China has long been considered an Eldorado for foreign companies. High growth rates, an innovative environment to learn from. Constantly improving living conditions for the posted employees. And above all: a high level of predictability and stability compared to other growth markets.
For years, this image has been getting more and more scratches. But never before has the government under Xi Jinping given foreign companies in the People’s Republic such a shock as in the past few weeks. Experts estimate that in China, due to the sealing off of entire cities or residential districts, significantly more people are currently unable to leave their homes than there are residents in Germany. Factories are standing still, reports of sometimes unacceptable conditions in quarantine facilities are making the rounds.
In Shanghai in particular, where most employees of foreign companies live, what has been a bitter reality for companies in the rest of China since the beginning of the pandemic can be seen under a magnifying glass. China’s former strengths as a business location have become weaknesses.
Week-long curfews even in important business locations, factory closures and transport disruptions make supply chain compliance a jigsaw puzzle.
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Companies find it difficult to get new employees from abroad into the country. And with those who are in the country, you always have to reckon with the fact that they won’t be able to come to work because they’re locked away somewhere. In today’s China, it’s enough to be on the same train with someone who has had contact with a Covid patient. The nerves are raw.
China’s government’s draconian zero-Covid strategy has made it an unsafe place, with companies having to reschedule every week, sometimes even every day. A quick improvement in the situation is not in sight.
The draconian policy to contain the corona virus in the third year of the pandemic is more of a symptom of the actual problem: China’s government could have prevented the lockdown drama that is currently taking place in the world’s second largest economy due to the spread of the highly contagious omicron variant . This is through comprehensive vaccinations and better planning.
Most of the elderly citizens who are particularly at risk have not even been vaccinated with a second dose. However, experts say that the Chinese vaccine only works reliably after the third administration. The more effective foreign vaccines are not approved.
But it is not just the severity of Covid that is increasing skepticism about China as a business location. Added to this is the enormous flood of new regulations that the government has been raining down on companies for months.
Business officials are saying behind closed doors that it is now impossible to stick to all these rules. The Chinese government, which can use the law as a political weapon, wants this to be the case. However, she apparently ignores the uncertainty she is triggering in companies.
Inscrutable flood of rules
And not only foreign companies are affected by the inscrutable flood of regulations. It is also paralyzing Chinese tech companies such as Alibaba and Didi – companies that make a significant contribution to China’s ability to innovate and for which the People’s Republic is the envy of the world. And that has the potential to hit China’s innovation hard. Up until now, this has been an argument in favor of the business location.
For a long time, China was a must-see destination for the German economy simply because of the fantastic growth figures. But these times are also threatening to come to an end. Because growth is slowing down significantly. Consumption is weakening.
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In the short term, this is mainly due to the lockdown and the ongoing real estate crisis. But it is to be feared that consumption will suffer in the long term – for example due to the aging of the population. So far, China’s leadership has done too little to encourage people to have more children again.
In addition, even the reliable growth driver of foreign trade is not only endangered by the lockdown policy. In recent months, the Chinese government has repeatedly alienated long-term reliable partners.
It is unlikely that foreign companies will leave China in droves. Depending on the industry, the market is still too attractive for that.
But many will think carefully about whether and how much to invest in the People’s Republic under the new circumstances. However, it must be doubted that the Chinese government will be significantly influenced by this in its strategy.
More: Guest article: The German economy must transform itself in order to maintain our prosperity