'There is light at the end of the tunnel," Jens Hildebrandt, Executive Director of the German Chamber of Commerce in north China, exclaimed as he officially released the report of the German Chamber of Commerce in China's latest Business Confidence Survey 2023/24 in Beijing on January 24.

The survey, launched in 2007, has been a key instrument for gauging the business sentiment of German companies operating in China. The latest survey was conducted between September 5 and October 6, 2023, with 566 member companies of the German Chamber of Commerce in China responding. 

The survey showed that German companies operating in China face a range of challenges, including increased competition from local companies, economic headwinds and geopolitical risks.

"Last year was a reality check for German companies operating in China," said Ulf Reinhardt, Chairman of the Board of the German Chamber of Commerce in south & southwest China.

Reinhardt said German companies' business sentiment about 2023 reflects a difficult and complex macroeconomic situation, with more than 80 percent of respondents saying China's economic growth has been on a downward trajectory. However, most added that they believe China's economic slowdown is only temporary. About 90 percent were confident that China will return to robust growth within five years. China's GDP posted a year-on-year growth of 5.2 percent in 2023, exceeding the country's official target.

Companies in certain industries thought that recovery would come sooner. More than 60 percent of respondents in the electronics, machinery and industrial equipment, plastic and metal products, and automotive industries expected a recovery within three years.

What's more, some 50 percent of respondents indicated positive expectations for 2024, saying they expect to see an increase in turnover this year.

Despite the challenges mentioned above, more than half of the surveyed German companies plan to increase their investment in China over the next two years.

Shifting ground 

According to the report, China's importance to the German economy remains unique. As Germany's most important trading partner for seven consecutive years, the economic relationship supports millions of jobs in both countries.

The enormous size of the Chinese consumer market, its advanced supply chain infrastructure and its status as an increasingly strong innovator make China one of the most important markets for many German companies.

In the previous edition of the survey in 2022, the results showed that China's attractiveness as a market was declining. The trend continued last year as well.

However, more than 90 percent of the companies surveyed in 2023 confirmed they had no plans to leave China, despite this widely recognized decline in its attractiveness as an investment location.

On the other hand, China is gradually being recognized as a potential innovation leader. Seventy-nine percent of companies continuing to invest in China will do so to remain competitive in the global market.

The latest survey results showed that over 50 percent of respondents believed their Chinese counterparts will lead innovation in the next five years. These findings highlight the competitiveness of Chinese companies and indicate potential opportunities for German companies to collaborate with Chinese players in their respective fields.

China's potential to become an innovation leader is particularly evident in the new-energy vehicle (NEV) industry. NEVs include plug-in hybrids, full-battery electric vehicles and fuel-cell electric vehicles.

Compared with other industries, German car companies showcase the strongest willingness to invest in this specific sector, and 63 percent of these companies said they intend to up investment in China over the next two years. It is the need to remain competitive that is the main driving force behind this decision.

Globally, China's NEV sector's production and sales have ranked first in the world for nine consecutive years. For example, Chinese auto manufacturer BYD concluded 2023 with a record 3.02 million vehicles in annual sales worldwide, leading the global NEV market.

German Volkswagen Group, a leading global automotive company, has been ahead in the Chinese market for a long time when it was dominated by gas-powered vehicles. However, with China's NEV industry rapidly developing, Volkswagen's market share in the country has continued to decline, and it has turned to China to learn from its successful experiences.

"Volkswagen is stepping up the pace of its transformation in China, where the group aims to remain the most successful international original equipment manufacturer and among the top three in the market," the company said in a statement last July, right after the group had invested $700 million in Chinese NEV manufacturer Xpeng. "Subject to final agreement, the companies will join forces to develop two mid-sized Volkswagen-branded NEVs for the Chinese market, to be rolled out in 2026," the statement further read. 

According to industry analysis, this kind of cooperation is an important sign that China's carmaking ability is gaining recognition from internationally renowned automakers. 

Fair conditions 

Creating a level playing field is essential for improving the foreign investment environment, according to the report.

At the Central Economic Work Conference last December, which outlined China's economic work for the year ahead, "expanding high-quality opening up" featured high on the agenda, with special reference to "seriously solving the problems of cross-border data flow and equitable participation in government procurement."

At the World Economic Forum Annual Conference in Davos, Switzerland, in mid-January, Chinese Premier Li Qiang promised to "seriously study and solve" the difficulties and problems encountered by foreign-funded enterprises in China, including a fair business environment, equal participation in government procurement, cross-border data flow, and so on.

"These are good steps that have been initiated. There has been a proposal by the CAC (Cyberspace Administration of China) on how to newly regulate the cross-border data transfer, but we have not seen any implementation of that. Also, in public procurement, we are waiting for the Chinese Finance Ministry to bring out new rules. I think China is still negotiating on the GPA (the World Trade Organization Agreement on Government Procurement). These are all good steps but we need to see a real implementation of these measures," Hildebrandt said.

Specifically, the report listed six proposals: the implementation of the 24-point guideline to optimize foreign investment issued by the State Council, China's highest state administrative organ, last August; zero tolerance to unequal treatment cases; increased transparency for public tenders; improved legal certainty and transparency; simplified cross-border data transfer; and guaranteed better intellectual property protection.

The State Council's guideline features 59 policy measures regarding foreign investment. Overall, over 60 percent of the policy measures have been implemented or positive progress has been made, according to a news briefing hosted by the State Council Information Office on January 26.

For example, policies such as tax exemption for foreign individual subsidies and tax refunds for foreign research and development institutions purchasing domestic equipment have been extended until the end of 2027, and a new version of the Foreign Permanent Resident ID Card and guidelines for foreign businesspeople to live and work in China have been issued to make transportation, life and consumption in China much easier for expats.

(Print Edition Title: A Competitive Climate) 

Copyedited by Elsbeth van Paridon 

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