24.3 C
New York
HomeBusinessInvestingChina’s Covid Policy Is Costing It Foreign Investors’ Confidence

China’s Covid Policy Is Costing It Foreign Investors’ Confidence

Shanghai over the weekend unveiled a 50-point plan to ease the economic fallout from its “zero-Covid” policy after lockdowns in the past several weeks in the global business hub created financial losses, disrupted global supply chains, and stirred concerns about a lack of transparency and predictability.

The impact on foreign businesses from the tumult isn’t likely about to go away anytime soon, according to Alan Beebe, a former president of the American Chamber of Commerce in China and long-time China hand who is now an external consultant at Bain & Co. based in Beijing.

“Confidence is being lost. China’s always been, relatively speaking, a very predictable business environment. You may not like all the policies, but at least it’s been predictable,” Beebe said in a Zoom interview. “Now, it’s very unpredictable, and businesses of course don’t like that. And this comes on top of last year’s crackdown in the Chinese private sector, for tech companies and education companies in particular.” New York-listed shares in Internet heavyweight Alibaba have lost 57% of their value in the past year, while those of education businesses such as TAL Education and New Oriental Education have each plunged 89% in the past 12 months.

“So in a way people feel ‘once burned, twice shy,’” Beebe said. “Just because the government comes out and says, ‘Hey, we’re going to change the policy’ or ‘Don’t worry about it,’ I doubt that people are just going to return back to that (previous) level of normalcy.”

Beebe, a Nebraska native and Yale graduate, led AmCham China for the past six years until March 2022; the organization has more than 1,000 members including Boeing, Microsoft and Morgan Stanley. Beebe has more than a quarter century of experience in Asia, and has been based in Beijing since 2002. Edited interview excerpts follow.

Flannery: What’s the impact of China’s Covid policies for U.S. businesses there?

Beebe: What has been happening is unprecedented. The draconian measures that China has taken have had a massive impact on businesses and frankly, the psyche of every individual that’s being impacted by that, whether foreign or Chinese. It creates an unprecedented level of uncertainty, non-transparency and ambiguity, as to what the future holds.

It’s one thing to have isolated cases or lockdowns that have a relatively minor impact on the economy. But the scale and the magnitude and the uncertainty surrounding what we have today is putting huge question marks around the economic outlook.

Surveys from AmCham China and the European Union Chamber of Commerce in China show revenues are down. Maybe what’s not captured in these surveys is the level of unease that people have. I feel that everyday both myself, but also among the many people that I know whether foreign or Chinese. In this sort of environment, few are actually going to make any meaningful business decisions, much less investment decisions. People here see a black box in terms of how government decision-making is being made, and there’s growing speculation that there is conflict within China’s government as to the best policy direction for the economy and Covid-19. They’re in a tough spot right now.

Flannery: Has the impact on smaller expatriate-entrepreneur businesses been larger than at bigger multinationals?

Beebe: I would say it’s different. You almost have to put those into two categories. Smaller companies may be led by an individual that has more likely than not made a substantial commitment to being in China. For them to pull up their stakes, pack their bags, and leave is simply not that easy, both business-wise and personally.

At the same time, their businesses are getting hurt and hit hard, and there’s not nearly the cushion that a large company has. If you have to make payroll, you have to make payroll. If you have got to pay rent, you’ve got to pay rent.

So I think it’s probably all over the board in terms of how they’re coping with this situation, ranging from just hunkering down and riding it out to taking more drastic actions, whether that’s laying off staff or delaying payments and so on. It’s not unlike any small- or medium-sized company anywhere in the world that’s dealing with a situation like that.

Whereas most large companies are able to ride out the storm, they’re putting major decisions on hold and putting plans in place to diversify their supply chains. They’re localizing positions that may have been traditionally tagged for foreigners or expatriates to contend with the situation short term.

The medium and longer-term concern is that the confidence is being lost. China’s always been, relatively speaking, a very predictable business environment. You may not like all the policies, but at least it’s been predictable. Now, it’s very unpredictable, and businesses of course don’t like that. And this comes on top of last year’s crackdown in the Chinese private sector, for tech companies and education companies in particular.”

So in a way people feel ‘once burned, twice shy.’ Just because the government comes out and says, “Hey, we’re going to change the policy” or “Don’t worry about it, ” I doubt that people are just going to kind of return back to that (previous) level of normalcy.

I do really think we’re at a key inflection point for foreign companies. For example, if you look at the international schools — which have long been a foundation for the foreign business community – I really don’t know if these foreign schools can survive. They’re facing all sorts of fundamental policy and financial struggles. There are so many question marks.

Flannery: Chamber surveys show that the overall relationship between the U.S. and China factors into business decisions about China. How do you see the overall relationship now?

Beebe: Going back to my tenure at AmCham China, I was continually amazed at how resilient U.S. business was in China, despite all of the fireworks, especially around the increase in tariffs. Companies adapted. They didn’t like it. There were some winners and losers, but largely speaking they adapted to it.

I do think that this time could be different. First off, once the Biden administration came into office, there was an arguably false hope that things would get better between the U.S. and China, but we see now that’s clearly not the case. I think there’s a recognition that the relationship is what it is, and the question is whether it’s going to stay the same or it’s going to get worse.

As a result of that, companies are taking action, or will be taking action. What are those actions? They don’t want to give up on the China market opportunity. At the same time, they want to minimize their risks. I imagine you will not see a full scale pulling out of China, but a diversification of supply chains to become less dependent, so they could serve the China market but be less exposed to the unpredictability.

Another development that is not directly related to the U.S.-China relationship — yet is — is the Russia-Ukraine war. I was surprised how quickly U.S. businesses and foreign businesses generally pulled out of Russia. That’s no doubt also making the Chinese government think: “If things got that bad, could we really count on foreign businesses staying in China? Does economics really trump everything else?” And I think the answer is no.

Flannery: That’s an interesting point. I’ve been thinking of calling Starbucks and saying, “I noticed that you’ve shut down 150 stores in Russia in connection with the Ukraine invasion. What’s your backup plan if, one way or another, Taiwan and mainland China come into conflict?” China is a big chunk of its business.

Beebe: It’s sound governance and corporate strategy to have fairly well developed, robust scenarios so that once certain triggers occur, companies can take the appropriate action. And I could imagine that many, many leading companies are going through that exercise now. And if they’re not, they should be.

Flannery: With Taiwan?

Beebe: Yes, including with Taiwan. Just to put a fine point on that, one of the things that surprised me was how some companies responded when Covid first hit back in early 2020. There was enormous unpredictability. People didn’t know what it was, how big the impact would be, and so on. But there were a fair number of companies that seemed pretty calm.

Why were they calm? It’s because they had backup plans. They relied on similar experience from other parts of the world. They pull out the playbook that is most similar. For example, companies in the energy sector and heavily invested in, say, the Middle East or northern Africa where there has been political turmoil and war have their contingency plans. I was in a way pleasantly surprised at the resiliency of those companies. They have an institutional capability to prepare for the best and plan for the worst.

See related posts:

Successful American Entrepreneur’s Lockdown Lesson In Shanghai: Don’t Take Your Freedom For Granted

China’s Covid Policy Will “Exact A Very High Cost On The Economy”

China’s Ambassador To The U.S. Talks Pew Poll, Trade, Air Travel — Exclusive Interview

@rflannerychina

Stay Connected
16,985FansLike
52,146FollowersFollow
2,458FollowersFollow
spot_img
Must Read
You might also like

LEAVE A REPLY

Please enter your comment!
Please enter your name here