China’s covid policy is costing foreign investors’ confidence

Shanghai this weekend unveiled a 50-point plan to mitigate the economic impact of its ‘zero Covid’ policy after lockdowns in recent weeks caused financial losses in the global business center, disrupted global supply chains and raised concerns about a lack of transparency and predictability.

The impact of the turmoil on foreign companies is unlikely to fade anytime soon, according to Alan Beebe, a former president of the US Chamber of Commerce in China and longtime Chinese hand who is now an outside consultant at Bain & Co. located in Beijing.

“The trust is gone. In relative terms, China has always been a very predictable business environment. You may not like all the policies, but at least it was predictable,” Beebe said in a Zoom interview. “Now it’s very unpredictable, and of course companies don’t like that. And this comes on top of last year’s crackdown on the Chinese private sector, especially on technology and education companies.” New York-listed shares in internet heavyweight Alibaba have lost 57% of their value in the past year, while those of education companies such as TAL Education and New Oriental Education have each fallen 89% in the past 12 months.

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

Beebe, a Nebraska native and a Yale graduate, ran 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 of a century of experience in Asia and has been based in Beijing since 2002. Edited interview excerpts follow.

Flannery: What is the impact of China’s Covid policy on US companies there?

Beebe: What happened is unprecedented. The draconian measures taken by China have had a huge impact on businesses and frankly on the psyche of every individual affected by it, be it foreign or Chinese. It creates an unprecedented level of uncertainty, non-transparency and ambiguity about what the future holds.

It’s one thing to have isolated cases or lockdowns that have a relatively small impact on the economy. But the scale, magnitude and uncertainty of what we have today are seriously questioning the economic outlook.

Surveys by AmCham China and the European Union Chamber of Commerce in China show revenues are declining. What may not be captured in these surveys is the level of discomfort people have. I feel that every day, both myself and among the many people I know, be they foreign or Chinese. In this kind of environment, few will actually make meaningful business decisions, let alone investment decisions. People here see a black box in terms of how government decision-making is made, and there is growing speculation that there is conflict within the Chinese government over the best policy direction for the economy and Covid-19. They are now in a difficult situation.

Flannery: Is the impact on smaller expat entrepreneurs greater than on larger multinationals?

Beebe: I’d say it’s different. You almost have to divide it into two categories. Smaller businesses may be run by an individual who is likely to have made a substantial commitment to be in China. It’s simply not that easy for them to raise their stakes, pack their bags and leave, both business and personal.

At the same time, their companies are being hurt and hit hard, and there is nowhere near the cushion that a big company has. If you need to do payroll, you need to create payroll. If you have to pay rent, you have to pay rent.

So I think it’s probably across the board in terms of how they’re handling this situation ranging from just plopping down and driving out to taking more drastic measures, whether that’s laying off staff or deferring payments and so on. It is no different than any small or medium sized company anywhere in the world that has to deal with such a situation.

While most large companies can weather the storm, they put important decisions on hold and formulate plans to diversify their supply chains. They locate positions traditionally tagged for foreigners or expats to cope with the situation at short notice.

The concern for the medium and long term is that trust will be lost. In relative terms, China has always been a very predictable business environment. You may not like all the policies, but at least it was predictable. Now it’s very unpredictable, and of course companies don’t like that. And this comes on top of last year’s crackdown on the Chinese private sector, especially on technology and education companies.”

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

I really think we are at an important turning point for foreign companies. For example, if you look at the international schools – which have long been a foundation for foreign business – I really don’t know if these foreign schools can survive. They face all kinds of fundamental policy and financial problems. There are so many question marks.

Flannery: Chamber surveys show that the overall relationship between the US and China plays a role in business decisions about China. How do you see the overall relationship now?

Beebe: Coming back to my tenure at AmCham China, I was constantly amazed at how resilient corporate America was in China, despite all the fireworks, especially around tariff hikes. Companies adapted. They didn’t like it. There were some winners and losers, but for the most part they adapted to that.

I think it could be different this time. First, when the Biden administration took office, there was an arguably false hope that things would get better between the US and China, but we now see that clearly isn’t the case. I think there’s an acknowledgment that the relationship is what it is, and the question is whether it will stay the same or if it will get worse.

As a result, companies take action, or are about to take action. What are those actions? They do not want to give up the opportunities in the Chinese market. At the same time, they want to minimize their risks. I imagine you won’t see a complete pullout from China but a diversification of supply chains to become less dependent so they can serve the Chinese market but be less exposed to the unpredictability.

Another development that is not directly related to the relationship between the US and China – but it is – is the war between Russia and Ukraine. I was surprised at how quickly US companies and foreign companies generally withdrew from Russia. No doubt this also makes the Chinese government think: “If things go so badly, can we really count on foreign companies to stay in China? Does economics really surpass everything else?” And I think the answer is no.

Flannery: That’s an interesting point. I’ve thought about calling Starbucks and saying, ‘I noticed you closed 150 stores in Russia over the invasion of Ukraine. What is your backup plan if Taiwan and mainland China somehow come into conflict?” China is a big part of his business.

Beebe: It’s good governance and business strategy to have reasonably well-developed, robust scenarios, so that once certain triggers arise, companies can take the appropriate action. And I can imagine a lot of leading companies going through that exercise right now. And if they aren’t, they should be.

Flannery: With Taiwan?

Beebe: Yes, also with Taiwan. To make a point of that, one of the things that surprised me was how some companies reacted when Covid first hit in early 2020. There was tremendous unpredictability. People didn’t know what it was, how big the impact would be, and so on. But there were quite a few companies that seemed pretty quiet.

Why were they quiet? It’s because they had backup plans. They relied on similar experiences from other parts of the world. They pull out the playbook that most resembles it. For example, companies in the energy sector that have invested heavily in the Middle East or North Africa, where there has been political unrest and war, have their contingency plans. In a way, I was pleasantly surprised by the resilience of those companies. They have an institutional capacity to prepare for the best and plan for the worst.

See related posts:

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