Insights from AmCham South China’s Latest Survey on 2022 Business Outlook

Despite many uncertainties, such as travel restrictions, IPR, profitability amid the pandemic, and US-China tensions, the outlook of businesses in China going into 2022 was net positive, according to AmCham South China’s latest survey. That’s because most companies accepted that China’s economic prowess made it an undeniably attractive investment destination and one that is unlikely to be replaced by any other country in the near to medium term. At the same time, it should be noted that pivotal changes to the world have occurred since the release of this report, such as the conflict in Ukraine, which could have impacted the business survey results.

In its annual survey of companies in China, the American Chamber of Commerce in South China surveyed 251 foreign and domestic companies on a variety of issues impacting their business in 2021 and their expectations for the coming year.

Among 251 companies participating in the survey this year, 41 percent are professional services, 34 percent are in primary sectors (such as agriculture and mining) and secondary sectors (such as manufacturing and construction), and 23 percent are in consumption production and services sectors.

In this article, we look at the challenges that companies faced in China in 2021 and provide an overview of the surveyed companies’ sentiment toward the various challenges. We also discuss what we can expect from China’s business environment in 2022.

COVID-19 and travel restrictions

Unsurprisingly, the impact of the COVID-19 pandemic and subsequent economic recovery has been a core focus in trying to understand the current business environment in China.

Impact of travel restrictions on foreign workers and businesses

Strict travel restrictions when entering China have made it exceedingly difficult for both Chinese and foreign nationals to return or move to China for work. Inbound flights are frequently canceled, and travelers face numerous COVID-19 tests and bureaucratic procedures before departure and a minimum of 14 days centralized quarantine upon arrival, to say nothing of the sky-high price of airline tickets.

Obtaining visas for foreign workers has gotten harder since the outbreak of the pandemic, as China currently only issues certain types of visas, usually only for highly skilled talent that are in high demand.

In the AmCham South China survey, 57 percent of participants said they had been impacted by China’s travel restrictions, while 32 percent said they were impacted by the US’ travel restrictions in 2021. 23 percent responded that they had not been impacted at all.

As a result of the travel restrictions, 60 percent of participants said they canceled all international business travel and 47 percent said they canceled events and meetings in China. A further 22 percent said that management had been impacted as executives were unable to return to China.

Despite this, the overall number of foreign employees at the companies surveyed remains largely unchanged. The number of companies that said they had no foreign employees increased slightly from 28 percent in 2020 to 30 percent in 2021 and companies with less than five foreign employees dropped slightly from 42 percent in 2020 to 40 percent in 2021.

Since the pandemic, the biggest change in the number of foreign workers was among companies with over 50 foreign employees, who experienced a significant drop in 2020, with 34 percent of respondents saying they had over 50 foreign employees in 2019, down to only 9 percent in 2020. However, this number remained unchanged in 2021.

It therefore seems that although there was an exodus of foreign workers when the pandemic first broke out in 2020, most of the foreign workers who remained since have chosen to stay put. Whether this will continue in 2022 remains to be seen and will be highly contingent on China’s timeline for reopening borders.

According to the White Paper, foreign businesses are concerned that the strict travel restrictions and prevention measures will continue in 2022. Analysts tend to agree, with the consensus being that China is unlikely to loosen restrictions on entry to the country until at least 2023.

Impact of COVID-19 prevention measures on profitability

China’s strict zero-COVID policy, though proven highly effective at containing the spread of the virus, has led to uncertainty as sporadic lockdown measures and travel restrictions impact movement, consumption, factory production, and business operations.

However, there is also an upside to China’s zero-COVID strategy. The low number of cases and highly targeted restrictions means that much of Chinese society has enjoyed relatively stable conditions and mostly unimpeded pace of life. This is in stark contrast to many other countries that imposed multiple rounds of country-wide lockdowns.

The percentage of companies that reported they were profitable dropped from 89 percent in 2020 to 82 percent in 2021. The reasons cited in the report for this drop include the continued COVID-19 outbreaks across China, natural disasters, such as the severe flooding experienced in central and southeast China in the summer, and the sharp increase in commodity prices worldwide.

The survey indicates recovery in 2021, with most companies reporting an increase in revenue in China in 2021. This proportion is the highest among American companies: 32 percent of American companies reported a revenue increase of over 15 percent and a further 39 percent reported a revenue increase of one to 15 percent.

Profitability is another matter, however. Companies appear to expect challenges to profitability to last beyond 2021, with most respondents (57 percent) stating that they believed it would take two years for them to reach profitability. This is down slightly from 2020 (60 percent), but significantly higher than in 2019, when only 32 percent of respondents believed it would take two years to turn a profit.

US-China relations and trade

There was an initial wave of hope that the US-China trade tensions would subside after Joe Biden was sworn in as president in early 2021, as many believed he would not be as tough on China as Donald Trump had been. These hopes were quickly dashed, however, as President Biden did not roll back any of the Trump-era tariffs or policies, and instead issued new China-targeted policies of his own.

Policies and restrictions on China include the addition of more Chinese companies to US investment blacklists, sanctions against Chinese officials, and the banning of all exports from Xinjiang. The Biden Administration has also passed two bills to improve America’s competitiveness against China, the US Innovation and Competition Act, passed by the Senate in June 2021, and the America Competes Act, passed by the House of Representatives in February 2022.

Although these two bills have not yet become law, they nonetheless represent a determined effort of the Biden Administration to stand in opposition to China. Obstacles to bipartisan support of legislation to counter China are mainly disagreements on domestic proposals included in the bills that split votes down party lines, such as funding left-wing projects.

Despite the internal bickering on domestic issues, there remains overwhelming bipartisan support in the US for the ‘tough on China’ strategy introduced by Trump.

Diplomatic relations between China and the US also became increasingly frosty in 2021, culminating in the diplomatic boycott of the 2022 Beijing Winter Olympics by US officials.

Against this backdrop, companies in China have had to navigate an increasingly difficult political landscape and mitigate against tariffs and sanctions. Despite this, most companies reported little to no change in the impact of US tariffs on their business, and the percentage was 14 percent lower than in 2019. The overall number was still relatively high, with 55 percent reporting a slight to strong impact of the US tariffs on their business. This was highest among American companies, of which 69 percent reported a negative impact.

Most companies, regardless of which country they come from, agree that the trade frictions will continue in 2022. Less than half of companies across all country demographics were optimistic about the outlook for relations, with slightly more US companies optimistic than Chinese ones (47 percent of US companies were optimistic going into 2022 versus only 40 percent of Chinese companies). The largest proportion had a neutral outlook.

The result of the trade frictions appears to be a lean toward more domestic consumption to circumvent the tariffs and restrictions. This was especially true among Chinese companies: 54 percent said they would expand the domestic Chinese market, versus just 34 percent of US companies and 34 percent of companies from other countries).

IPR protection

Concerns over intellectual property rights (IPR) protection have been a headache for foreign companies in China for decades. As China’s market has matured and is increasingly the originator of many patents and IPs, the government has placed increasingly more importance on the issue and has begun shoring up its IPR protection regime in the past few years.

In 2020, the China National Intellectual Property Administration (CNIPA) issued a set of guiding opinions for improving the business environment through better IP services and administration. This document proposed a one-stop services platform for dispute resolution and led to the establishment of numerous IP rights protection centers across the country.

2021 was witness to several moves to strengthen IPR in China. The release of the Guidelines for Building a Powerful Intellectual Property Nation (2021-2035) set out targets for China’s IP protection system. Improving IPR protection was also highlighted as a key goal in the 14th Five Year Plan (FYP), which acts as China’s economic and development roadmap for the period leading up to 2025.

On June 1, 2021, the Patent Law of the People’s Republic of China also came into effect, strengthening the legal system by increasing infringement penalties, making regulatory changes to the burden of proof, and improving administrative law enforcement, among other measures.

China also amended its Criminal Law in 2021 to strengthen IPR protection. The amendment significantly increased the scope of protections for IP, expanding the range of copyright holders protected, adding service trademarks to protected IP, and including the concept of commercial espionage.

Despite China’s concerted efforts to improve the system, it remains somewhat unclear what impact these changes are having on the sentiment of businesses, judging from the AmCham South China survey responses.

While only 20 percent of respondents said they had experience filing a lawsuit at a Chinese IP court, 54 percent said that the courts were helpful – a significant decrease from the 72 percent who said they were helpful in 2019 (17 percent of respondents had experience with an IPR court in 2019).

Optimism amid uncertainty

2021 has presented many new challenges for businesses in China, many of which will take a long time to resolve – COVID-19, US-China tensions, high commodity prices, and supply chain disruptions to name a few.

At the same time, some of the setbacks seen in 2021 are not likely to be repeated in 2022. This is true of the energy crunch experienced in the fall of 2021, as the government has taken resolute measures to ensure energy security in the coming year, such as increasing coal production.

Despite the many uncertainties, the outlook of businesses in China going in 2022 remains positive. 77 percent of companies surveyed by AmCham South China reported a positive outlook for 2022 – a decrease from 2020 (84 percent) but nonetheless a high proportion.

The number of companies with a negative outlook was also very low, up slightly to five percent from three percent in 2020. In response to questions on the continued US-China tensions, 94 percent of companies said they would not decouple from China despite the expectation that relations would not improve in 2022.

The reason for the survey’s optimism is likely that China’s economic prowess makes it an undeniably attractive destination for investors and is unlikely to be toppled by another country any time soon. China’s economy was the only one in the world to see positive growth in 2020 and achieved 8.1 percent growth in 2021.

Although forecasts for 2022 are lower, growth remains significantly higher than many other markets, and few others have the consumer base and production capacity that China does.

On the commercial side, 58 percent of the surveyed companies reported that their return on investment (ROI) was higher in China than in other markets. When asked specifically about South China, 58 percent of respondents said that the overall business environment had improved, which was the same proportion as in 2019.

Addressing the most recent changes

At the same time, it is important to mention that several pivotal changes to the world have occurred since the release of this report, which were largely unpredictable to businesses.

The most significant is of course the recent outbreak of the Russia-Ukraine conflict. This event has already upended many countries’ views on national security and led to an unprecedented shift in political priorities. It has also left the US and its allies and China squarely on opposite sides of the geopolitical struggle, even as China attempts to straddle the divide.

Although no sanctions have been imposed on China as a result of the conflict, and the direct impact on businesses in China is limited, the full consequences of the conflict are not yet clear. We can see that it is already impacting EU-China trade – who are major trade partners – further driving up the price of commodities, exacerbating supply chain disruption, and worsening relations between China and the west. All of this is likely to put more pressure on businesses in China and worldwide.

The fallout of the conflict may also increase suspicion and unease among western countries with regard to dealing with China and will almost certainly accelerate China’s pursuit for self-sufficiency and increase protectionism worldwide.

It is therefore possible, had these companies been surveyed at the time of writing, that their outlook would have been somewhat different, in particular with regard to US-China relations.

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