Re-opening: China Needs to Rebuild Foreign Investor Confidence
*The following article appeared in Caixin Global’s opinion section.
As foreign businesses operating in China conclude their damage assessment of the annus horribilis which was 2022 and reset expectations following the sudden scrapping of zero covid, the mood is shifting towards cautious optimism. There is widespread relief at the prospect of a more predictable operating environment and the resumption of connectivity with the rest of the world. Recovering the more robust levels of confidence common among foreign investors pre-2019 will now need to be the goal if China seeks to capitalize on its re-opening, stabilize and grow levels of inbound investment, and return to the ‘new normal’ of annual GDP expansion of 5% or above. Initial signs of recovery are beginning to emerge as China’s economy begins to breathe into life after a year of heavy disruption from zero covid. Fortunately for the economy, the impact from the first wave of infections arrived early enough in December and January for the process of recovery to capture a significant chunk of the annual Spring Festival boost to travel, leisure, and consumption more broadly.
Travel rebounded strongly over the 7-day holiday up 50.9% on 2021 though still significantly (47%) lower than 2019 trip volumes according to the Ministry of Transport. Cinema box office also sprung back into life with around $1 billion generated over the 7-day national holiday aided by a strong line-up of domestic films and beating 2019 takings. Data from Meituan indicates a recovery of China’s restaurant sector has also started with Spring Festival revenues for some chains already recovering to pre-pandemic levels.
Signals from China’s leadership such as China’s Vice Premier Liu He’s Davos speech which declared China’s economy ‘will get back to normal in 2023’ have also added further fuel to the relief rally. As have the recent approvals for foreign finance firms to set up or acquire wholly-owned mutual funds as well as securities brokerages. One interpretation of this sudden raft of approvals is they are evidence of a indicate a more welcoming stance towards foreign business (and the private sector more broadly).
Foreign investors, however, continue to hold a range of concerns which will be more challenging to shake off for the economy than the reversal of zero covid has proven to be or the lower hanging fruit of granting approvals. Board rooms are asking more questions of China as the number of fronts which present risk or uncertainty have grown. Whether regulatory, geo-political, or the shock of zero covid on the operating environment and supply chains, decision-makers will need to recover the belief that China presents not just growth potential but a predictable enough environment to invest long-term.
Relations have been strained between China and several of its closest neighbours as well as some of its largest trade and investment partners including the US, Europe, Canada, and the UK. Reducing diplomatic tension will have a positive knock-on effect for foreign business which has consistently listed geo-politics as a key factor affecting decision-making since 2018 and the onset of the US-China trade war.
A recent PwC survey of CEOs in China indicates a high degree of concern about the long-term viability of their business models in large part due to the shifting geo-political landscape and the uncertainty which has formed as a result. Geopolitical conflict sat in third place on the list of business risks CEO globally are bracing for over the next 12 months and five years respectively sitting behind only inflation and macroeconomic instability.
China’s recent efforts to reengage with international partners including Chinese President Xi Jinping’s attendance at the November G20, the healing of relations with Australia, as well as the rush of outward official visits expected to take place in the months following Spring Festival are all encouraging signs. The lack of interaction between the Governments of the UK and China, for example, has created a void in recent years where normally there would be regular engagement at both senior and working levels. Resuming dialogue while accepting both sides will continue to have, at times, significant differences will be a crucial step to rebuilding trust and constructive exchange.
Foreign investors will also be watching closely for signs the economy remains a high priority. The sudden nature of the restrictions imposed on the education sector, for example, sent a chill through the economy and left many businesses concerned their sector might be next in the firing line. Providing business with greater transparency and advanced consultation on decisions regarding future legislation or adjustments to rules and regulations will help create a more predictable environment and contribute towards restoring trust among investors. Continued steps towards increasing market access and tackling business environment issues will also play a big role.
Regarding the economy, strong growth appears possible in 2023 with projections generally falling between 4-5.5%. The second quarter in 2023 is likely to be a bumper one with growth potentially into the double-digits given the low performance of the second quarter 2022. Although down to an accounting quirk, this will present an opportunity to signal China’s pro-growth stance and provide further evidence of the strength of recovery to the international business community at a time when the global economy is likely to be struggling for positive narratives. The upcoming Two Sessions in March also provides an opportunity to provide reassuring signals to investors.
If strong economic growth is to be a priority for China over the coming years, then recovery of investor confidence will need to feature high on the list of short to medium term objectives. Any recovery of sentiment, however, will take more than just one of the factors highlighted above to succeed. China’s management of its economy and business-related policies will play a significant role but unless the backdrop of heightened geo-political tensions eases, uncertainty will persist and continue to weigh upon decision-making for investments, supply-chains, and any exposure to China more generally.
Initial signs suggest the cautious optimism for 2023 which is increasingly prevalent among foreign business is not misplaced. Though for board room-level confidence to return it will require China to take a sustained, collaborative, and transparent approach in addition to the return of long-lasting strength in the economy beyond the inevitable bounce from re-opening.
The coming months will show what China’s post-zero covid ‘reset’ will mean for business and perhaps provide an early indication of what to expect over the longer term. Foreign investors will be hoping for more efforts to promote confidence and trust in the operating environment for international business, a strong focus on restoring stable long-term growth and predictability in the Chinese economy, alongside visible efforts to dial down geo-political tensions.