Pessimism Swells on Doing Business in China, European Firms Say

A recent survey by the European Union Chamber of Commerce in China reveals increasing pessimism among European firms regarding growth prospects and profitability in China, with 29% expressing a negative outlook for their sector and 49% pessimistic about profitability; this represents the most downbeat sentiment since 2011, highlighting ongoing challenges despite government efforts to improve the business environment.

Analysis

A survey conducted by the European Union Chamber of Commerce in China between January and February, involving 503 European firms, indicates a significant downturn in business sentiment, reaching its most pessimistic level since 2011. Specifically, 29% of respondents expressed a downbeat outlook for their sector's growth prospects over the next two years, and a substantial 49% reported pessimism regarding their profitability. This negative sentiment, reflected by a sentiment score of -0.7, persists despite recent efforts by the Chinese government to address business complaints, highlighting ongoing and potentially deepening challenges for European companies operating within the world's second-largest economy. The findings suggest that fundamental concerns about the business environment are outweighing any recent ameliorative measures, impacting expectations for both growth and profitability.

Key Decisions for Investors

• Investors should critically re-evaluate the growth and profitability assumptions for European companies with significant operational exposure or revenue dependency on the Chinese market.
• Consider increasing scrutiny on investments in China-exposed sectors, particularly if alternative markets offer more stable or predictable operating environments, until tangible improvements in business conditions are evident.
• Monitor closely any further policy responses from the Chinese government and subsequent sentiment surveys to gauge the effectiveness of measures aimed at improving the business climate for foreign enterprises.