European businesses are rethinking their plans for a ‘closed’ China.

Foreign direct investment from Germany to China rose nearly 30 percent in the first eight months of the year from a year earlier, China’s Ministry of Commerce said Monday.

VCG | Visual China Group | Getty Images

BEIJING – European businesses in China are reassessing their marketing plans after this year’s Covid-19 outbreak isolated the country from the rest of the world, according to Jörg Wuttke, president of the European Union Chamber of Commerce in China.

China’s strict covid policy has restricted international travel and business — especially since it shut down Shanghai for two months this year.

Strong measures taken over the past two years have helped China recover from the shock of the epidemic faster than other countries.

But the policy is increasing with the world relaxing more and more Covid restrictions.

For European businesses, “over the last six months we have been talking about a complete adjustment of our view on China,” Wuttke told reporters at the chamber’s annual China position statement released Wednesday.

The business closures and uncertainty have made China a “closed” and “isolated” country, which could prompt companies to leave, he said.

So far, most companies haven’t gone — only very small ones, Wuttke said. However, he pointed out that the Chamber is unable to investigate businesses that have decided not to enter China at all.

I’ve been here for 40 years and I’ve never seen anything like this, suddenly an ideological decision is more important than an economic decision.

George Wutke

President, EU Chamber of Commerce in China

Foreign direct investment from the EU to China in 2020 is down 11.8 percent from a year earlier, according to a position statement from the Chamber of Commerce. More recent figures are not available.

“While there is still a ‘select group of high-profile multinational companies ready to fork over billions of dollars’, the downward trend in foreign direct investment is irreversible, and European executives are increasingly restricted from traveling to China and developing greenfield projects,” the paper said.

The analyst says that investors are still in 'wait and see mode' when it comes to China

China’s economy grew by 2.5 percent in the first half of the year, below the target of 5.5 percent. Beijing has indicated by the end of July that the country will not reach its goal.

Meanwhile, authorities have shown no sign of abandoning the so-called flexible zero-covid policy.

China has reduced quarantine periods for international and domestic travelers. But occasional lockdowns on the tourist island of Hainan or the city of Chengdu have heightened business uncertainty.

Wutke early China opens its borders in the year By the end of 2023, depending on the time needed to vaccinate a sufficient population, he said.

“Ideology weakens the economy.”

Old European businesses are increasingly in China, where “ideology drives the economy,” the council’s position paper said in its executive summary.

“I’ve been here 40 years and I’ve never seen anything like this. All of a sudden, an ideological decision is more important than an economic decision,” he said. “And that’s amplified by voices from outside, America[n] Sanctions, the US has cut China, so I can partly understand why self-reliance is high on the agenda.

He was referring to China’s push to build its own technology and other industries over the past few years.

Meanwhile, among other measures, the US has restricted its companies from supplying key components to Chinese tech companies such as Huawei.

Read more about China from CNBC Pro

The council did not specify what this ideology entailed, but said China’s Covid policy embodied the country’s “distance from the rest of the world”.

Despite many long and frank discussions with Chinese government officials, the policy has not changed, Wuttke said.

“I think these people are torn between what they see should be done and what can be done,” he said. “Well then [there’s] Very strict, very clear instructions from the top, it should be like this, that’s the ideology. And how can you challenge ideology?

Chinese President Xi Jinping said earlier this month that the country “continues to respond to Covid-19 and promote economic and social development in a coordinated manner,” according to a statement released by China’s Foreign Ministry.

“China has entered a new stage of development,” Xi said in a statement, adding that “China’s door to openness and friendly cooperation will always be open to the world.” The speech came during his first foreign trip to Kazakhstan and Uzbekistan since the start of the pandemic – during which he met with leaders of several countries in the region.

Over the past few years, China’s leader has tried to rally the country around the ruling Communist Party and its plan for the “Great Renewal of the Chinese People.” Xi is poised to consolidate power at a major political summit next month.

China’s big market

Foreign businesses in China generally stay put for now.

Although China’s economy has grown slowly, its size and low base “is really a compelling case [for foreign businesses]We’re still going to do it,” Wutke said.

Some, notably German automakers, are investing more.

In the first eight months of the year, foreign direct investment from Germany grew nearly 30% from a year earlier – compared with a 23.5% pace in the first seven months, China’s Ministry of Commerce said Monday.

But the ministry did not release the latest investment figures from the US, where official data showed growth of 36 percent in the first seven months of the year.

Foreign businesses can still find certain areas of opportunity.

China is improving domestic market access, even in areas where locals already dominate or are “desperate” for foreign investment, Wuttke said. “Otherwise, frankly, I’ll stop doing this paper.”

Why China shows no sign of backing down from its 'Zero-Covid' strategy.

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