MNI INTERVIEW: Euro Firms Face Slow China Market - Chamber

China’s economic slowdown represents the biggest challenge for European firms wanting to operate there, with Beijing recently improving market access, a leading European lobbyist has told MNI, noting the EU should resist excessive protectionist policies based on simplistic “level-playing field” arguments.

Jens Eskelund, president at the European Chamber of Commerce in China, noted European firms citing China's economic slowdown as a significant business impediment had jumped 19 percentage points y/y within the Chamber's recent sentiment report. This was the the fastest rise of any metric ever, he said.

“Members exporting from China saw improvements, but others declined, blaming slow post-Covid domestic demand,” he added.

The survey showed 44% of members remained pessimistic on profits for the next two years – a record high – with 52% planning cost cuts, and 26% via headcount reductions.

“China has enhanced treatment for foreign firms to some extent," he explained, adding 45% of members had noted better market access in the past year, up 9 pp.

BALANCED BRUSSELS

Eskelund called on Brussels to balance securing its industrial base with maintaining an open economic exchange with China, adding only 10% of sectors drove European grievances, while the majority remained fair and healthy.

The EU could soon raise tariffs on Chinese EVs to address Beijing's alleged mercantilist policies, which it blamed for 2023’s EUR291 billion trade deficit with China, up from 2019’s EUR164 billion.

But leaders should not assume protectionism solely to blame for trade imbalances, Eskelund continued, noting Chinese firms had improved significantly, while inflation and Covid-19 had also contributed.

Former Italian Prime Minister Mario Draghi has recently called for "radical change" as he prepares an upcoming report on improving European competitiveness.

Eskelund, who last month consulted with top EU leaders visiting Beijing including Trade Commissioner ValdisDombrovskis, argued leaders should separate out and address "the small number of bad sectors only.”

While the outlook for foreign direct investment was negative, Eskelund said factors such as increased use of leasing and capital light models, alongside interest-rate arbitrage, made it harder to draw conclusions than official data showed.

China's 2023 direct investment liabilities, an indicator of FDI into the country, totalled USD33 billion last year, down 80% from 2022. (See MNI: China FDI Outlook Down As Economy Weakens - Chambers)

VOLUME UP, PRICE DOWN

Analysts noted a 10% y/y decrease in the EU's China trade deficit in Q1 to EUR62.5 billion showed Brussels' bid to rebalance trade was underway.

However, Eskelund said falling prices likely drove the trend, noting container volumes had increased. “Over stimulation on the supply side has led to falling prices and excess capacity, authorities have to address demand side deficiencies,” Eskelund emphasised.