2023 CHINA BUSINESS REPORT

 Revenue expectations stable: With the end of zero-Covid, 52% of respondents expect their revenue to beat 2022’s. This rate was highest —  74% — for retail companies, which suffered significantly during last year’s restrictions. The percentage of companies expecting China revenue  growth to outpace global growth dropped 7 percentage points (pp) to 40%. However, the retail sector was relatively optimistic on this metric,  with 57% of retail companies expecting China revenue growth to outperform worldwide growth compared to only 41% for manufacturing and  31% for services. 

Financial metrics plummet: A record-low percentage of respondents, 68%, were profitable in 2022 after city-wide closures and intermittent  lockdowns struck a deep blow to operations. Only 49% saw revenue increase in 2022 compared to the prior year, a 27-pp drop from last year’s  survey, while just 37% reported margin increases — down 17 pp year-over-year. 

Five-year optimism at a record low: Just 52% of respondents are optimistic about the five-year business outlook in China, a 3-pp drop from  last year and the lowest in our survey’s history. The percentage of companies identifying as slightly pessimistic or pessimistic was 23%, even  worse than in 2019, when the imposition of US tariffs prompted 21% of companies to describe themselves as such. 

More companies increasing investment: 31% of companies plan to increase investment in China this year, 6 pp more than did last year.  The top reason for increasing investment was unchanged — China’s market growth potential — followed by the removal of zero-Covid restrictions and pressure to localize. Meanwhile 22% expect to decrease investment, on par with last year, and this was highest for the manufacturing sector at 29%. The top reason for decreasing investment was overwhelmingly uncertainty about the US-China trade relationship, followed  by expectations of slower growth in China and uncertainty over future Chinese commercial policies and policy implementation. 

China is the top priority for fewer companies: Only 17% of companies ranked China as their headquarters’ number one investment destination, down marginally from 18% last year, but 10 pp lower than the 27% recorded in 2021. Unsurprisingly, headquarter confidence has  suffered. Only 8% of survey takers reported that their headquarters’ view of China’s economic management had improved in the past year,  against 46% that said it had worsened. 

More companies moving investment abroad: 40% of respondents are redirecting or planning to redirect investment originally planned for  China, a 6-pp uptick from last year. Southeast Asia remains the most favored destination, followed by the United States, Mexico and Europe,  which surpassed the Indian subcontinent for the first time. The top reasons for redirecting investment were making contingency plans to diversify away from China, growth opportunities in the target market and market changes in China. 

Geopolitical challenges loom large for companies: Asked to identify the top challenges to their company over the next three to five years,  60% of respondents chose US-China tensions, 60% chose an economic slowdown and 49% chose domestic competition. Similarly, geopolitical tensions was cited as the top challenge to China’s economic growth while improved US-China relations was the factor that respondents  most expected to benefit their industry. Uncertainty about US-China relations was also the top reason that nearly one-fifth of all respondents  are planning to move some of their operations out of China. 

Chinese competitors prove increasingly challenging: Domestic competition was ranked by the most members, 32%, as a serious operational hindrance, and by a further 46% as some hindrance. Although three-quarters of companies see local firms’ speed to market as superior,  they remain confident in their product quality and product development. The most common strategy for better competing with Chinese firms is  to adapt products to the local market, chosen by more than half of respondents. 

R&D spending is stable: This year, 42% of companies with R&D in China planned to increase their R&D investment, down 3 pp from 2022.  Automotive and chemical companies saw the most respondents increasing R&D expenditure (65% and 53%, respectively). Only 10 of the 217  companies with R&D activities in China expect to cut their R&D budgets, a reassuring sign given today’s downbeat economic environment. 

Digital policies continued to trouble respondents: 70% labeled data localization and other cybersecurity requirements as a hindrance to  their business. Meanwhile, 60% said that digital and data security laws have brought increased uncertainty about such policies’ requirements  and enforcement, while 48% say it has increased their company’s operating costs. 

Barely a passing grade for market reform: Asked how committed China is to market opening and reform, on a scale of 1-10 with 1 as no  commitment and 10 as fully committed, respondents gave an average ranking of 6. Companies from the pharmaceuticals, medical devices  and life sciences and banking, finance and insurance industries gave the best grades; those in technology hardware, software and services  and legal services gave the worst. Meanwhile, companies’ perception of policy transparency deteriorated for a third-straight year, with only  one-third labeling the regulatory environment as transparent, and more than half said that government policy in their industry favors local  companies. 

Pressure to decouple comes mainly from the US: Of the two-thirds of total respondents that face decoupling pressure, two-thirds said the  pressure comes from US government policy while only one-third blamed Chinese government policy. Uncertainty over future Chinese policy  direction and uncertainty over future US policy direction were the top factors contributing to this pressure, followed by tariffs and trade barriers  and then risk of military conflict. Among companies that considered how the effects of excessive/premature or non-strategic decoupling of their  industry would impact the US, 72% said that Chinese competitors would replace their operations in China and 57% said that unnecessary decoupling would disadvantage US companies by distancing them from a competitive environment. 

Extension of expatriate tax benefits and new foreign investment measures may boost confidence: The Ministry of Commerce and  State Taxation Administration extended the preferential individual income tax policy on foreigners’ fringe benefits for another four years. The  announcement shows commitment to fostering an environment that attracts foreign talent. The State Council’s release of 24 measures to promote greater foreign investment and ensure national treatment of foreign-invested enterprises is another signal that government has listened  to the business community’s key concern, though the effects will be minimal until companies can assess how the measures are implemented  over the coming year.