China says it’s ‘open for business’ again after zero-covid. Here’s what that means.

Brian Klein

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Confusion, it seems, is the main feature of analysis of China’s economy these days. The country’s prospects are everything, everywhere, all at once: We hear that the Chinese economy is about to drive world growth to new heights after a post-covid reopening; that the economy is in crisis; and that a full recovery remains uncertain. These analyses come from reputable sources, each with plenty of data to support them. And, of course, all the prognosticating matters beyond feeding the prediction industry; businesses are using these forecasts to make investment decisions, and world leaders are reassessing the strength and character of their China relationships. And where money flows, politics follow.

Now China is hoping to get the money flowing again. The government has announced with some fanfare that it is “open for business” — after the “zero-covid” clampdown that slowed manufacturing and consumer spending and all but shut down business travel to and from China. Liu He, the outgoing Chinese vice premier and among the last of the country’s senior economic reformers, said at the January Davos conference, “Foreign investments are welcome in China, and the door to China will only open up further.”

On the surface, the opening appears promising. It’s already clear that the on-the-ground reality of open shops, busy restaurants and full trains for the recently ended Chinese New Year is a vast improvement over all those rolling covid lockdowns. In terms of commerce and travel, things look good right now. But widen the lens and a different picture emerges — and with it a sense of the challenges that loom for that “open-for-business” mission.

In part that’s because in Xi Jinping’s China, broader economic reforms and openings are on hold, for the foreseeable future. The last of the true economic reformers are gone from the stage, following the latest political reshuffling in Beijing, and the current leadership has far less experience in modern economic policy than its predecessors. Ideology and party primacy are the key factors that will shape China’s business environment in the near term. None of this bodes well for foreign businesses looking to expand existing operations or start new ventures.

Meanwhile, many foreign companies are relocating from China to other emerging and cost-effective manufacturing hubs which boast more open business environments — India and Indonesia, to name two prominent examples. At the same time, firms that can create dual supply chains — one inside China for the domestic market, and another for the rest of their global footprint — are busy implementing their plans. These are trends that began during the covid pandemic and are accelerating now.

All of which begs the question: What exactly does “open for business” mean in the way Chinese officials are using the phrase — and what are its chances for success?

How China got here: Open, closed and open again

For most of the last three decades, China’s welcoming of foreign business — while still nothing like the open approach of other Asian or Western economies — has been a critical feature of its economic success. That openness led to favorable U.S. and European policies; global CEOs made expansive investments in manufacturing capacity on the mainland, and global markets for Chinese goods opened even while China’s markets remained relatively difficult to penetrate. Global trade routes altered the Chinese landscape, as entire cities with tens of millions of inhabitants sprang up from farmland in what many longtime China watchers would describe as the blink of an economic eye.

It was the golden age of optimism about China. Bookstore shelves were filled with titles about a China boom, a billion new consumers for the world and a China-led “Asian century.”

To listen to the Beijing establishment today, there’s no reason — with “covid-zero” in the rearview mirror — not to think the golden age will return. Liu He, the outgoing vice minister, hit all the familiar talking points at Davos: support for the rule of law, growing consumer demand and a further opening to foreign business and investment.

“Looking ahead,” he said, “China’s urbanization is still on a fast track, and the enormous potential demand generated in this process will provide a strong underpinning for the development of the real estate sector.”

China, according to its global emissaries, is open for business, eager for foreign investment, tourism and trade. And for all the talk of “decoupling” with the U.S. and other stresses in the relationship with Washington, U.S-China trade hit an all-time high in 2022.

“Open for business” had its big moment on a single day in December, when most of the covid lockdowns and other restrictions came to an abrupt end. Millions of people across China are spending and traveling again, despite the recent spread of the virus and the soaring death toll that followed.

Some expect that after this current wave of infections and deaths subsides — and that moment may have already arrived — Chinese consumers flush with savings will spend even more. Chinese households are estimated to have saved more than $2 trillion during the zero-covid period when they were effectively confined to their homes.

To be sure, 2023 has started off with a bang. The economy rebounded in January, according to official Chinese statistics. The IMF has raised estimates for China’s GDP growth this year to 5.3 percent from 4.4 percent, though with a heavy caveat that 2024 may not look as rosy. And investors are pouring back into the region, eager to capitalize on new demand that will likely outpace the rest of the world. Overall, this is welcome news at a time when recession fears persist in the U.S. and Europe.

Meanwhile, some foreign financial firms have recently gained increased access to China’s markets. Most notably, JPMorgan and Standard Chartered Bank have received authorization to expand in China, including brokerage and private wealth management services. This is no small matter: It’s estimated that there is the equivalent of some $20 trillion in assets to be managed.

It’s one concrete example of what “open for business” can look like.

There’s a catch. Many catches, actually.

The first problem with “open for business” involves a matter of basic economics.

China’s economy has a debt problem, especially for local governments. They relied on real estate to fuel their budgets. When that market tanked their debts skyrocketed. Now some officials are trying to cut where they can, including basic medical benefit allowances for retirees. This comes at a time when China’s aging population is rising rapidly, putting further budgetary strains on the government to take care of their needs.

Beijing is going to have to reckon with these problems sooner rather than later — and the fixes are more likely to be driven by a favoring of Chinese firms over foreign competition.

Already there’s talk of fresh spending on massive infrastructure projects, which provide a base for steel, cement and other domestic heavy industry. And when it comes to a broader economic opening, there are signs that the opposite is happening: less international competition, more made-in-China champions and a focus on socialist principles that favor the state over the private sector. Beijing’s policy of greater, not less, party and government control is putting the brakes on what foreign businesses can do in China. And that means that the China market is only likely to get tougher for foreign companies going forward.

Xi Jinping, in his address to the Communist Party Congress in October 2022, extolled the virtues of “high standard opening up” without offering convincing details on how that would happen. Xi also said, “We will deepen reform of state-owned capital and state-owned enterprises (SOEs); accelerate efforts to improve the layout of the state-owned sector and adjust its structure; work to see state-owned capital and enterprises get stronger, do better and grow bigger; and enhance the core competitiveness of SOEs.”

That’s a powerful statement, but it’s not an “open-for-business” message.

When “Made in China” + “Made in America” = economic trouble

Apart from all the economic challenges for China’s “open for business” plans, geopolitical tensions are on the rise — and these will impact those plans as well.

Worries about a possible Chinese invasion of Taiwan seem to grow by the day. According to a recent U.S. Chamber of Commerce in Taiwan industry survey, one-third of respondents said their business operations had been “significantly disrupted” due to the increasing tensions.

And in the U.S., policies to thwart Chinese innovation and competition in the technology sector have sailed through the partisan divide in Washington. President Joe Biden’s signature pieces of legislation in 2022 — the CHIPS Act and Inflation Reduction Act — were loaded with measures aimed squarely at China in the areas of trade, technology transfer and chip manufacturing. These policies have U.S. companies worried about the potential for China to take retaliatory action, a possibility that Beijing has alluded to without mentioning specifics.

In short, “Made in China” has a current logic for the Communist Party — and “Made in America” is increasingly a driving principle for the Biden administration. Taken together, all these issues are weighing heavily on corporations assessing the risks of doing business in China.

Headed elsewhere

Whatever the Chinese government is saying about a reopening, many major foreign corporations are moving to diversify their supply chains away from China. According to a late 2022 survey conducted by the Conference Board, “31 percent of CEOs said their companies have reduced or are planning to reduce dependencies on Chinese suppliers, up significantly from 17 percent” in the first half of the year.

Some recent high-profile moves include Sony Group moving most of its camera production to Thailand for sales outside of China, and Apple, which has been highly reliant on China for the manufacturing of its most popular products, at least beginning to look elsewhere. Even though more than 95 percent of Apple’s production remains tied to mainland China, the company has begun shifting a small part of its MacBook production to Vietnam and begun expanding iPhone manufacturing in India.

In the end, China’s business environment remains a portrait of contradictions, shifting policies and often contradictory rhetoric. In that way, not much has changed. As China focuses on growth for its domestic businesses, foreign companies are likely to gain less and less market share. None of this means there won’t be stronger domestic demand eventually, but it’s likely to be far slower than in previous years, with much less opportunity for non-Chinese brands to thrive.

As far as being “open for business,” Beijing will continue to play by its own rules, often at odds with international norms, while promoting an international image of openness and opportunity. Foreign firms will likely continue to run into roadblocks thrown up by both official policy and unofficial preferences pushed by the central government. Even sectors that have been traditionally more open to foreign businesses may see tightening if Washington widens its restrictions on Chinese investment into the U.S. Expect Beijing to pursue similar policies in response. And if U.S.-China relations continue to sour, a consumer backlash against U.S. brands — similar to what happened during heightened tensions with Japan and Korea — would likely follow.

The risks for foreign companies — whatever China’s government says — are growing. Geopolitical tensions, Beijing’s domestic policy preferences and the weight of years of unbalanced growth will have increasingly negative effects for some time to come. The sign may say “open for business,” but the prime shelves, as it were, may be reserved for China.