence that companies have begun shifting investments away from China. 13 percent of the survey respondents stated that they have already shifted or have decided to shift existing investments to other countries, and 12 percent said they were doing the same with future planned investments. While a majority still do not plan to shift current investments, the percentage has decreased from the previous year, indicating a potential trend. Moreover, only 42 percent are planning to expand their China operations in 2024, marking the lowest on record.

Despite these shifts, China remains a significant destination for investments. Fifteen percent of respondents stated that China ranks first for present investments, down from 19 percent in 2023, while 40 percent said it ranks in the top three destinations, unchanged from 2023.

Nonetheless, there’s a decline in the percentage of respondents ranking it first for present and future investments. Notably, 13 percent have no current planned investments in China, up from 7 percent in 2023, while 13 percent have no future planned investments, up from 8 percent in the previous year.

In Tianjin, challenges lie ahead to maintain EBIT margins, with competitive factors negatively impacting 78 percent of respondents, and half experiencing a loss of market share to domestic competitors over the past five years. However, there’s a desire to expand operations, with 58 percent considering such endeavors, although market access does not emerge as a significant driving factor for new investments.

In South China, efforts to attract investment and regain consumer confidence in 2023 yielded limited meaningful action. However, the report states that there are positive signs in 2024, including better communication on available support to businesses, the assistance provided for companies to receive practical support, and the provision of the Greater Bay Area (GBA) individual income tax (IIT) subsidy policy for foreign talent.

Challenges attracting foreign talent

European companies continued to cite difficulties in attracting foreign talent as a hindrance to business operations, despite the lifting of COVID-19 restrictions making international travel considerably easier.

One significant trend observed is the decoupling between global headquarters and China operations over the past two years. Forty-one percent of respondents reported this phenomenon, resulting in numerous challenges. Among these challenges, 44 percent noted a slowdown in existing operations, albeit a slight decrease from the previous year. Additionally, 43 percent highlighted a reduced ability to capitalize on new projects or investment plans, with a notable increase (10 percentage points) from the previous year.

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A key factor contributing to this trend is the drop in the number of Europeans employed by China operations. Moreover, more than a third of respondents face difficulties in attracting and retaining international talent, with 70 percent identifying potential candidates’ lack of willingness to relocate as a key issue.

One place where this is felt particularly acutely is Tianjin, where 61 percent of respondents stated they face difficulties attracting and retaining international talent, notably higher than the national average of 39 percent. South China also echoed this concern, with over half of respondents reporting difficulties in attracting and retaining international talent. In Southwest China, meanwhile, recruiting foreign talent, especially for senior-level positions, has become increasingly difficult, with 91 percent of respondents expressing challenges in this regard.

Companies have identified policies for talent attraction as crucial to tackling this problem, with 45 percent of companies in the region stating that favorable policies could encourage increased investment.

However, other obstacles persist, with companies calling for improved communication with industry stakeholders and coordination among government departments. Additionally, there’s a growing call for advocacy for greater consultation and communication in Southwest China, alongside steps to address air quality concerns.

These findings underscore the multifaceted challenges businesses face in attracting and retaining foreign talent across different regions in China, highlighting the need for targeted strategies and policy interventions to address these issues effectively.

China’s efforts to improve the business environment and attract foreign investment

Since reopening following the COVID-19 pandemic, the Chinese government has made concerted efforts to improve the business environment in China and address foreign companies’ concerns, with the explicit aim of increasing foreign investment.

Foreign direct investment (FDI) fell considerably in 2023 amid the many challenges faced by foreign companies. As highlighted in the report, European businesses are increasingly concerned about the Chinese economy, with optimism over the near to medium-term future outlook fading. To adjust to revised expectations, companies have adopted strategies, such as cost-cutting, reducing headcounts, toning down expansion plans, and reevaluating investment plans, all of which will impact FDI flows into China.

All of this has highlighted the need for further policy efforts to improve the business environment for foreign companies. In July 2023, the State Council issued a set of 24 measures to optimize the foreign investment environment, outlining measures such as improving access to clean energy, ensuring equal participation in government procurement, improving cross-border data transfer (CBDT) procedures, and facilitating visa procedures for foreign talent.

Earlier, in June 2023, Shanghai had issued a similar set of measures, proposing actions such as increasing market access, administrative resources, and administrative support for foreign companies, and improving financial opening.

In March 2024, the State Council released another 24-point plan to boost foreign capital, repeating the call to enact measures, such as expanding market access in key industries, ensuring equal participation in government bidding, and facilitating CBDT for foreign companies.

In addition to the plans, China has taken several concrete measures to improve conditions for foreign companies over the past year. These include extending tax breaks for foreign employees until 2027, optimizing visa procedures, and facilitating cross-border data flows.

In August 2023, China relaxed rules for on-arrival business visas, enabling people traveling to China for business or trade activities to apply for a business visa on arrival. The new rules also allowed people applying for residence permits in China to retain their passports during the application procedure, enabling them to travel out of the country in the meantime.

In January 2024, the National Immigration Administration (NIA) began implementing five measures aimed at facilitating the arrival of foreign nationals in China. These include relaxed requirements for foreigners applying for port visas, facilitating visa extension and renewal processes, and providing re-entry visas for foreigners who need to enter and exit the country multiple times.

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Since November 2023, China has also begun piloting 15-day visa-free travel for arrivals from 11 European countries, including France, Germany, Italy, the Netherlands, and Spain, until the end of 2025. Among the measures identified by the participating companies in the report to improve the business environment is expanding the visa policy to all EU member countries, but it remains to be seen whether China will do so.

Another important step in improving the business environment for foreign companies has been new regulations to ease rules on CBDT. In March 2023, the Cybersecurity Administration of China (CAC) adopted the Regulations to Promote and Standardize Cross-Border Data Flows, which make it easier for foreign companies to export data overseas. Nonetheless, some issues remain in this regard, such as the still unclear definition of “important data”, as mentioned in the report.

Finally, China has also taken concrete steps to improve market access in certain industries. In April 2024, the commerce regulator expanded access to cross-border services sales with the release of two new negative lists. These lists clarify which sectors are off-limits for foreign companies, thus opening the door for participation in all areas not included in the lists.