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2023: The year China reopened to the world

Three years of closed borders is a long time in business: here's what foreign companies can expect from China now it's reopened – and what's changed forever

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China’s sudden reopening, three years after travel restrictions severed links between its coastal cities, other Asian financial hubs, and the rest of the world, has given businesses plenty of opportunities and challenges to consider. Hawksford’s Commercial Director for China, Fabio Stella, discusses the latest trends and implications of this return to normality and what they may mean for foreign businesses in the region

launchpad CBBC

An economy just out of quarantine

Since China’s long-awaited travel restrictions were lifted on 8 January 2023, the number of daily inbound and outbound travellers has hit a three-year high, with more than 676,000 people entering or leaving the country.

Following the removal of China’s existing quotas, approximately 84% of the country’s arrivals and departures now come from inland cross-border travel via Hong Kong and Macau. Among the travellers returning to the Mainland are the many students and professionals who had migrated abroad before the pandemic and were only able to return to China following the lifting of restrictions. Business and trade are undoubtedly ready to follow.

Chinese fashion and luxury operators and purchasing teams have returned to Milan and Paris Fashion Week, while government-led trade missions to advanced industrial hubs – including the UK, Germany and Southern Europe – are back on track. CEOs and key representatives of international companies have also resumed their business trips around the region. It’s therefore no surprise that immigration agencies and consulates on both sides are now advising that, after years of difficulties, their calendars are fully booked for the first half of the year.

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The future of non-financial FDI

The reinstated link between people, economies and wider regions is now shedding light on the future of non-financial foreign direct investment (FDI), i.e., the total amount of capital injected by companies inside their Chinese subsidiaries, which in the past few years has been limited to a few giant companies in a handful of industries.

If we take Europe as an example – a region with fewer political repercussions throughout these years – Germany, the UK, the Netherlands and France have scaled to 87% of the total investment amount from all 27 member states. Among these, projects by just four large German companies in the automotive and chemical sector make up more than a third of the overall amount.

As well as posing an obvious question about the opportunities available to companies with advanced technology but limited scale, 2023 will likely offer more insight into the sectors actively promoted by China as it looks to revive its homegrown champions.

Top picks from China’s observers include everything health-related, from medical devices, drugs and food supplements, to the more mainstream food and beverage. In fashion and luxury retail, a clear focus has emerged on spending more on collectibles with high long-term value (rare leather bags, top-tier jewellery, luxury watches, etc.), rather than mere garments that now tend to be seen more and more as closet liabilities under the same trend targeting fast-fashion.

For any industry that has invested heavily in the Chinese market during the years of covid restrictions, it’s time to evaluate the effect of China’s “dual circulation strategy” to pump up local demand versus its export-led economy and the resurfacing of travel retail by Chinese tourists if they end up buying overseas, as they did previously.

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The challenges for foreign businesses

If we look at the main challenges in the Chinese market for wider businesses and industries, there are clearly struggles regarding how to keep key expatriate personnel in the country. Local rules over individual income tax and social contributions are now making this much more costly than in previous years.

In addition, companies that have applied “China +1 or 2 countries” strategies to reduce the interdependence of their supply chain over the market are considering dispatching seasoned “old China hands” to new growth markets or new projects. As a result, we may see an increase in the number of more senior roles becoming widely available to local personnel with overseas educational backgrounds. That said, companies may then be faced with the challenge of shortening the geographical and so-called ‘cultural gap’ between global headquarters and local outfits.

Restarting from certainties: For most, China is still what it was in 2019

One thing that hasn’t changed throughout the three years of covid is that any scalable business with global ambitions and the belief to turn itself into a multinational corporate (MNC) has to include China on its roadmap with a related strategy as its compass. But what are the main themes that still make China so important for businesses in Asia?

The sheer size of its domestic market and burgeoning middle class

Over the next three years, China is expected to add a further 71 million upper-middle and high-income households. No other economy has consumers with such high spending power and desire for new products. Couple this with the impressive number of suppliers and clients any company can find in its industry, even by simply selecting one of the regional specialised districts along its hyper-developed coastal areas.

The underexposure of Western companies in the Chinese market

Despite what one may think from reading mainstream Western press, a glance at the data on the volume of FDI published by the competent authorities reveals a worrying underexposure of companies from the old continent on the Chinese market, especially when compared to FDI towards the United States.

In 2021, the US recorded a total of US$ 506.1 billion for inbound FDI, with as much as US$ 318.6 billion originating from Europe. In the same period, China recorded an FDI total of approximately US$ 181 billion, with only a mere US$ 4.72 billion of European origin.

That said, it should be noted that the value of this figure is mitigated by the fact that a significant percentage of investments in the country in question come from regional hubs such as Hong Kong and Singapore. Nevertheless, analysts say the real percentage of European investment in China is estimated to be approximately 1/20 of the United States, thus presenting ample potential for growth and consolidation in the future.

China’s interconnected infrastructure

China has always seen investments in infrastructure towards a network of pathways for people and goods as a pre-requisite to attract FDI and develop obsolete provinces and areas. Unlike many of its regional competitors, the county was able to solve most of its geographical challenges through a myriad of world-class transportation hubs (42,000km of high-speed railways, 34 major deepwater ports, 2,000 minor trade ports, 180,000km of highways) supporting a logistics network that has made single-day delivery achievement available for most of its cities.

The appeal of technology development

The pace of industrial modernisation and mass adoption of Internet of Things and AI solutions in the healthcare, security, finance and education sectors via smartphones and apps, together with the robotisation of labour-intensive industries, remains unseen when considering the state of China’s economy in the post-Second World War scenario.

Safety and stability via ever-changing regulation

Although seen as a double-edged sword, China’s bureaucracy has still safeguarded its link with the real economy, avoiding extreme burdens on businesses and consumers. Regulators have overseen potential pitfalls of financial trends in the wider society (P2P lending, property bubble, tech giants’ ambitions on the gig economy), while making sure to grant tax reliefs, subsidies, and benefits to most FDI projects worth supporting.

Undergoing regional integration

Thanks to an increasing number of free trade agreements with other Asian economies and active outreach to stimulate outward direct investment (ODI)-FDI from and towards its economy, China was able to exit the status of a quasi-hermit country and find its own pace in international organisations in less than two decades. China’s access to the Regional Comprehensive Economic Partnership (RCEP) and Association of Southeast Asian Nations (ASEAN) block of nations is the ultimate symbol of its commitment to deepening integration into economic cooperation in the Asia-Pacific region with benefits for all the parties involved.

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Are we ready for China’s comeback?

Analysts have already stated that the success of China’s comeback is in the hands of its households and consumers. How much the local population decide to allocate to purchasing, travelling, savings and investments will determine the way the economy rebounds and impacts neighbouring and overseas economies.

For the opportunities that will emerge throughout the year, companies with investments and projects on the ground still hold a first-class seat and are able, as of today, to phase up a renewed commitment to the jurisdiction.

For those that are still evaluating the pros and cons of exposure and presence in the country, a new set of additional reasons to finally make that step is now hard to ignore, as the historical reasons that have made China such an attractive magnet for global businesses in the past two decades also remain.

Photo by Jerry Wang on Unsplash

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