China has remained firm on its practice of a Zero-COVID strategy that allowed the nation to quickly curb infection rates during the initial outbreak of 2020. The rapid and tight lockdown measures as well as the restrictive travel requirements allowed the country’s economy to quickly recover and sustain its growth trajectory. Despite past effectiveness, the Zero-COVID policy has taken a toll on the economy and businesses have questioned its impact and sustainability in the long term.
With the overall sense of discontent among companies from various industries regarding the government’s response to the pandemic, some businesses are reconsidering their investment strategies while others are considering leaving the Chinese market altogether.
Overview of Lockdowns and Travel Restrictions in China
China currently maintains some of the most stringent policies on lockdown measures and travel restrictions, in the world. These policies have presented various challenges to business and individuals alike.
Zero-COVID policy
China has required its cities to implement lockdowns, even if there are a small number of reported infections. An intolerance for even the slightest increase in COVID-19 infections makes this one of the strictest and most restrictive policies in the world, with millions of citizens being locked down at times, in various parts of the country.
Businesses, except for essential suppliers like supermarkets and food shops, are forced to temporarily shut down operations until local authorities have confirmed that there are no new infections in the area.
Such measures have heavily affected logistic and transport networks since there are restrictions on how people and things can move.
Travel restrictions
Travel to and from China has been severely limited and travel restrictions have further halted the plans of many high-level expatriates who have decided to return to their home country as a result of the effects of recent lockdown measures. This presents difficulty not only to those who are based in China and wish to return home, but also to the companies who are losing employees and are unable to secure employees to fill those roles.
Reasons Why Companies Are Considering Leaving China
Lockdowns
The uncertainty regarding the timing of a lockdown prevents businesses from being able to anticipate when they may get locked down and how long it may last. As such businesses are experiencing more challenges and unexpected losses that they were unable to prepare for.
Aside from the temporary closures, which have in some cases led to permanent shutdowns, other problems such as the cost of operations, disrupted supply chains and human resource issues have also arisen.
Travel restrictions
While individuals are still able to travel to China, the restrictions have made travel difficult, with numerous barriers that have served to discourage open travel.
Those wishing to enter China are faced with high flight prices, flights being cancelled, difficulty in obtaining necessary documentation and lengthy quarantine periods. The long procedures for quarantine and health screening have become exhausting to those who wish to travel to the country or who want to leave and return at some point soon.
In terms of restrictions still in place as of 20 May 2022, travelers entering China are required to take a PCR tests within 24-48 hours of their flight as well as an antigen test pre-flight. Prior to entry into China, travelers are required to have been vaccinated within 14 days of their entry. Proof of negative-test results and vaccination records need to be provided upon arrival and entrants are screened at the airport. All travelers are also required to complete a mandatory quarantine of at least 14 days, which may be more depending on the region.
Logistics
Interruptions in trucking, air freight and shipping services have greatly disrupted local and international supply chains. Numerous ships have been waiting at Chinese ports for extended periods, while trucks remain unable to mobilize due to restrictions and a lack of manpower. With the delivery of raw materials and finished products behind schedule, businesses are faced with an increasing number of difficulties in meeting demand.
The Shanghai lockdowns in particular had a damaging effect on local and global supply chains. Shanghai is host to the globe’s biggest and busiest port and with over two months of halted operations, global supply chains have experienced harsh repercussions.
For example, Chinese logistics company Suto Logistics did not deliver their regular load of cargo supplies which during normal times would have amounted to over 1,000 tons of goods, but instead helped support city operations during lockdown period through the delivery of daily necessities.
Other examples can be seen from multinational companies such as Apple, Tesla, Amazon and Adidas who have also experienced supply chain shocks, given that such a large portion of international trade is processed through Shanghai.
The effects of the extended lockdowns in Shanghai have further caused inflationary shocks globally, and burdened consumers worldwide. Heightened freight costs due to delays and congestions in ports throughout the world has meant that companies are constantly incurring unanticipated increases in costs.
Rapid and unpredictable change of regulations in certain sectors
Regulatory policies directly targeted at specific industries have prompted a number of foreign-based companies to leave the Chinese market, as we see with companies like Yahoo and LinkedIn. Most notable is the crackdown on the technology industry, as was evident in the cancellation of the initial public offering of Alibaba’s fintech arm, Ant. Group. Such regulatory control measures have expanded towards other major industries such as gaming, private education and entertainment and have contributed to an overall perception of hostility and unpredictable change, from foreign enterprises.
Are Companies Really Leaving?
AmCham China recently surveyed the impact of COVID-19 on the American business community in the country. The survey covered business factors and key performance indicators such as supply chain, profits, talent retention, and investments. The survey also covered the Chinese government’s effort to stabilize the economy and reopen business sectors through a number of different policies.
Some notable findings include:
- Respondents felt an overall decrease in confidence towards doing business in the country due to the recent outbreak and restrictive measures imposed.
- More than half of the businesses surveyed had already reduced or delayed investments in the country.
- The majority of companies reported reduced production capabilities due to a lack of supplies and manpower, as well as the uncertainty of government-issued lockdowns.
- The respondents also project reduced revenues for the year.
When it comes to talent acquisition and retention, around half of the businesses said that foreign workers are refusing to relocate to China due to “Dynamic Zero-COVID” policies and its associated effects. On the other hand, more than one-fourth of the respondents said that the COVID-19 restrictions resulted in a reduction of over 30% of their foreign staff.
With all these factors in mind, some businesses have considered moving their operations, or parts of their operations, out of mainland China. Others are looking at relocating their headquarters, and a few are expecting the complete closure of operations in China.
In a flash survey released by the EU Chamber of Commerce in China, 23% of EU businesses have considered moving their investments out of China.
At the start of 2022, businesses operating in China had an overall positive perception and sentiment of the business landscape in China. However, with the halt to daily life seen in some major cities and no clear sign as to when the stringent policies will come to an end, the sentiment has significantly changed. While multinationals and larger businesses continue in their discussions with authorities, many other companies are reconsidering their position in the market.
Majority of Companies Choose to Stay
While many foreign companies are expressing their frustrations regarding the COVID lockdowns by considering reducing their investment, these companies only make up a fraction of the businesses in the country.
The majority of companies do not have such plans in the near future, since shifting operations out of China is an extremely difficult and complex process. While they may be frustrated by the COVID policies, they still remain hesitant to remove themselves from an established market based on a short-term inconvenience.
Meanwhile the Chinese government is becoming increasingly aware of the impact the pandemic is having on the country’s supply chains and is finding ways to meet business demands without putting the health of its citizens at risk. The Ministry of Commerce has stated that there is an agenda in place to improve foreign investment services and increase opportunities for foreign businesses.
Effects of COVID on Future Investments in China
Foreign direct investments in China rose by 26.1% in the first four months of 2022, and investments from the US and Germany were the main contributors to this economic activity. China’s supply chain advantage is based on more than just its cheap labor costs. The presence of multiple supply chain hubs helps to create more efficient processes and better business resiliency.
With the recent developments in COVID-19 policies and the reactions to the outbreaks, investors are now looking to other emerging markets. Southeast Asian countries will now be viewed as an option, in order to diversify supply chains and reduce risk. This, however, does not mean that companies are exiting the Chinese market entirely. In fact, many companies are still waiting for changes in policies that will make investments in China viable again.
In the recently conducted 2022 Sino Benelux Business Survey, 30% of respondents considered moving (some of) their operations out of China. Despite a large portion of respondents still wishing to keep their operations in the country, the economic effects are bound to be felt.
Many European companies have production units based in China, so any disruption in the supply chain can negatively impact their business. Which is confirmed by the decision or consideration of moving to another region, which illustrates the short- and medium-term effects on business confidence.
Moving Forward
Many international businesses continue to feel the strain of the Zero-COVID policy in China. While there are individuals who have hinted at pulling out of the country, the majority still choose to remain in China and hope that the government will relax its policies in the foreseeable future.
Even though the current strain experienced by foreign businesses is challenging, missing profit targets and taking losses seem to be a more acceptable outcome when compared to completely relocating operations and gaining a foothold in another market.
Finally, China is already taking steps to make investing in the country more amicable to foreigners. The reduction of restricted industries in their Negative List and the opening of more free trade zones are just some of the measures the country has implemented to entice more foreign investments into the country.
A Reliable Partner in China
MSA has supported foreign enterprises with the process of navigating and expanding their business in China for over a decade. With specializations in accounting, financial advisory and corporate set-up services, we help set companies on a path for success in China. Contact MSA China, to learn more about our services and how we are able to help you reach your goals.
