European investment and endless lockdowns in China

May 5, The European Union Chamber of Commerce in China, in partnership with Roland Berger, released a survey on the impact that China’s policies on Covid-19 and Russia’s war in Ukraine are having on European business in China. As a result of China’s policy regarding Covid-19, 23% of those surveyed are now considering shifting current or planned investments to other markets - more than double the number that were considering doing so in early 2022 - and 7% are considering the same because of the war in Ukraine.

The introduction in 2022 of more stringent Covid-19 containment measures, with China imposing indefinite lockdowns in at least 45 cities (covering approximately 373 million people), is causing massive uncertainty for businesses. 75% of those surveyed say that the measures have had a negative impact on their operations, with special emphasis on logistics/ warehousing (94%), business travel (97%), and the ability to conduct face-to-face meetings (94%).

Supply chains have taken a pounding, both upstream and downstream, with 92% of companies being impacted by measures such as China’s recent port closures, the decrease in road freight and spiraling sea freight costs. More than 25% of European businesses report headcount decreases because of China’s Covid-19 policy, with this happening most in the education (80%), legal (46%), retail (43%) and cosmetics (40%) industries. It is worth mentioning other key findings from the survey:

- 60% of respondents have lowered their revenue forecasts for 2022.

- 78% of respondents feel that China is a less attractive investment destination as a result of its more stringent Covid-19 restrictions.

- The war in Ukraine has also made China a less attractive investment destination for 33% of those surveyed. The war is exacerbating the challenges businesses face as supply chains face disruption in the transportation of goods to and from Europe. In addition, rising material and energy costs are having a negative impact on 63% and 58% of respondents, respectively.

There are studies by Chinese academics referring to potentially significant drops in China’s GDP in the case of simultaneous lockdowns of more than a month in some of its major metropolitan areas. However, the IMF still forecasts a 4.4% growth of China’s GDP for 2022.

Since 1979, China has been a bastion of stability, which has contributed to significant foreign investment and capital inflows, including in innovation and technology, which China still needs in various domains. If the instability and unpredictability created by the zero-covid policy and successive lockdowns of metropolitan areas continues, it is quite possible that foreign investment in China will decline. Besides the reduction in economic interdependence between China and Europe, this will be reflected in the economic growth of both; given the importance of the European and Chinese economies for the world economy and trade, the overall effects will be quite negative.