Successfully investing in China

China's economy has only slowly recovered since the end of the zero-covid policy in December 2022. Although GDP grew by 5.2 percent year-on-year in 2023, China's economy continues to face challenges: a slowing global economy, geopolitical tensions, demographic change and the ailing property sector.

  

In response, the Chinese government has introduced stimulus programs and measures. Positive effects have been seen in growing domestic demand, the recovery of the automotive market and infrastructure investment, which has led to increased demand for construction materials and machinery. The problematic areas of the Chinese economy remain the ailing property sector, which had previously been a guarantor of strong growth, and the labour market, with high unemployment affecting household purchasing power.

  

China recorded robust growth of 5.3 percent in the first quarter of 2024. For 2024 as a whole, China is targeting growth of around 5 percent, while the International Monetary Fund (IMF) is forecasting 4.6 percent. Domestic demand, an important indicator for the global economy, is also expected to grow moderately.

  

In terms of economic relations between Germany and China, there is still a clear imbalance in the trade balance in favour of China. Although German exports of machinery and Chinese imports increased slightly, overall trade with China fell by almost 15.5 percent in 2023. Nevertheless, the overall trade partnership between China and Germany remains dynamic and diverse. Both countries benefit from each other, although the trade deficit remains a challenge for Germany.

  

China's economy is in transition and the recovery is still fragile, depending on factors such as the property sector and the global economy. However, German companies can continue to benefit from the Chinese market, but they must be prepared for a challenging market environment.

The investment climate in China remains challenging for German companies, but it also offers great oppor­tunities. On the one hand, there are complex legal frameworks, geopolitical tensions, more difficult market conditions, cybersecurity risks, data protection concerns and intellectual property protection that affect business activities in China. Strong integration with the Chinese market requires even greater diversification and comprehensive risk and sustainability management. Some companies are moving their entire production to China to serve the growing market and meet local preferences.

  

On the other hand, China's huge market of more than 1.4 billion people, world-leading innovation and strong research and development activities offer attractive investment opportunities. The well-developed infra​­structure and numerous support programs of the Chinese government create an interesting investment framework.

  

German companies will find many opportunities to invest in China, including the following:

  

With the right strategy and the right local partner, China is and will remain a lucrative market for German companies. However, the challenges should be taken into account when making investment decisions and minimized through appropriate measures. Diversification, risk management and the use of support programs are important success factors.

German companies operating in China face particular challenges. On the one hand, they have to comply with constantly evolving Chinese legislation, while on the other hand they are also subject to German and European regulations. Meeting compliance requirements can therefore be a major challenge. In particular, data protection laws and regulations on data transfer with foreign countries are a source of uncertainty. However, Chinese legislators have recognized that some regulations may be too restrictive and have issued new regulations that relax the strict rules.

  

German companies operating in China must comply with the German Supply Chain Due Diligence Law (LkSG). This law can pose significant challenges for companies with activities in China. In addition, there is the recently adopted European Supply Chain Law, which however will take some time to be implemented in the EU member states. German companies can benefit from a head start here, as they have already become active as a result of the relevant German law and should have already taken appropriate risk management measures.

  

Attracting foreign professionals to China remains a complex task. The country's attractiveness to foreign professionals has not fully recovered from the coronavirus pandemic, and the confidence of many foreigners in China is still shaken. Recruiting German and other foreign professionals is becoming increasingly difficult. The high cost of living in major cities such as Beijing, Shanghai and Guangzhou is also a factor. The Chinese government is trying to counter this with measures such as extending income tax reliefs for foreigners, but the situation remains tense.

  

On the positive side, China has eased visa requirements for citizens of various countries, including Germany, and allows visa-free short stays. This can benefit companies if they need short-term support from headquarters in Chinese subsidiaries or need to make business trips.​

The new Chinese Company Law will take effect on 1 July 2024. The changes to the law cover a wide range of areas, including corporate organization, the first-ever introduction of legally standardized due diligence obligations for corporate bodies, the strengthening of the role of directors, extended provisions on the liability of corporate bodies, employee representation, share transfers and much more. The changes are likely to affect almost all existing German companies in China. For example, a general period of five years is provided for the payment of registered capital. Any company that has planned for a longer period will therefore be forced to adjust its schedules accordingly.

  

On the other hand, the new Companies Act also provides some relief. For example, so-called 'small' companies can dispense with a supervisor or supervisory board. The transfer of company shares has also been made easier, although this can of course also pose a risk, particularly if a German company holds only a minority stake in a joint venture, for example.

Despite challenging circumstances, China proved to be a robust economic power in 2023, achieving growth of 5.2 percent. Moderate growth of between 4.6 percent and 5 percent is expected for 2024. If China's growth stabilizes and global demand picks up, the country could once again become the locomotive of the global economy. German and European companies would also benefit from this. The prerequisites for this are a normalization of supply chains, a recovery of the property market and a further increase in domestic demand.

  

China is seeking long-term sustainable growth to improve the living standards of its people and strengthen its global position. The 'green economy' plays a central role. China is investing heavily in environmental tech­nology, renewable energy and sustainable mobility. Research and development and key technologies such as artificial intelligence, robotics and green technologies are also important priorities.

  

The future brings challenges, including demographic change with an ageing population and a shortage of skilled labour. Growing inequality in the population also calls for new solutions. The key words here are social security systems, the promotion of education and training and the strengthening of the social market economy.

  

At the same time, the challenges outlined above and the ongoing digital transformation offer an opportunity to redesign business models with sustainability in mind. The Chinese government is promoting green business models and offering incentives to companies. German companies can score points in the Chinese market with innovations and sustainable offerings.

  

The success factors for a successful investment in China are and remain courage, intuition, intercultural expertise and a reliable local partner who can present the legal and economic framework in a transparent manner. It is important to understand and respond to the specific requirements of the Chinese market.

  

Despite all the challenges and the current crises and conflicts, China will continue to expand its position as one of the most important investment and sales markets and will become even more important for the German economy in the future.​