European businesses struggle with regulation and red tape in China

11 July 2019 5 min. read
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European companies operating in the Chinese market face several challenges, ranging from regulatory burden and unequal treatment to growing competition, equity caps for local business endeavours and geo-political developments.

To better understand the impact felt by European businesses in China, the European Chamber of Commerce (ECC) commissioned Roland Berger to survey nearly 600 businesses that conduct significant activity in China. Respondents came from across industries, and are of varying company sizes.

The researchers found that across the board, European businesses feel slightly more welcome than when they first entered the Chinese market. Greater market access was the most frequently cited reason for this improvement, with China’s government pushing through several initiatives in 2018 aimed at opening up its market for foreign direct investment.

European businesses feel more accepted

However, respondents are conscious of the fact that it remains to be seen if all reform promises will actually become a reality, as there has been a lack of consistency in the signals coming from the Chinese leadership. “China’s significant market opening announcements were received with mixed feelings by the European business community. Despite bringing some improvements, positive impacts have been diluted by stagnation, or even backsliding, in other areas,” write the researchers.

Factors that hinder European companies from doing business in the globe’s second largest economy include being less equally compared to local companies, regulatory systems that don’t meet expectations, communication with the government not meeting expectations and the ability to obtain required licences and certifications.

Examples of how Chinese regulations frustrate market entry by foreign corporations are abundant. In the banking sector, state-owned banks have been protected from international competition for so long that they already have a well-established foothold, making it difficult for foreign banks to expand their market share of under 2% (as of late 2018). Foreign construction service providers, which include architects, surveyors, project managers and contractors, are only allowed to take part in four kinds of projects in niche industries. This ‘segment’ account for a tiny share of the construction industry, under 1% of the total value of the country’s construction services industry.

Macroeconomic challenges lie ahead

In state-owned sectors, the situation is arguably even more compelling. 70% of the European enterprises surveyed that they state-owned enterprises are present in their industries and that they hold advantages in most areas of doing business, including public procurement, the ability to influence policy, and access to financing and licences.

The transfer of intellectual property is another area of discontent, in particular for larger corporates. Roland Berger’s analysis shows that European firms are still being forced to hand over intellectual property to retain market access in China. The number of firms faced by that dilemma increased significantly in the past two years, from 10% in 2017 to 20% this year.

Chinese economy slowing

China’s slowing macro-economic environment is a reason for concern. In its latest annual review of the global economy, the International Monetary Fund (IMF) predicted the Chinese economy would continue to slow further in 2019, forecasting 6.2% growth. This slowdown is now ranked by 27% of companies as the top challenge to future business in China, up 8% compared to the previous year. After the Chinese economic slowdown, respondents ranked labour costs as the third greatest challenge to future business, followed by a current issue: the US-China trade war, which despite the recent ceasefire could inflame at any point in time again.

European businesses struggle with regulation and red tape in China

“Macroeconomic challenges coupled with the slow pace of regulatory reform, mean that many European firms are facing increasingly difficult times while tied up in red tape that should have been cut years ago,” state the authors.

The European Chamber of Commerce speaks of a missed opportunity in its trade relations with China. According to the institution, there remains vast untapped potential in the EU-China investment relationship, with 65% of its members reporting that they would be likely to increase their investment if they were granted greater access to the Chinese market.

To illustrate the potential: overall European investment into China was only €6.1 billion in 2018, a fraction of European investment in markets such as the US, which reached over €150 billion in the same year. “China would do well to capitalise on this situation, and foster a more competitive economy,” concluded the authors.