Doing business with China: a tougher challenge
Even before the proposed tariffs threatened by America on imports heightened fears of a trade war, life was getting more difficult for companies that want to conduct business in China.
Even before the proposed tariffs threatened by America on imports heightened fears of a trade war, life was getting more difficult for companies that want to conduct business in China.
Even before the recent tweets about proposed tariffs that America could slap on imports heightened fears of a trade war, life was getting more difficult for companies that want to conduct business in China – as well as to trade with Chinese companies that have ventured overseas.
With its foreign reserves dropping by more than US$300bn last year and the Chinese yuan (CNY) down by more than 5%, China has begun introducing limits on outgoing funds. Towards the end of 2016, the State Council reportedly started to block overseas acquisitions of US$10bn or more by Chinese companies and to limit investments in real estate by state-owned enterprises to US$1bn.
More recently, the People’s Bank of China (PBOC) is believed to have imposed a limit on the ratio of outbound to inbound payments. Some banks have been asked to stop processing cross-border CNY payments until they balance inflows and outflows, according to reports by Bloomberg, and others have been told not to exceed a ratio of outbound to inbound payments. The policies, not all of which have been confirmed by China’s regulators, have put pressure on Chinese companies doing business abroad.
Late-November also saw a circular issued by the PBOC that prohibits a domestic non-financial enterprise from lending more than 30% of its equity to a foreign company in renminbi (RMB).
In the same month, China also alarmed many technology companies by approving a new cyber-security law – slated to take effect from this June – that it said was designed to reduce the increasing threats of hacking and terrorism. Some foreign companies have said that the new law threatens to shut overseas tech companies out of sectors that the Chinese government has designated as critical, as requirements for security reviews and for data to be stored on servers in China limit the attractiveness of doing business in the country.
Donald Trump’s speed in confirming the withdrawal of the US from the Trans-Pacific Partnership (TPP) agreement presents further complications, particularly for American companies and potentially for other firms as well. Despite the US decision to bale out, a trade agreement may well be signed without American participation. One emerging potential scenario is that the 11 other countries that agreed on the TPP – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – may go on to ratify it and invite China to step in and replace the US as the 12th member.
Another option is that those countries would shift towards the Regional Comprehensive Economic Partnership (RCEP) proposed by China as an alternative to the TPP. The concept of the RCEP has been on the drawing board for more than six years and is ambitious in its scope; a free trade agreement (FTA) involving no less than 16 members. These would be the 10 Association of Southeast Asian Nations (ASEAN) member states -Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – plus six major economies – Australia, China, India, Japan, New Zealand and South Korea – with which ASEAN already has FTAs.
Despite certain shortcomings, such as less stringent requirements in areas such as labour and environmental requirements, the RCEP could therefore prove easier to move forward since it already includes a similar set of countries as the TPP and also because the prospect of doing more business in China makes it attractive.
Either way, the exclusion of the US could make American products or services more expensive in China and companies in Asian countries that sign the RCEP or a revised TPP agreement could have lower-cost access to China than firms in Europe or other regions.
Waning attraction
The prospect of high tariffs on goods from China that are imported into the US, together with additional restrictive US measures that are likely be reciprocated, creates further uncertainties.
These changes, along with a slew of others, have made China a less welcoming place for foreign firms, suggesting that incoming US president Donald Trump’s ‘America First’ policy might attract more support than expected. A survey released this month by the American Chamber of Commerce (AmCham) suggests that the world’s second-largest economy is among the top three global investment destinations for 56% of the 462 companies surveyed, down from 78% in a similar poll conducted five years ago.
The number of firms that regard China as just “one among many destinations” rose from 15% to 27% over the same period, while 47% believe companies from overseas are less welcome in China than in the past. One in four of the participating companies reported that they were slowing down their investment in China or pulling out together.
Asked to highlight their areas of concern with the country, the companies cited China’s opaque rules and regulations, increasing labour costs, Chinese protectionism, attracting suitable management talent and obtaining operating licences.
William Zarit, chairman of AmCham China, which marked its 25th anniversary last April, confirmed the frostier relationship between the two biggest global economies. “There’s a sense that the Western countries, including the US, have been very open to Chinese exports and to Chinese investments, which have helped the Chinese in the last 30 years with their incredible growth,” he commented. “However we don’t see that we have the same open opportunities in China, whether it’s in trade or in investments.”
While the policy environment is likely to change even further and faster in the first half of this year, foreign corporates looking at doing business in China as well as firms that have looked at collaborating with Chinese companies venturing abroad will likely need to develop an entirely new and constantly evolving playbook to optimise their business opportunities during 2017.
However, one positive sign this month was China’s president, Xi Jinping, standing up for globalisation at this month’s World Economic Forum (WEF) summit in Davos, which surprised many. “It is true that economic globalisation created new problems, but this is no justification to write off economic globalisation altogether,” he told delegates. “Rather we should adapt to and guide economic globalisation,cushion its negative impacts and deliver its benefits for all countries.”