China’s Covid policy is costing foreign investors confidence

Shanghai unveiled a 50-point plan over the weekend to mitigate the economic fallout of its “zero Covid” policy after lockdowns in recent weeks have caused financial losses at the global business hub, disrupted global supply chains and raised concerns about a shortage had transparency and predictability.

The turmoil’s impact on foreign companies is unlikely to go away anytime soon, according to Alan Beebe, former president of the American Chamber of Commerce in China and a longtime China hand who is now an outside consultant at Bain &. Co. based in Beijing.

“Trust is lost. China has always been a very predictable business environment, relatively speaking. They might not like all of the guidelines, but at least it was predictable,” Beebe said in a Zoom interview. “Now it’s very unpredictable and obviously companies don’t like that. And this comes on top of last year’s crackdown on China’s private sector, particularly for tech companies and education companies.” New York-listed internet heavyweight Alibaba has lost 57% of its value over the past year, while those of education companies like TAL Education and New Oriental Education has plummeted 89% in each of the last 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 policy’ or ‘Don’t worry,’ I doubt people will just go back to that (previous) level of normality.”

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

Flannery: How are China’s Covid policies affecting US companies there?

Beebe: What happened is unprecedented. The draconian measures China has taken are having a massive impact on businesses and, frankly, on the psyche of everyone affected, whether foreigners or Chinese. It creates an unprecedented level of uncertainty, opacity and ambiguity about what the future holds.

It’s one thing to have isolated cases or lockdowns that have relatively little impact on the economy. But the magnitude and scale and uncertainty of what we have today leaves big question marks over the economic outlook.

Surveys by AmCham China and the European Union Chamber of Commerce in China show revenue has fallen. What these surveys may not capture is the level of discomfort people have. I feel that every day both in myself and in the many people I know, whether they are foreigners or Chinese. In such an environment, few will make truly meaningful business decisions, let alone investment decisions. People here see a black box in terms of government decision-making and there is growing speculation that there is conflict within the Chinese government over the best policy direction for the economy and Covid-19. You are in a difficult position right now.

Flannery: Has the impact on smaller foreign entrepreneurial companies been greater than on larger multinational companies?

Beebe: I would say it’s different. You have to divide them into two categories. Smaller companies may be headed by a person who most likely has made a significant commitment to operate in China. It’s just not that easy for them, whether for business or pleasure, to do their jobs, pack their bags and leave.

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

So I think it’s probably very general how they handle this situation, from just hunkering down and holding out to more drastic action, whether it’s firing employees or delaying payments and so on. It’s no different than any small or medium-sized business anywhere in the world that is struggling with a situation like this.

While most large companies can weather the storm, they are putting important decisions on hold and implementing plans to diversify their supply chains. They locate positions traditionally intended for foreigners or expatriates to deal with the situation at short notice.

The medium and longer term concern is that trust will be lost. China has always been a very predictable business environment, relatively speaking. You might not like all of the guidelines, but at least it was predictable. Well, it’s very unpredictable, and obviously companies don’t like that. And this comes on top of last year’s crackdown on China’s private sector, particularly for tech companies and education companies.”

So in a way, people feel “once burned, twice shy.” 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 normalcy.

I truly believe that we are at a crucial turning 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 face all sorts of fundamental political and financial struggles. There are so many question marks.

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

Beebe: Looking back on my time at AmCham China, I have always been amazed at how resilient the US business has been in China despite all the fireworks, especially around the tariff increases. customized company. They didn’t like it. There have been some winners and losers, but by and large they’ve settled into it.

I do think it could be different this time. First of all, after the Biden administration took office, there was arguably false hope that things would improve between the US and China, but we now see that this is clearly not the case. I think there is a realization that the relationship is the way it is and the question is will it stay the same or will it deteriorate.

As a result, companies are taking or will take action. What are these actions? They don’t want to give up the opportunity in the Chinese market. At the same time, they want to minimize their risks. I imagine you won’t see a full pullout from China, but rather a diversification of supply chains to become less dependent to serve the Chinese market but less exposed to unpredictability.

Another development that is not directly related to US-China relations – but is – is the war between Russia and Ukraine. I was surprised how quickly US companies and foreign companies in general withdrew from Russia. This certainly makes the Chinese government think: “If things get that bad, can we really expect foreign companies to stay in China? Does economics really trump everything else?” And I think the answer is no.

Flannery: That’s an interesting point. I thought about calling Starbucks and saying, “I noticed that you have closed 150 stores in Russia in connection with the invasion of Ukraine. What’s your contingency plan if Taiwan and mainland China come into conflict one way or another?” China is a big part of his business.

Beebe: It’s part of sound corporate governance and strategy to have fairly well developed, robust scenarios so that companies can take appropriate action once certain triggers arise. And I would imagine many, many leading companies are going through this exercise right now. And if they aren’t, they should be.

Flannery: With Taiwan?

Beebe: Yes, also with Taiwan. Just to get to the point, one of the things that surprised me was the reaction of some companies when Covid first hit back 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 a number of companies that seemed pretty quiet.

Why were they quiet? Because they had backup plans. They drew on similar experiences from other parts of the world. You pull out the playbook that is most similar. For example, companies in the energy sector that are heavily invested, for example 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 these companies. They have the institutional ability to prepare for the best and plan for the worst.

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@rflannerychina