Are Companies Leaving China?

China has remained firm in its zero-COVID strategy, which allowed the nation to curb infection rates quickly during the initial outbreak of 2020. The rapid and tight lockdown measures and the restrictive travel requirements allowed the country’s economy to recover and sustain its growth trajectory quickly. Despite past effectiveness, the Zero-COVID policy has taken a toll on the economy, and businesses have questioned its impact and sustainability in the long term.

With the overall discontent among companies from various industries regarding the government’s response to the pandemic, some businesses are reconsidering their investment strategies, while others are considering leaving the Chinese market altogether.

Overview of Lockdowns and Travel Restrictions in China

China initially maintained some of the most stringent policies on lockdown measures and travel restrictions worldwide. These policies presented various challenges to businesses and individuals alike. However, in late 2022, China began to ease these restrictions significantly, moving away from the strict Zero-COVID policy. By mid-2023, China had fully reopened its borders and lifted most domestic restrictions to stabilize its economy and attract foreign investment again.

Zero-COVID Policy

During the height of the Zero-COVID policy, China required its cities to implement lockdowns even if there were only a small number of reported infections. An intolerance for even the slightest increase in COVID-19 infections made this one of the strictest and most restrictive policies in the world, with millions of citizens being locked down at times in various parts of the country.

Except for essential suppliers like supermarkets and food shops, businesses were forced to temporarily shut down operations until local authorities confirmed no new infections in the area. Such measures heavily affected logistic and transport networks due to restrictions on how people and goods could move.

Travel Restrictions

Travel to and from China was severely limited, and travel restrictions further halted the plans of many high-level expatriates who decided to return to their home country due to the effects of recent lockdown measures. This presented difficulties not only to those based in China who wished to return home but also to companies losing employees and unable to secure replacements.

By mid-2023, these restrictions were lifted, and regular travel resumed, albeit with some health checks and documentation requirements.

Reasons Why Companies Are Considering Leaving China

Lockdowns

The uncertainty regarding the timing of a lockdown prevented businesses from anticipating when they might be locked down and how long it might last. As such, businesses experienced more challenges and unexpected losses they could not prepare for. Aside from the temporary closures, which sometimes led to permanent shutdowns, other problems such as the cost of operations, disrupted supply chains and human resource issues also arose.

Travel Restrictions

While individuals could still travel to China, the restrictions made travel difficult, with numerous barriers that discouraged open travel. Those wishing to enter China faced high flight prices, flight cancellations, difficulty obtaining necessary documentation, and lengthy quarantine periods. These procedures became exhausting for those who wished to travel to or from the country.

Logistics

Interruptions in trucking, air freight, and shipping services significantly disrupted local and international supply chains. Numerous ships waited at Chinese ports for extended periods, while trucks could not mobilize due to restrictions and a lack of workforce. With the delivery of raw materials and finished products behind schedule, businesses faced increasing difficulties meeting demand.

The Shanghai lockdowns, in particular, damaged local and global supply chains. Shanghai hosts the globe’s biggest and busiest port, and with over two months of halted operations, global supply chains experienced harsh repercussions.

Are Companies Leaving China?

AmCham China recently surveyed the impact of COVID-19 on the American business community in the country. The survey covered business factors and key performance indicators such as supply chain, profits, talent retention, and investments. The survey also covered the Chinese government’s efforts to stabilize the economy and reopen business sectors through various policies.

Some notable findings include:

• Respondents felt an overall decrease in confidence in doing business in the country due to the recent outbreak and restrictive measures imposed.
• Over half of the businesses surveyed had already reduced or delayed investments in the country.
• Most companies reported reduced production capabilities due to a lack of supplies and workforce and the uncertainty of government-issued lockdowns.
• The respondents also projected reduced revenues for the year.

Regarding talent acquisition and retention, around half of the businesses said that foreign workers refused to relocate to China due to “Dynamic Zero-COVID” policies and their associated effects. On the other hand, more than one-fourth of the respondents said that the COVID-19 restrictions reduced over 30% of their foreign staff.

With all these factors in mind, some businesses have considered moving their operations or parts of their operations out of mainland China. Others are considering relocating their headquarters, and a few expect the complete closure of operations in China.

In a flash survey released by the EU Chamber of Commerce in China, 23% of EU businesses have considered moving their investments out of China.

At the start of 2023, businesses operating in China had an overall positive perception and sentiment of the business landscape in China. However, the sentiment significantly changed with the halt to daily life seen in some major cities and no clear sign of when the stringent policies would end. While multinationals and larger businesses continue discussing with authorities, many other companies are reconsidering their position in the market.

The majority of Companies Choose to Stay

While many foreign companies are expressing their frustrations regarding the COVID lockdowns by considering reducing their investment, these companies only make up a fraction of the country’s businesses. Most companies do not have such plans shortly since shifting operations out of China is extremely difficult and complex. While they may be frustrated by the COVID policies, they remain hesitant to remove themselves from an established market based on a short-term inconvenience.

Meanwhile, the Chinese government is becoming increasingly aware of the pandemic’s impact on the country’s supply chains. It is finding ways to meet business demands without putting the health of its citizens at risk. The Ministry of Commerce has stated that there is an agenda in place to improve foreign investment services and increase opportunities for foreign businesses.

Effects of COVID on Future Investments in China

Foreign direct investments in China rose by 26.1% in the first four months of 2023, and investments from the US and Germany were the main contributors to this economic activity. China’s supply chain advantage is based on more than just its cheap labor costs. The presence of multiple supply chain hubs helps to create more efficient processes and better business resiliency.