German companies must brace themselves for difficult times in China as Beijing locks up company profits and opens up new industries to investors to simultaneously curb capital flight and attract more money.
After decades of investing in their businesses there, suddenly it has become more difficult to extract profits.
China has long been accustomed to more capital flowing into the country than investors took out. With its market of up to 1.4 billion customers, the burgeoning economy was irresistible for businesspeople. But that perception is changing as the country bids goodbye to that level of growth.
The greatest risks are not to be found in Beijing's short-term controls of capital movement, but rather in an industrial policy that represses foreign companies.
And while that may be appropriate, the result has been that Chinese companies in particular have begun shifting their money out of the country in search of more attractive investment opportunities. Over half a billion dollars left China in 2015, and it could become almost a billion this year.
And apparently the trend is more dramatic than previously assumed, prompting the government to take drastic measures. As of right now, the strict rules apply for payments exceeding $5 million and only in a few cities like Shanghai and Chongqing, while the old rules still apply in the capital of Beijing. But the barriers for paying out dividends may be just the start.
Discussion about the worst-case scenarios are already being discussed on the executive floors of a number of companies, where anxieties are high. But China wouldn’t be China if its leadership wasn’t making crucial adjustments on another front. While Beijing seeks to curb the outward flow of capital, it is also searching for ways to lure new money into the country. In line with this, China’s economic planning bureau, the National Development and Reform Commission (NDRC), has already begun opening industries that had been closed to foreign investors.
That is likely to please German carmakers, among other manufacturers. The authorities have proposed making the field of automobile electronics more friendly for international investment. At the same time, foreign companies will have access to agricultural and chemical production, mining, the manufacture of motorcycles and the operating of amusement parks and golf courses.
The crisis presents an opportunity for China. German Economics Minister Sigmar Gabriel has so often called for the country to open new industries to German investors that it was beginning to sound like a mantra. Now that Beijing urgently needs more capital, it can sell its new measures as a concession to European and American politicians.
But Beijing is still playing a dangerous game because these measures also undermine the confidence of the international business world. Companies will think twice about exposing themselves to new risks and industries in China.
At the same time, Beijing is making no secret of the fact that its prime objective is to build up and expand its own economy. This means that German companies who invest today as partners could later be seen as rivals. That’s why those who want to have long-term success in China need both innovative products and the support of European governments and lobby groups to push for protection against structural disadvantages in things like public tenders and subsidies.
China’s decision to lock up profits has been a shock to the German business world — as well it should. The greatest risks, however, are not to be found in Beijing’s short-term controls of capital movement, but rather in an industrial policy that represses foreign companies.
The lesson to be learned is that it is not enough for German companies to simply offer superior products. Engaging in the debate over China’s economic policies will also be essential.
Stephan Scheuer is Handelsblatt’s correspondent in China. He can be reached at firstname.lastname@example.org