Other BriefingsBritish Businesses in China: Conditionally Optimistic for 2023
The British Chamber of Commerce in China released its 2023 Position Paper in late May based on the outcomes of its survey of British businesses in China and their experiences. In his latest op-ed, Guilherme Campos discusses the Chamber’s findings and key expectations of the British business community in China from the government that could boost confidence.
On May 23, 2023, the British Chamber of Commerce in China released its position paper (“the Position Paper”) concerning the experiences of British businesses in China.
Like many other position papers or surveys released by other Chambers of Commerce all over China, the Position Paper represents the views of the members of the British Chamber across China on the challenges posed by local regulations.
In addition to this, it offers recommendations to both the Chinese and British governments on how to level the playing field for British companies in several industries or business sectors in diverse regions of China. It also identifies areas of potential opportunity for both sides where companies can complement each other.
2023 marks the fifth edition of the Position Paper of the British Chamber of Commerce in China and is the first normal year following China’s border reopening in the aftermath of the COVID pandemic. It is of fundamental importance to see to what extent has the Chinese business environment improved (if at all) and what are the expectations for British businesses for this year and the coming years in China.
Business sentiment findings
Seventy-six percent of British businesses in China feeling more optimistic though on conditional basis
In the British Chamber’s most recent survey conducted in April this year, more than three-quarters (76 percent) of British companies expressed “cautious yet conditional” optimism about doing business in China, following the country’s recent reopening and abolition of strict COVID-19 prevention measures in January 2023. The resumption of travel has made it possible to conduct business in a more conventional manner, by traveling to headquarters and global offices and meeting international clients. Besides, China’s comparatively better economic performance and prospects has further spurred the renewed optimism.
This is in contrast to the situation in late 2022, when 42 percent of businesses reported a pessimistic outlook for the China market, surpassing 10 percent for the first time in the history of the British Chamber’s surveys.
Nevertheless, despite the much-improved business sentiment, the optimism is largely tied to whether China is able to restore the trust and certainty needed to fully realize its market potential. Other considerations include: whether China can properly manage the challenges posed by rising geopolitical tensions, a slowing global economy, increased talk of self-sufficiency, technology decoupling, shifts in investor perceptions, and the need for predictability in the business environment.
British businesses in China understand that these aspects are outside of the control by any single stakeholder. But they do hope the Chinese government can take concrete actions to promise support for foreign businesses, establish clear objectives and guidelines regarding policies and regulations, and maintain open communication channels with the foreign business community.
All these steps, according to the British Chamber, would help further restore confidence and reduce uncertainty that continues to negatively impact business sentiment in China.
British Chamber asks Chinese government for more concrete actions to ensure predictability in the business environment
In the business sentiment part, the Position Paper seems to reveal a “newly-formed perception of China as an unpredictable market.” In order to regain stability, the British Chamber calls for some concrete actions that could help improve this, namely:
- Establish clear and specific timelines for implementing policies designed to improve the business environment, address long-standing market issues related to intellectual property rights and data security, and create a more welcoming environment for foreign investment.
- Continue to reduce the negative list for foreign investment and communicate these changes effectively to potential investors.
- Develop and adopt comprehensive guidelines for interpreting and implementing policies consistently across the country, to ensure a level playing field for all market players.
- Ensure faithful implementation of policies that support opening up, including lifting foreign ownership limits on passenger car companies, issuing debt underwriting licenses to foreign banks, and addressing difficulties in obtaining design licenses for foreign built environment firms, with specific timelines and metrics to measure progress.
- Accelerate negotiation of entry into international partnerships, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and align with international standards where possible, such as in the carbon market, in ESG requirements, and cross-border data rules.
- Implement measures to improve transparency and competition for businesses that addresses the unequal playing field between state-owned enterprises (SOEs), domestic private companies, and international businesses.
- Provide policy clarity to reduce compliance uncertainty for businesses navigating the changing regulatory environment.
- Ensure there is an open and inclusive consultation process in the development and implementation of policies.
- Establish clear and increased lines of communication at all levels.
Cautious attitude towards China’s growing emphasis of national security and self-reliance
According to the Position Paper, the 2023 Two sessions event delivered mixed messages to the foreign business community. On one hand, foreign businesses understood that China will continue supporting foreign investment and improving its business environment, but on the other hand, the emphasis on national security and self-reliance breached business confidence and introduced concerns about the long-term prospects for international businesses in China.
Seventy percent of the businesses surveyed by the British Chamber say they are adopting a ‘wait-and-see’ approach to understand what specific China policy support will be put in place by the government, and to understand just how exactly the government will act in order to revitalize and stimulate the China market.
Industry analysis and challenges
The Position Paper also reports on the challenges, recommendations, and mutual opportunities of some key industries, such as automotive, environment services, consumer goods, education, energy, financial services and healthcare.
Below, we present some cross-sector challenges that are seen to systemically affect almost all industries.
Hiring challenges and talent development
There are increasing restrictions on hiring foreign staff, as last year 56 percent of businesses reported being unable to recruit and hire the necessary international talent. However, international border restrictions as a result of COVID-19 were a primary driver.
Besides restrictions due to the pandemic management, the qualifying requirements for work permits have led to difficulties in employing junior personnel. British businesses have raised concerns over the need for two years of work experience to acquire a work permit as well as some foreign degrees not being recognized by Chinese authorities.
On the tax front, the proposed income tax reform in China, taking effect in January 2024, has raised concerns among foreign nationals and companies. China has been successful in attracting skilled professionals from around the world with attractive salary packages and benefits, such as tax relief on expenditure on housing and school fees. However, if the proposed China tax reform is implemented, the exemption on fringe benefits, which excludes school fees, accommodation costs, and other living expenses from taxable income, would be removed. As a result, foreign nationals working in China could face significant increases in individual income tax burdens, with potential losses of over 40 percent of their current income.
Navigating cyber and data security regulations
Cybersecurity regulations and IT restrictions have continued to rank amongst the top three regulatory challenges facing British businesses in the past year.
According to the Chamber’s ‘British Business in China: Sentiment Survey 2022-23’, around 40 percent of British businesses reported being negatively impacted by China’s cybersecurity and IT regulations. Increasing difficulty in accessing online resources located outside the Chinese mainland is the most cited challenge (24 percent).
This relates to the Chinese authorities’ blocking of foreign websites, which reduces foreign companies’ ability to access information overseas and connect with global colleagues and clients. Meanwhile, 14 percent of companies reported that they were affected by a lack of clarity over key concepts, such as important data and critical information infrastructure operators (CIIOs), which reduced confidence in the Chinese business environment. A further 13 percent cited negative financial impact due to increasing costs in ensuring compliance.
Formulation and enforcement of laws and regulations
Of the companies that noted that they would be decreasing their investment in the Chinese mainland in the Chamber’s Business Sentiment Survey 2022-23, 40 percent noted that issues surrounding regulatory challenges had influenced their decision to do so – the joint-third reason for decreasing investment after COVID-19 and economic uncertainty.
Overall, the enforcement of laws and regulations was the fourth-most cited challenge for the British Chamber’s member companies. Meanwhile, the issue was the second-biggest challenge for British businesses in China’s financial services, education, retail and consumer goods, and hospitality, travel, tourism and leisure sectors.
Though the challenges of zero-COVID and uneven approach to local pandemic regulations have been removed under the national reopening, post-pandemic interviews with businesses still highlight the formulation and implementation of laws as a key challenge for British businesses in China.
Other issues
Various challenges exist across all sectors, including difficulties in accessing a company’s finances. Obstacles still persist, hindering effective capital and financial transfers between businesses in China and their overseas subsidiaries, sister companies, or other affiliates. Specifically, the British Chamber members have reported unpredictable administrative processes and bureaucratic difficulties when attempting to contact regulators to address issues.
Obtaining business licenses poses a major challenge for many foreign companies operating in China. The lack of clarity and consistency in the procedures associated with acquiring necessary licenses and permits causes significant anxiety for organizations and hampers their ability to thrive in the Chinese market.
Nevertheless, China’s commitment to strengthening its intellectual property (IP) protection in recent years has been acknowledged by numerous business entities as a significant improvement. Notably, the surveyed companies have observed increased government assistance in providing proof of violation during IP litigation disputes. This commitment has resulted in substantial improvements in the area of China IP protection.
Key takeaways
China’s 2022 FDI data, which was released on January 18, 2023 by the Ministry of Commerce (MOFCOM), shows FDI inflows into the country slowed but remained “steady” in the year.
The slowdown in part was caused by the many COVID-19 outbreaks and stringent control measures imposed over the course of 2022, which knocked business confidence in the China market. Nonetheless, investment into certain industries and from certain regions grew rapidly in 2022, showing that China remained an attractive destination for many investors.
As the country enters a new post-COVID era, the government is now focused on economic growth. Given the importance of foreign investment to China’s economy, the Chinese government at all levels has been ramping up efforts to attract foreign capital. Against this background, more supporting policies can be expected throughout the rest of 2023.
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China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, Dubai (UAE), and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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