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European Businesses Urge China to Open Up, Avoid Inward Turn

·4 min read

(Bloomberg) -- European businesses in China urged the country to steer away from what they see as an “inward” turn of the economy to achieve self-sufficiency, which has impeded their operations and prospects.

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China has stepped up control over foreign firms’ supply of technology and components to Chinese clients over national security concerns, according to a report by the European Union Chamber of Commerce in China. That’s driving European businesses to localize development and supply chains and creating an increasingly difficult business environment, the paper said.

Beijing’s focus on building core technologies such as semiconductors domestically as part of its dual-circulation strategy could result in massive misallocation of resources, according to the European Chamber, which represents over 1,700 companies operating in China. A lack of further opening and structural reform of the economy could also lead to slower innovation and growth, according to the paper released Thursday.

“It’s a bit more challenging to operate in China than it was two or three years ago,” Joerg Wuttke, president of the chamber, said at a recent press conference. “We have this problem of contradiction between the self-reliance that China is aiming for and the openness that it’s always talking about.”

China released a five-year plan for its economy in March, which placed a top priority on increasing spending on research and development to turn the nation into a tech superpower. The blueprint raises concerns that economic policy making increasingly could be driven by national security concerns, according to the European Chamber, which laid out some 930 recommendations for the government in the report.

Green Goals

Foreign companies in different industries receive drastically different treatment, according to the report. For example, the government’s policies are favorable for companies in the machinery, chemicals, semiconductors and green energy sectors that have technology needed to upgrade China’s industrial sectors or support its green goals, according to the report.

For consumer goods, authorities sees it as necessary to keep a foreign presence to maintain competition and supply. But foreign companies in network equipment, telecommunications and most things digital increasingly are unwelcome, the European Chamber said.

The Cyberspace Administration’s critical information infrastructure regulation, released in August on the basis of the cybersecurity law, is “having a considerable, negative impact” on European companies, it said.

The regulation requires European telecom equipment and service providers, as well as producers of certain software, to undergo a national security review involving as many as 12 government departments before they can supply new equipment or services. Many companies are localizing their production and research to cope with the review, while some see the inevitable result being their exit from the market, according to the paper.

Increasing Pressure

European companies also are facing increasing pressure from government guidelines encouraging Chinese companies to adopt “autonomous and controllable” technologies and avoid relying on foreign suppliers, it said.

Wuttke raised the example of Swedish telecom giant Telefonaktiebolaget LM Ericsson, which won only 2% market share in the latest bid to supply 700MHz radios for China Mobile Ltd.’s 5G network development. That was down from 11% in a previous round and came after Sweden blocked Chinese vendors Huawei Technologies Co. and ZTE Corp. from its own 5G roll-out.

Some European-made fire brigade equipment and health care equipment also was banned from being sold to Chinese clients in some provinces, according to Wuttke.

“We hope this national security self-reliance will not impact innovation, but we see receding diversity,” Wuttke said, adding that “diversity matters” in driving innovation.

Fewer Foreigners

In another sign of China’s rising insulation from the world, the number of foreigners living in Beijing and Shanghai plunged 28% to about 227,000 people in 2020 from a decade earlier, according to census data cited in the report.

Part of that decline may be due to the many foreign residents of China who have been unable to return due to restrictions enacted during the pandemic.

U.S. businesses operating in China said they’re constrained by the nation’s Covid-zero policy, according to a separate report released Thursday by the American Chamber of Commerce in Shanghai.

Pandemic restrictions on entry into China will hurt the country’s competitiveness if the government doesn’t make adjustments, the report said, asking that the government allow locally based foreign workers to have family members join them in China.

(Updates with report from American Chamber of Commerce in Shanghai in final paragraphs.)

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