According to the Business Confidence Survey presented by the European Chamber of Commerce in China on Wednesday, the sentiment among European companies is the worst it has been in 20 years. More than one in ten companies have already withdrawn investments from China. The conditions for foreign businesses remain challenging even as the COVID-19 pandemic subsides, writes Frank Sieren, who has examined the figures more closely. In addition, there are geopolitical tensions. Many companies are considering “how many eggs they want to keep in their China basket,” explained Jens Eskelund, the new president of the EU Chamber of Commerce in China, upon the release of the survey results.
In an interview with Christiane Kuehl, Eskelund delves into what the Chamber and the companies are currently concerned about. The term “de-risking” is still on everyone’s lips, but it is still not clear what it actually means in the ultimate sense. “We think that there is still a lot of work to do to give content to this concept – and also to think about what it means in the Chinese context.”
China itself has been implementing a form of de-risking towards Western companies for years. However, it is called “Made in China 2025”, “Dual Circulation”, or “14th Five Year Plan”. Eskelund believes that there are still significant opportunities in China in certain sectors. But Beijing also has a lot to do to prove that it can provide foreign companies with an efficient and predictable business environment where they would be happy to settle.
You have just taken up your position as EUCCC president. What do you see as the most pressing issue at this early stage of your tenure?
At the moment, the whole discussion about ‘de-risking’ is our main cause. There is a lot of talk about ‘de-Risking’ in Europe, and there is a lot of talk about ‘de-Risking” in China. And we think that there is still a lot of work to do to give content to this concept, in terms of its quality or its terms. So we need to begin taking a closer look at what this idea means in Europe – and also thinking about what it means in the Chinese context. Actually, China has been de-risking for the past decade. They just call it something else: ‘Made in China 2025’, ‘Dual Circulation’ or even ’14th Five Year Plan’. So I think it will be important to try finding a common language and to break down and deconstruct the concept.
How can the de-risking of the EU work?
We need to thoroughly analyze what is perceived as a risk and as a vulnerability when we look at trade and production flows, in order to to get to a much better understanding of what ‘de-risking’ means to the actual business. That is a priority. But it will need a little bit of thinking and cannot be accomplished overnight. Words matter a lot, and this is an agenda-setting concept, same as the 2019 EU concept of China as a partner, competitor and strategic rival. So we need to be really clear about the concept and its implications.
China is still an important trading partner for most countries in Europe, particularly Germany, so diversifying away from it will be complicated. What do you expect?
I think a lot of things are not really going to change. As for manufacturing, China has been continuing to increase its share of global export. What we see right now is that there is a continued high focus on supporting the supply side in export manufacturing, through policies like easier access to credit. So I think we will continue to see China being quite strong on the export production side, which is somewhat supported by the weakening of the renminbi, at least in the short term.
That doesn’t sound bad for the Chinese economy at first.
On the other hand though, the weak Yuan is not doing a lot of good to Chinese households, because it makes imported stuff more expensive. This shows that government support is now flowing more to the supply side rather than to the demand side. We don’t see many measures that support consumption growth these days. But that’s what we would like to see.
What would help to boost consumption?
China’s people need to feel that the real estate sector is stabilizing. 70 percent of household wealth is tied up in real estate, and as long as people feel uncertain about where real estate is going, they will be conservative in their spending habits.
How do you see China’s current economic situation in general, post-Covid?
It is still early days to evaluate the reopening. We saw things were going relatively well in the first quarter, followed by some softening in the second quarter. So, yes, we are a bit concerned, we do see weaknesses in some sectors, especially in big-ticket manufactured goods, while services performed better. We may have a clearer picture in three months from now.
How much does this uncertainty about growth hit European companies?
My observation is that GDP figures are becoming less and less important and you need to look much more closely at sectors. When China was growing 12 percent a year, everyone could grow in China. I think now that growth is softening, you need to be looking a bit more carefully to pick the winners, because growth is not universal anymore. But in some sectors, there are still significant opportunities in China.
Which sectors?
We have made the point previously in one of our papers that China will mean different things in different industries. There are certain industries where China is going to account for more than half of global demand going forward. And you have others that are simply so complicated that you might ask yourself, is China really for me? So if you are doing specialty chemicals, then China is the place to be. But if you make digital platforms or digital content, then China could be a bit more difficult.
Companies are complaining about the various security laws that make their life increasingly difficult. At the same time, Europe is working on laws forcing enterprises to assess and control their value chains abroad. What does all this mean for long-established or new value chains in China? And how can companies navigate in this complicated environment – SMEs in particular?
If you are not a very large company, and it comes to a point where you have to establish and run two separate value chains – one for the West, and one for China – the cost might become prohibitively high. I would rather invest in one value chain that works very well, in a market that I know – rather than beginning to establish two, and run the second one in a market I am not too well acquainted with.
Does this have concrete consequences for European companies?
It is beginning to impact investment decisions. If I cannot predict with some amount of certainty, what the world is going to look like five years from now, and whether China will be the right place for me at that point, I will not invest. I actually don’t know of a single SME that has established itself in China since the beginning of Covid. It’s not all related to politics. But I think a lot of our companies were shaken during Covid, when they realized how vulnerable their supply chains were and how dependent they had become on a single location.
What can companies do about this?
People are sitting over their calculators trying to figure out what investments they need to make – and how those investments match the expected profits they could make in the Chinese market. And the more the costs of separating the value chain rise, the higher the threshold at which it becomes interesting for companies to set up shop here.
How does that play out in China?
This poses a risk and shrinks the variety in size and types of companies that have a longer-term interest in coming to China. I think these are exactly the kind of conversations we need to have with the Chinese government: Regulations and restrictions have consequences in real life, and consequences in invested Euros and US Dollars. So Beijing has some work to do in order to demonstrate to the international business community that China is an efficient and predictable place where companies can come and put down roots.
Is it true that local governments continue to be eager to attract foreign companies – all the while the central government is putting more attention on security and stability these days, with less focus on business?
Yes, there is a lot of interest in most provinces and municipalities in attracting foreign investment – especially under the present circumstances of a softening economy. I think anything that boosts economic activity is welcome. I certainly recognize that myself when I am traveling around. There is a high appetite for engaging with the foreign business community – and we of course appreciate that.
Beijing sends a not-so-open message.
Frankly, many of us got a bit concerned after the CCP Congress in October where there was so much focus on security and self-reliance which seemed to push in the other direction. But then we had the NPC in March, where talk was a lot more about unwavering support for reform and opening up, which was nice to hear.
What do you think the direction will be in the future?
At this point, we don’t really know which side is for real. It is wonderful that local governments want to talk to us. We like the attention. But will it translate to results on the ground? I think that remains to be seen.
Jens Eskelund has lived in China for 25 years and is the chief representative of the Danish Maersk Group. He has already served two terms as Vice President of the EU Chamber – from 2019 to 2021 and from October 2022 to May 2023 – and has also been actively involved in the Chamber’s working groups since its inception. He has also been a board member and chairman of the Danish Chamber of Commerce in China.
The recent G7 summit in Hiroshima and the subsequent G20 tourism meeting in Kashmir underscored the stark contrast between the two groups’ rhetoric. While the G20 emphasized its “one Earth, one family, one future” motto, the G7’s combative attitude could be summarized as “We must divorce China.”
For the member states of the Association of Southeast Asian Nations (ASEAN), decoupling is not an option. While the region could benefit from production and investment shifting away from China to ASEAN countries, a full economic decoupling between the Chinese economy and the West could also result in trade diversion, higher production costs, and reduced welfare over the long term.
The push to decouple the American and European economies from China currently seems to be limited to sectors such as energy, semiconductors, information and communication technology, mining, and minerals. But decoupling is expected to affect nearly every industry, including machinery, mechanical appliances, electrical components, and automobiles.
Given that ASEAN economies are equally dependent on the United States, the European Union, China, and East Asia, the bloc must maintain neutrality, refrain from taking sides, and strengthen cooperation. By leveraging their growing economic and political influence, member states could promote peace, foster cooperation, and increase engagement with the international community.
Amid the intensifying geopolitical rivalry between the US and China, ASEAN countries must also deepen regional economic integration. Over the past two decades, intra-ASEAN trade as a share of members’ total trade has stagnated at around 22-23 percent. To be sure, members’ exports to the rest of the world have increased over this period. But ASEAN countries’ share of global trade barely increased between 2000 and 2022, growing from 6.4 percent to 7.8 percent.
There are three possible explanations for the stagnation of intra-ASEAN trade since the turn of the century. The first is the region’s model of shallow integration. Because most ASEAN-made products are substitutes rather than complements, the scope for increased trade between members is inherently limited.
Second, stricter rules of origin and non-tariff measures could act as trade barriers. While these regulations and procedures are aimed at ensuring health, safety, and environmental protections, their design and implementation can inadvertently impede trade and investment.
Lastly, it is important to recognize that ASEAN is not a self-contained region. Member states rely heavily on investment and technology from countries such as Japan, South Korea, and China. And while the bloc functions as a united group, it is not a customs union, which means that member states may engage with other countries or blocs on their own. This flexibility enables members to pursue their own interests and seek diverse partnerships and agreements while maintaining the cohesion and vitality of the ASEAN community.
The Regional Comprehensive Economic Partnership, which includes all ten ASEAN countries, China, Japan, South Korea, Australia, and New Zealand, is a case in point. Representing roughly one-third of global GDP and one-quarter of the world’s total trade and investment, the RCEP is the world’s largest free-trade area, and its aim is to foster greater trade integration by reducing tariffs on 90 percent of product lines.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (previously known as the Trans-Pacific Partnership) is another example. Since 2018, four ASEAN countries – Singapore, Vietnam, Brunei, and Malaysia – have joined the CPTPP, which accounts for roughly 13 percent of global GDP and aims to reduce tariffs on 98 percent of product lines.
The Indo-Pacific Economic Framework for Prosperity (IPEF), a newly established grouping launched by US President Joe Biden’s administration in May 2022, also seeks to foster regional partnerships. But the agreement has faced criticism for being exclusionary and divisive. In addition to the US, Japan, South Korea, India, Australia, and New Zealand, seven ASEAN countries – Singapore, Thailand, Indonesia, Malaysia, the Philippines, Vietnam, and Brunei – have joined the IPEF. But Cambodia, Laos, and Myanmar have been left out of this new framework.
Such exclusions could exacerbate economic disparities between ASEAN members and heighten regional tensions, offsetting the benefits of existing mega-regional trade agreements, such as the RCEP. Some critics have argued that the IPEF is largely symbolic and intended to appeal to American voters rather than implement effective policies that benefit its members. Likewise, trade ministers from across the Indo-Pacific recently convened in Detroit to discuss a series of measures aimed at bolstering supply chains for essential goods, such as semiconductors and critical minerals. But the agreement they reached lacks clear policy objectives beyond reducing dependency on China.
Unable to afford to decouple from either side, the intensifying rivalry between China and the West puts ASEAN countries in a difficult position. Trade between the bloc’s member states and Europe more than tripled between 2000 and 2022, from 111 billion to 342 billion dollars. Similarly, ASEAN’s trade with the U.S. has increased from 135 billion to 452 billion dollars. ASEAN exports to the U.S. nearly quadrupled over the same period, from 88 billion to 357 billion dollars.
At the same time, trade between ASEAN and China reached 975.3 billion dollars in 2022, an astounding 24-fold increase from 2000. ASEAN countries’ exports to China increased by a factor of 18 during this period, from 22.2 billion to 408.1 billion dollars.
Moreover, East Asia, the US, and the EU are all significant sources of foreign direct investment in ASEAN countries. In 2021, East Asian countries accounted for 33 percent of total FDI in the region, while the US and EU accounted for 22 percent and 15 percent, respectively.
Given the depth of these economic ties, urging ASEAN countries to decouple from China is deeply unfair. It is also short-sighted, because decoupling would undermine trade and economic development within the bloc, fueling political instability across the region.
Lili Yan Ing, Secretary General of the International Economic Association, is Lead Adviser for the Southeast Asian region at the Economic Research Institute for ASEAN and East Asia.
Copyright: Project Syndicate, 2023
Namaste, welcome to World Yoga Day. These yogis are performing their Virabhadrasana II pose in the Lotus Pond of Tiande Park in Taizhou. June 21st has been recognized as International Day of Yoga since 2015, celebrating the spiritually inclined sport.
According to the Business Confidence Survey presented by the European Chamber of Commerce in China on Wednesday, the sentiment among European companies is the worst it has been in 20 years. More than one in ten companies have already withdrawn investments from China. The conditions for foreign businesses remain challenging even as the COVID-19 pandemic subsides, writes Frank Sieren, who has examined the figures more closely. In addition, there are geopolitical tensions. Many companies are considering “how many eggs they want to keep in their China basket,” explained Jens Eskelund, the new president of the EU Chamber of Commerce in China, upon the release of the survey results.
In an interview with Christiane Kuehl, Eskelund delves into what the Chamber and the companies are currently concerned about. The term “de-risking” is still on everyone’s lips, but it is still not clear what it actually means in the ultimate sense. “We think that there is still a lot of work to do to give content to this concept – and also to think about what it means in the Chinese context.”
China itself has been implementing a form of de-risking towards Western companies for years. However, it is called “Made in China 2025”, “Dual Circulation”, or “14th Five Year Plan”. Eskelund believes that there are still significant opportunities in China in certain sectors. But Beijing also has a lot to do to prove that it can provide foreign companies with an efficient and predictable business environment where they would be happy to settle.
You have just taken up your position as EUCCC president. What do you see as the most pressing issue at this early stage of your tenure?
At the moment, the whole discussion about ‘de-risking’ is our main cause. There is a lot of talk about ‘de-Risking’ in Europe, and there is a lot of talk about ‘de-Risking” in China. And we think that there is still a lot of work to do to give content to this concept, in terms of its quality or its terms. So we need to begin taking a closer look at what this idea means in Europe – and also thinking about what it means in the Chinese context. Actually, China has been de-risking for the past decade. They just call it something else: ‘Made in China 2025’, ‘Dual Circulation’ or even ’14th Five Year Plan’. So I think it will be important to try finding a common language and to break down and deconstruct the concept.
How can the de-risking of the EU work?
We need to thoroughly analyze what is perceived as a risk and as a vulnerability when we look at trade and production flows, in order to to get to a much better understanding of what ‘de-risking’ means to the actual business. That is a priority. But it will need a little bit of thinking and cannot be accomplished overnight. Words matter a lot, and this is an agenda-setting concept, same as the 2019 EU concept of China as a partner, competitor and strategic rival. So we need to be really clear about the concept and its implications.
China is still an important trading partner for most countries in Europe, particularly Germany, so diversifying away from it will be complicated. What do you expect?
I think a lot of things are not really going to change. As for manufacturing, China has been continuing to increase its share of global export. What we see right now is that there is a continued high focus on supporting the supply side in export manufacturing, through policies like easier access to credit. So I think we will continue to see China being quite strong on the export production side, which is somewhat supported by the weakening of the renminbi, at least in the short term.
That doesn’t sound bad for the Chinese economy at first.
On the other hand though, the weak Yuan is not doing a lot of good to Chinese households, because it makes imported stuff more expensive. This shows that government support is now flowing more to the supply side rather than to the demand side. We don’t see many measures that support consumption growth these days. But that’s what we would like to see.
What would help to boost consumption?
China’s people need to feel that the real estate sector is stabilizing. 70 percent of household wealth is tied up in real estate, and as long as people feel uncertain about where real estate is going, they will be conservative in their spending habits.
How do you see China’s current economic situation in general, post-Covid?
It is still early days to evaluate the reopening. We saw things were going relatively well in the first quarter, followed by some softening in the second quarter. So, yes, we are a bit concerned, we do see weaknesses in some sectors, especially in big-ticket manufactured goods, while services performed better. We may have a clearer picture in three months from now.
How much does this uncertainty about growth hit European companies?
My observation is that GDP figures are becoming less and less important and you need to look much more closely at sectors. When China was growing 12 percent a year, everyone could grow in China. I think now that growth is softening, you need to be looking a bit more carefully to pick the winners, because growth is not universal anymore. But in some sectors, there are still significant opportunities in China.
Which sectors?
We have made the point previously in one of our papers that China will mean different things in different industries. There are certain industries where China is going to account for more than half of global demand going forward. And you have others that are simply so complicated that you might ask yourself, is China really for me? So if you are doing specialty chemicals, then China is the place to be. But if you make digital platforms or digital content, then China could be a bit more difficult.
Companies are complaining about the various security laws that make their life increasingly difficult. At the same time, Europe is working on laws forcing enterprises to assess and control their value chains abroad. What does all this mean for long-established or new value chains in China? And how can companies navigate in this complicated environment – SMEs in particular?
If you are not a very large company, and it comes to a point where you have to establish and run two separate value chains – one for the West, and one for China – the cost might become prohibitively high. I would rather invest in one value chain that works very well, in a market that I know – rather than beginning to establish two, and run the second one in a market I am not too well acquainted with.
Does this have concrete consequences for European companies?
It is beginning to impact investment decisions. If I cannot predict with some amount of certainty, what the world is going to look like five years from now, and whether China will be the right place for me at that point, I will not invest. I actually don’t know of a single SME that has established itself in China since the beginning of Covid. It’s not all related to politics. But I think a lot of our companies were shaken during Covid, when they realized how vulnerable their supply chains were and how dependent they had become on a single location.
What can companies do about this?
People are sitting over their calculators trying to figure out what investments they need to make – and how those investments match the expected profits they could make in the Chinese market. And the more the costs of separating the value chain rise, the higher the threshold at which it becomes interesting for companies to set up shop here.
How does that play out in China?
This poses a risk and shrinks the variety in size and types of companies that have a longer-term interest in coming to China. I think these are exactly the kind of conversations we need to have with the Chinese government: Regulations and restrictions have consequences in real life, and consequences in invested Euros and US Dollars. So Beijing has some work to do in order to demonstrate to the international business community that China is an efficient and predictable place where companies can come and put down roots.
Is it true that local governments continue to be eager to attract foreign companies – all the while the central government is putting more attention on security and stability these days, with less focus on business?
Yes, there is a lot of interest in most provinces and municipalities in attracting foreign investment – especially under the present circumstances of a softening economy. I think anything that boosts economic activity is welcome. I certainly recognize that myself when I am traveling around. There is a high appetite for engaging with the foreign business community – and we of course appreciate that.
Beijing sends a not-so-open message.
Frankly, many of us got a bit concerned after the CCP Congress in October where there was so much focus on security and self-reliance which seemed to push in the other direction. But then we had the NPC in March, where talk was a lot more about unwavering support for reform and opening up, which was nice to hear.
What do you think the direction will be in the future?
At this point, we don’t really know which side is for real. It is wonderful that local governments want to talk to us. We like the attention. But will it translate to results on the ground? I think that remains to be seen.
Jens Eskelund has lived in China for 25 years and is the chief representative of the Danish Maersk Group. He has already served two terms as Vice President of the EU Chamber – from 2019 to 2021 and from October 2022 to May 2023 – and has also been actively involved in the Chamber’s working groups since its inception. He has also been a board member and chairman of the Danish Chamber of Commerce in China.
The recent G7 summit in Hiroshima and the subsequent G20 tourism meeting in Kashmir underscored the stark contrast between the two groups’ rhetoric. While the G20 emphasized its “one Earth, one family, one future” motto, the G7’s combative attitude could be summarized as “We must divorce China.”
For the member states of the Association of Southeast Asian Nations (ASEAN), decoupling is not an option. While the region could benefit from production and investment shifting away from China to ASEAN countries, a full economic decoupling between the Chinese economy and the West could also result in trade diversion, higher production costs, and reduced welfare over the long term.
The push to decouple the American and European economies from China currently seems to be limited to sectors such as energy, semiconductors, information and communication technology, mining, and minerals. But decoupling is expected to affect nearly every industry, including machinery, mechanical appliances, electrical components, and automobiles.
Given that ASEAN economies are equally dependent on the United States, the European Union, China, and East Asia, the bloc must maintain neutrality, refrain from taking sides, and strengthen cooperation. By leveraging their growing economic and political influence, member states could promote peace, foster cooperation, and increase engagement with the international community.
Amid the intensifying geopolitical rivalry between the US and China, ASEAN countries must also deepen regional economic integration. Over the past two decades, intra-ASEAN trade as a share of members’ total trade has stagnated at around 22-23 percent. To be sure, members’ exports to the rest of the world have increased over this period. But ASEAN countries’ share of global trade barely increased between 2000 and 2022, growing from 6.4 percent to 7.8 percent.
There are three possible explanations for the stagnation of intra-ASEAN trade since the turn of the century. The first is the region’s model of shallow integration. Because most ASEAN-made products are substitutes rather than complements, the scope for increased trade between members is inherently limited.
Second, stricter rules of origin and non-tariff measures could act as trade barriers. While these regulations and procedures are aimed at ensuring health, safety, and environmental protections, their design and implementation can inadvertently impede trade and investment.
Lastly, it is important to recognize that ASEAN is not a self-contained region. Member states rely heavily on investment and technology from countries such as Japan, South Korea, and China. And while the bloc functions as a united group, it is not a customs union, which means that member states may engage with other countries or blocs on their own. This flexibility enables members to pursue their own interests and seek diverse partnerships and agreements while maintaining the cohesion and vitality of the ASEAN community.
The Regional Comprehensive Economic Partnership, which includes all ten ASEAN countries, China, Japan, South Korea, Australia, and New Zealand, is a case in point. Representing roughly one-third of global GDP and one-quarter of the world’s total trade and investment, the RCEP is the world’s largest free-trade area, and its aim is to foster greater trade integration by reducing tariffs on 90 percent of product lines.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (previously known as the Trans-Pacific Partnership) is another example. Since 2018, four ASEAN countries – Singapore, Vietnam, Brunei, and Malaysia – have joined the CPTPP, which accounts for roughly 13 percent of global GDP and aims to reduce tariffs on 98 percent of product lines.
The Indo-Pacific Economic Framework for Prosperity (IPEF), a newly established grouping launched by US President Joe Biden’s administration in May 2022, also seeks to foster regional partnerships. But the agreement has faced criticism for being exclusionary and divisive. In addition to the US, Japan, South Korea, India, Australia, and New Zealand, seven ASEAN countries – Singapore, Thailand, Indonesia, Malaysia, the Philippines, Vietnam, and Brunei – have joined the IPEF. But Cambodia, Laos, and Myanmar have been left out of this new framework.
Such exclusions could exacerbate economic disparities between ASEAN members and heighten regional tensions, offsetting the benefits of existing mega-regional trade agreements, such as the RCEP. Some critics have argued that the IPEF is largely symbolic and intended to appeal to American voters rather than implement effective policies that benefit its members. Likewise, trade ministers from across the Indo-Pacific recently convened in Detroit to discuss a series of measures aimed at bolstering supply chains for essential goods, such as semiconductors and critical minerals. But the agreement they reached lacks clear policy objectives beyond reducing dependency on China.
Unable to afford to decouple from either side, the intensifying rivalry between China and the West puts ASEAN countries in a difficult position. Trade between the bloc’s member states and Europe more than tripled between 2000 and 2022, from 111 billion to 342 billion dollars. Similarly, ASEAN’s trade with the U.S. has increased from 135 billion to 452 billion dollars. ASEAN exports to the U.S. nearly quadrupled over the same period, from 88 billion to 357 billion dollars.
At the same time, trade between ASEAN and China reached 975.3 billion dollars in 2022, an astounding 24-fold increase from 2000. ASEAN countries’ exports to China increased by a factor of 18 during this period, from 22.2 billion to 408.1 billion dollars.
Moreover, East Asia, the US, and the EU are all significant sources of foreign direct investment in ASEAN countries. In 2021, East Asian countries accounted for 33 percent of total FDI in the region, while the US and EU accounted for 22 percent and 15 percent, respectively.
Given the depth of these economic ties, urging ASEAN countries to decouple from China is deeply unfair. It is also short-sighted, because decoupling would undermine trade and economic development within the bloc, fueling political instability across the region.
Lili Yan Ing, Secretary General of the International Economic Association, is Lead Adviser for the Southeast Asian region at the Economic Research Institute for ASEAN and East Asia.
Copyright: Project Syndicate, 2023
Namaste, welcome to World Yoga Day. These yogis are performing their Virabhadrasana II pose in the Lotus Pond of Tiande Park in Taizhou. June 21st has been recognized as International Day of Yoga since 2015, celebrating the spiritually inclined sport.
