2023 has been about recovery: recovery of relationships, revenues, and – in more ways than one – our collective sanity, writes Tom Simpson
Over the past year, we have seen a gradual rapprochement of Western relations with China, including the UK, after a few years of tense relations and largely constructive introspection. This was particularly the case over the last four months with James Cleverly’s visit to Beijing and the Biden-Xi meeting in San Francisco. And March’s Integrated Review refresh helped to provide some much-needed structure to the UK government’s approach to relations with China.
The volume and seniority of inward visits coming to China has been high and sustained throughout the year, with global executives, state leaders and the trade delegations making their way here. The last quarter of 2023 felt much like 2019 in terms of business programming and traffic flow in China.
Meanwhile, the landscape remains mixed for British businesses operating in China, with three distinct investor profiles emerging:
1. Confident and investing: This group consists primarily of the largest UK investors in China as well as those with significant market share or revenue exposure. In most cases, this group operates local business units that have grown over multiple decades. A sizable number of SMEs with strong market fit also fall into this category. Larger investments by this group that CBBC has supported in 2023 range from $100 million (£78.4 million) to upwards of $1 billion (£784 million) and more announcements are anticipated for 2024.
2. Hesitant but growing: The largest of the three groups and consisting of a wide body of sectors and company sizes. The hesitancy tends to be concentrated at the HQ level rather than local and is due to a combination of geopolitics, sluggish domestic and international economic outlook, or commercial considerations (competition, pressure on margins, regulation, etc.). Add also the fact that British companies tend to lean more conservative than our comparators, such as those from the US.
3. Recovering revenue or struggling for growth: Companies in this group are often facing strong headwinds from competition and regulatory barriers, economic challenges such as the real estate crisis and/or weak demand, or are still working to recover revenues from the impact of Covid restrictions. This group is generally not considering leaving China and is instead reorienting its strategic approach to return to a growth trajectory. In a very small number of cases, companies have decided to exit – although this is not uncommon in any given year due to mostly commercial failure. However, in one case, a company (Graphcore) did opt to exit China this year due to US semiconductor controls in a rare case of a UK company getting caught directly in the crossfire of geopolitics.
As we head into 2024, talk will continue to focus on the performance of the Chinese economy and potential risks (real estate, local Government debt levels, domestic demand, oversupply) in addition to recovering investor confidence among both domestic and foreign investors. This was also the focus at the beginning of 2023, when I wrote an article reflecting on the long-term challenges the current mix of headwinds present for China.
The Chinese Government will continue to take steps to reassure investors of their commitment to supporting the economy and, in particular, the private sector. This will have a positive effect; however, any shift in sentiment is likely to be gradual due to continued uncertainty around geopolitics and the macroeconomy.
Regardless, foreign MNCs with significant traction in China will continue to invest into their operations in the pursuit of growth. R&D and M&A will be a major focus as a way to counter the increasing fronts of competition with domestic companies. Localisation will remain a major theme. MNCs will also turn to more creative ways of financing investments in China, including through local banks (see BASF’s recent RMB 40 billion syndicated bank loan as a leading example) motivated by comparatively cheaper rates and the need to commit cash to other key markets.
China will remain a critical front for the future of many MNCs as a focal point for facing up to competition, innovating technology and services, and maintaining or growing global market share.
I also expect we will see an uptick in investment activity into the UK from China, both by State-owned and private investors. This investment will be aimed towards renewables, batteries and EVs — all areas the UK Government is actively promoting — but also consumer and niche segments of healthcare, manufacturing and technology. This is despite continued concerns among Chinese investors regarding the degree to which their investment is still welcome. More work is required to shift this perception, and CBBC will continue to play a central role on this front.
Meanwhile, trade between the UK and China will continue to perform strongly in 2024 and likely set new records, both in terms of exports and imports. UK exports to China had a bumper 12 months up to the end of September, growing by +10.6% to £138.6 billion (inc HK) — the highest 12 months on record. UK exports grew a staggering 71% to £44.4 billion in this period.
Nevertheless, despite the overall positive outlook for growth of UK-China trade, export controls will remain a challenge for many UK exporters. Clearly, more work needs to be done to improve the process. Again, this will form a core focus for CBBC’s work to support our members next year.
It’s been a productive year for CBBC across China and the UK. As a bilateral trade and investment organisation, we thrive on engagement, so 2023 was like taking a big dose of medicine. I look forward to continuing to build upon this momentum into 2024, my seventeenth year in China, and beyond.
