Business Confidence Survey
BUSINESS CONFIDENCE SURVEY 2019/20
2019 was significantly affected by the US-China trade dispute, by a rising global tendency for rather protectionist economic policy developments paired with a decelerating global economy. Economic slowdown and political uncertainty point to a mixed year for German companies in China. For Germany as an export-oriented economy in particular, open markets and a rules-based trade system are cornerstones of its companies’ worldwide success. Against this backdrop, and in times of uncertainty, German companies are eager to see more signals from the Chinese government showing its commitment to deepen and thoroughly implement necessary economic reform and opening-up measures. The conclusion and implementation of a high-quality EU-China Comprehensive Agreement on Investment (CAI) next year – with a scope beyond the usual investment protection dimension to also cover fair market access – would create new momentum and also bring Sino-German economic relations to a new stage.
Business Outlook Gloomy With Small Signs Of Hope
The slowdown of the Chinese economy combined with uncertainty due to the ongoing US-China trade dispute has left its marks. China remains a significant market for German companies, but the momentum of recent years has diminished. Industry forecasts for 2019, in particular for Germany’s traditionally strong Automotive and Machinery/Industrial Equipment sectors, have significantly decreased. Business expectations are reported at their lowest level in years, with only 27% of surveyed German companies expecting to reach or exceed their business targets in 2019. However, for 2020 surveyed enterprises report tentative signs of recovery with a slightly improved industry development.
Investment Growth Needs Improved Market Access
China has taken a number of meaningful steps this year towards implementing reforms aimed at greater openness and equal treatment of foreign entities in the Chinese market. Almost half of the surveyed companies (45%) positively acknowledge China’s commitment to further open its market. This is indeed progress, but still far from a comprehensive systematic market opening at all levels. Direct and indirect market access barriers still exist in China, with two in three respondents reporting that they face restrictions. The survey results also reveal that the more challenging market access barriers for German companies are indirect, such as obtaining licenses, disproportionate tendering processes and insufficient lead time when implementing new regulations. Despite reported market access barriers, the surveyed companies see various significant opportunities emerging in the Chinese market. Consistent this finding, two thirds of surveyed German firms plan to invest in China within the coming two years, with new manufacturing (46%) or office (37%) facilities topping the list. However, limited market access remains a barrier to further growth. One in two (53%) of all surveyed companies would even likely or very likely increase their investments in China if greater market access were granted.
Reform Efforts Acknowledged But Regulatory Challenges Remain
The need to level the playing field for foreign companies remains challenging and skepticism continues on several reform promises. More than one third of surveyed German companies assess some of the structural economic policy reforms as insufficient. On the other hand, policy reforms with regards to “enforcement of environmental regulations” as well as China’s “anti-corruption campaign” are perceived as sufficient. While acknowledging with the progress of environmental law enforcement, the implementation of these regulations has, nonetheless, been accompanied by disproportionately strict measures that affect production, supply chains and, ultimately, the strategic investment decisions of German companies. More than two thirds (71%) of companies surveyed, found their most important regulatory business challenge in 2019 is market access barriers and investment restrictions. For around every second respondent, legal uncertainty and unclear regulatory frameworks as well as technology transfer requirements are the top prioritized pressing hurdles. Human-resource related challenges remain at the top the list of obstacles facing the operational business of the companies surveyed. Around three out of four respondents state that finding and retaining qualified staff is their no. 1 operational business challenge. This year, the issue of difficulties obtaining visa/work permits for foreign employees in China significantly rose from rank 13 to 3 when compared to last year’s survey results. Furthermore, about half a year ahead of the planned introduction of a comprehensive national scoring system for companies, around seven out of ten German companies in China are not familiar with the system, its mode of operation and its objectives in the business context.
Trade Dispute Impacts Noticeably
In 2019, the bilateral relations between China and the US were characterized by the ongoing trade dispute, resulting in mutual implementation of punitive tariffs. The majority (83%) of the surveyed German companies operating in China feel either directly or indirectly affected by this conflict. More than every second company reports indirect impacts via supply chains or through growing volatility in global markets. While 40% do not intend to implement any changes, other companies surveyed see diverse potential consequences ranging from revisions of product portfolios, shifting focus to other markets through to relocate production sites. However, the majority (77 %) of surveyed companies are not considering moving operations out of China, which demonstrates the importance of the Chinese market.