2023 AmCham China Business Climate Survey – Insights and Analysis
AmCham’s annual survey on the business environment in China reveals that many foreign companies are concerned about challenges stemming from US-China tensions, COVID-19 era restrictions, and the regulatory and policy climate for their business outlooks in 2023. However, the majority of companies still remain committed to the Chinese market, and with the abolishment of the zero-COVID policy, business sentiment may improve this year. We look at the findings of the report and discuss the challenges noted.
The American Chamber of Commerce in China (AmCham) has released its annual survey on the business climate in China. The China Business Climate Survey (BCS) Report is an annual survey, which asks member companies about a variety of factors impacting their investments in China. The BCS Report therefore provides a snapshot of the current sentiment of foreign companies toward the business environment in China.
The companies are surveyed at the end of each year and are asked about their outlook for their businesses’ growth in China in the coming year. The companies surveyed in the report covered four main sectors: Technology and R&D, Resources and Industrial, Consumer, and Services.
In the 2023 survey, respondents focused heavily on the impact of the COVID-19 pandemic, US-China tensions, and the changing regulatory and policy environment, among other factors impacting the business environment in China.
Below we look at some of the main findings of the report and provide some context and analysis of the challenges and concerns of foreign companies in China.
What did the 2023 AmCham survey find?
US-China tensions a persistent concern
The findings: The report found that the top business challenge that foreign companies foresaw for 2023 was “rising tensions in US-China relations”. This has been cited as the number one business challenge for three years in a row.
Almost all respondents cited positive bilateral relations as being important to their company’s growth in China, with 52 percent stating that it was “extremely important”. This was even more pronounced in the technology and R&D sector, in which 61 percent said it was “extremely important”.
The respondents were also very pessimistic about the possibility of US-China relations improving, with 46 percent stating that they would deteriorate in 2023; only 13 percent said they will improve.
The survey also cast doubt on the efficacy of the Phase One Trade Deal, in which China committed to purchasing US$200 billion worth of US goods over a two-year period. In the survey, nearly one-third of respondents said they were uncertain about how the deal would impact their business, while 40 percent said it was somewhat stabilizing to the bilateral relationship.
Analysis: The fact that US-China tensions are listed as a major business challenge for the largest proportion of companies indicates that the deteriorating bilateral relations over the last couple of years is having a tangible impact on companies operating in China.
Since taking office in early 2021, the Biden administration has kept in place Trump-era tariffs on Chinese goods and has also launched a campaign against Chinese technology companies, most notably by implementing major export controls on products for the Chinese semiconductor industry in 2022. It has also expanded the number of Chinese companies on the “Entity List” (a list of companies that are subject to export controls), adding an additional 28 Chinese companies as recently as March 2.
China has retaliated by adding US companies to its “Unreliable Entities List”, which prohibits companies from engaging in a range of activities with China, including imports and exports. However, due to the limited scope of companies affected by these sanctions, the move has been seen as largely symbolic.
In January of this year, China’s Ministry of Commerce also solicited public feedback on a draft catalogue of technologies that are prohibited or restricted from being exported. If implemented, this would restrict the export of key solar technology, which could hamper the solar industry in the US and the EU.
These recent developments indicate that the concerns of foreign companies are unlikely to be resolved soon, as there is currently little to indicate that tensions will subside in the near future.
However, it bears mentioning that US-China trade has continued to grow despite the worsening relations, with trade in goods hitting a new record in 2022. Above all, these figures show that the two countries remain highly reliant upon each other and that they will have to continue to work with each other in the future.
COVID-19 impacting 2022 revenue and 2023 outlook
The findings: After US-China tensions, the most-cited business challenge going into 2023 was “COVID-19” prevention measures, with 55 percent of respondents listing it as a concern. Notably, this was not among the top five business challenges for companies in 2021 and 2022.
In addition, the report found that foreign companies overwhelmingly anticipated that their 2022 revenue results would be impacted by COVID-19 measures. When asked to what extent measures such as intermittent lockdowns would impact 2022 revenue results, 60 percent responded saying that revenue results would go down as a result, while just 17 percent said it would go up.
The impact of COVID-19 measures was felt more acutely by companies in consumer sectors, with 70 percent of respondents in this sector saying that revenue would go down, of which 8 percent said it would go down by 50 percent or more.
Overall, 56 percent of respondents characterized their business as unprofitable in 2022 (not exclusively due to the pandemic), of which 34 percent said they expected to break even. Meanwhile, 44 percent characterized their business as profitable, the lowest number since the start of the pandemic and a 25.4 percent decrease from 2021.
COVID-19 measures were also cited as a major challenge for HR and headhunting. Over half of the respondents said they would either maintain their current headcount or decrease it in 2023. Meanwhile, 65 percent said that COVID-19 was a factor in their decision to either increase, maintain, or decrease their headcount.
Analysis: 2022 was an unprecedented year even in the context of the pandemic. This is why COVID-19 measures were not cited among the top five business challenges in the 2020 and 2021 surveys. In 2022, the Omicron variant of COVID-19 spread quickly to many parts of the country, leading to the largest outbreaks recorded in China since the start of the pandemic (prior to the lifting of the zero-COVID policy).
The prevention measures implemented were therefore stricter, more widespread, and more sporadic than in previous years – even compared to 2020, when strict lockdowns were largely confined to certain areas and were almost all lifted by the second half of the year.
In 2022, lengthy lockdowns in cities, such as Shanghai, Shenzhen, Jilin, and Chengdu, as well as significant restrictions in cities, such as Beijing and Tianjin, caused major disruption to economic activity, forcing businesses to stop or scale down their operations for long stretches of time.
The low profitability anticipated among the majority of companies in 2022 therefore reflects the overall slowdown of the Chinese economy. The overall GDP rate last year was 3 percent, slowing from 8.1 percent in 2021. In Shanghai, where many foreign companies have operations, the local GDP declined by 0.2 percent.
However, these factors have virtually disappeared since the government began lifting COVID-19 restrictions, which began in late 2022. The fact that “COVID-19 measures” is listed as a top business challenge going into 2023 is therefore more indicative of the period in which the survey was conducted, rather than a reflection of the current reality.
Given that there are almost no more COVID-19 restrictions in place, it is likely that if surveyed now, the respondents would not list COVID-19 measures as a top business concern. When asked what actions respondents hoped the Chinese government would take, the top response was “Ease the COVID-19-related restrictions” – an action that has now been taken.
Because of the switch to “living with COVID”, both the Chinese economy and company profitability is expected to rebound in 2023.
Regulatory environment and legal compliance remain a challenge
The findings: The respondents cited “inconsistent regulatory interpretation and unclear laws and enforcement” and “regulatory compliance risks” among the top five business challenges in 2023. In 2021 and 2022, “concerns about data security” was also among the top five business challenges for the coming year.
When asked about the estimated increase in investment in China operations for 2023, more than half of respondents said they would make no change or decrease investments (46 percent planned no expansion and nine percent planned to decrease investment). Among these, 33 percent cited “concerns about an uncertain Chinese policy environment” as the main reason for maintaining or reducing investment in 2023, the largest factor. This rose to 48 percent among respondents in the consumer sector.
Meanwhile, when asked about the impact of recent regulatory actions, such as data privacy, anti-monopoly, and social regulations, 38 percent of respondents said that it would lead them to “emphasize and reinforce internal compliance and controls”. Another 30 percent stated that the regulations are “contributing to uncertainty and worry among headquarters”, and 17 percent responded they are “decreasing our confidence and willingness to invest in China”.
While the majority of respondents said that innovation and R&D are important to their future growth in China, issues surrounding policies and regulations were cited among the top five barriers to achieving this. These barriers are:
Increased restrictiveness of cybersecurity-related policies – 19 percent of respondents
Increased restrictiveness of data privacy-related policies – 17 percent of respondents
Vague policies and lack of detailed implementation guidelines – 13 percent of respondents
Finally, the tech and R&D sector companies were particularly concerned with the impact of the new “legal data localization requirements”, with 84 percent of respondents in the sector citing this as having a negative impact on their business. Around 55 to 65 percent of companies from the other sectors responded in the same way.
Analysis: The last few years have seen major developments in China’s policy and regulatory environment. On the policy side, we have seen major changes to the government’s policies toward the education, technology, and real estate industries, among others, which have hugely impacted the industries. Some of these policies have eased more recently – such as the so-called “tech crackdown” – but a certain level of uncertainty and unpredictability remains.
Meanwhile, on the regulatory side, there have been major overhauls of the cybersecurity and data protection regulatory environment over the last few years. The regulations that have a particular impact on foreign companies include restrictions on the cross-border transfer of data and personal information, storage localization requirements for data and personal information collected in China, as well as cybersecurity and personal information protection obligations.
These regulations significantly increase compliance and administrative burdens on foreign companies whose operations are by nature cross-border. Moreover, many of these regulations have been released with little explanation for how they will be implemented, or how companies will be expected to comply with them.
There have been some improvements to this situation in 2022, however. Building upon the major pieces of legislation that came into effect in 2021, most notably the Personal Information Protection Law, China’s cybersecurity regulator has released a range of interpretation guidance and supplementary guidelines to help with the implementation. These include a series of documents on how to legally engage in cross border data transfer, with one set of guidelines being released as recently as February.
While these guidelines will not remove all barriers to operations, they will make compliance easier, which could help to ease some of the current administrative burdens. At the same time, some gaps remain in the implementation of these regulations, which may be filled with further guidelines over the coming months and years.
What does all this mean for the business environment in China?
It is clear that the confidence of foreign businesses has been shaken by three years of strict COVID-19 prevention measures. With the removal of almost all of the associated restrictions, many of these challenges and concerns will subside quickly, and businesses are likely to see better performance in 2023. As this was the single top concern for businesses in China going into 2023, we anticipate a significant improvement to the overall sentiment over the coming year, even if not all concerns have been addressed.
It is also possible that the impact of COVID-19 on businesses last year will have somewhat skewed the results of the survey to be slightly more pessimistic than is currently the case, especially regarding the impact of COVID-19 on future investments and operations.
There are nonetheless still challenges facing foreign businesses in China, many of which may not be resolved so quickly or easily, such as the ongoing US-China tensions. With the removal of COVID-19 as a factor, this is likely to become one of the most important challenges for US companies in China, besides the changing policy and regulatory environment.
The survey also showed that more companies were considering diversifying by relocating some of their operations to other countries. When asked 24 percent said they have decided or are considering moving capacity outside of China. This is a 10-percentage point increase from last year’s survey. The reasons for considering or deciding to move some operations to other countries include US-China tensions, rising labor costs, and COVID-19 restrictions.
This reflects a wider – and perhaps inevitable – shift in global manufacturing and supply chains. With increasing instability and rising costs in global supply chains, stemming from a wide range of factors, such as geopolitical conflicts, inflation, and climate change, diversifying supply is increasingly becoming a necessity. “Nearshoring”, where companies locate their manufacturing facilities closer to their end market, appears to be an inexorable trend in global manufacturing, with Chinese companies getting in on it too.
However, the survey also showed that China remains an important investment destination and that its manufacturing prowess continues to be a draw for foreign firms. Regarding the question about moving manufacturing and sourcing outside of China, 74 percent of respondents said they were not considering it.
The survey also highlighted several ways in which the Chinese market is still highly attractive to foreign companies. For instance, “growth in consumption/rise of an increasingly sizeable and affluent middle class” were cited among the top three important opportunities for businesses in China across all sectors. Other draws included “globalization of Chinese companies and increased outbound investment”, “ongoing economic and market reforms”, and “adoption of digital technologies”.
Source: China Briefing