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Raymond Yin: ÃÛ¶¹ÊÓƵ is not pulling back from China. In fact, we are investing more. As the largest and fastest-growing global capital market, China is a strategic priority. Our China business is growing and evolving to be more of a standalone business, given the size of the country’s capital markets and its unique regulatory environment.

Localization is accelerating as we build dedicated systems to support the growth of our business. Close to 1,400 people are now employed onshore by ÃÛ¶¹ÊÓƵ—by far the largest number among the major investment banks—and this number will continue to grow. The COVID situation and geopolitical tensions have made it more challenging to operate in China. But to succeed in China, you have to be 100% committed for the long term, and we are.
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Bruno Weill: It is clear that foreign companies need to localize in China in order to increase their resilience in this rapidly evolving and specific market. Because of restrictions on cross-border data transfer under Chinese law, MNCs are required to store data that is locally collected in China, which often means building a separate and dedicated IT system onshore. Localization can be challenging and expensive, as it prevents companies from leveraging their global network and breaks economies of scale. European and American companies that have the size and scale to absorb the costs of localization are doing so. The end of the zero-COVID policy is giving these companies a boost.

However, smaller, less profitable companies are taking more of a wait-and-see approach. Unlike the pre-COVID days, when it was easy to ride the growth in China, companies today have to be more selective about where they invest. Ultimately, the question that all MNCs are wrestling with is: Are we still international companies operating in China, or are we becoming Chinese companies with international shareholders?

Raymond Yin: It is true that COVID has made it extremely challenging for MNCs to operate in China. There has been attrition of 20% to 30% from the expat community, especially among families. However, we have not seen any major businesses pulling out of China. In fact, with the recent state visit to China by Chancellor Olaf Scholz, German companies have reiterated their commitment to large scale projects in China.

The challenging environment in Europe is a factor, with volatile energy prices, a shrinking labor force and the regulatory environment. China offers the largest market for many MNCs’ products. Large companies are recommitting and increasing their investment in China. But it is challenging for the medium-sized and smaller companies, regardless of whether they are multinational or domestic.

Eric Zheng: Among US firms, we have two types of members. One, companies that are in China for China. Their markets are here, and they are here for the long term. And two, those that are in the supply chain business. They source products from China and manufacture here, but they market and distribute their products abroad. Companies that are in China for China remain very committed. Based on our recent survey, we estimate about 75% of US companies have remained profitable in China.

For the second group of companies, however, 2022 was a very challenging year due to the zero-COVID policy, which caused disruptions to the supply chain, and deteriorated bilateral relations between China and the US. Now that the strict policy has ended and China has reopened its borders to international visitors, we expect 2023 to be a better year.

Raymond Yin: China is a large and complex market. Even though the government is strong, it does not mean that China is uniform. There are 30 different provinces, and there are regional politics just like in Europe and the US. Thus, companies need to dig deeper to find the opportunities. Things are not black and white—they are a thousand shades of grey.

The companies that will be successful are those comfortable operating under uncertainty in our view. Many regulations in China are still work in progress, and it is important to understand both the letter and the spirit of the law—so as to distinguish what is permitted and what is not. It is therefore crucial to have strong legal and compliance support when operating in China.

Bruno Weill: The amount of Chinese investment in Europe is still much below where it should be. But we see quite a bit of interest in Europe from Chinese companies, and Europe is still very much welcoming Chinese investment. The question is how to be successful in Europe. We are seeing an increasing willingness by Chinese companies to localize their production in Europe. Some are acquiring brands in order to be perceived as more local, finding joint ventures with European companies, or opening their shareholding structure in Europe. Just as international companies need to localize in China, we see the same need for Chinese companies to localize in Europe.

Raymond Yin: As we know, China is very good at manufacturing the entire supply chain of products, from the very low end to the high end. But Chinese companies are becoming dissatisfied because the margin for pure manufacturing is very low. They want to get into the branding business so that they can capture the higher end of the supply chain. Chinese companies are registering patents for their intellectual properties, purchasing failing foreign brands and reviving them, and acquiring luxury foreign brands in order to inject capital and broaden the market for these brands. We expect to see that trend increase going forward.

Raymond Yin: While we cannot predict the timing of China’s economy picking up, the worst case scenario has clearly been avoided. The People’s Bank of China has declared it has resumed normal operations and is putting in place several measures to inject liquidity into the market, specifically real estate. That has reduced tail risk significantly, making it less likely for the Chinese banking system to face significant defaults. We believe the banking system will remain strong and sound, which should put in a bottom for the market.

In addition, as the reopening measures kick in, China’s robust manufacturing capability is coming back online. Manufacturers will start taking orders and the export machine will start running again. It will likely take a quarter or two for that to show up in the GDP figures, but we are confident it will. The capital markets in China have rallied in anticipation of a more positive scenario, reversing some of the depressed valuations in 2022. We expect to see stronger growth, a recovery in corporate earnings and valuation expansion.

Eric Zheng: US-China relations are still at that stage where the two sides are trying to figure out how to deal with each other. They still see each other as competition, but they are trying to find room to cooperate. In our view, it is in the interest of both countries to try to find ways to work together while managing their differences. Both sides will need to work together to resolve important global issues such as climate change and public health.

At the recent summit in Bali, President Joe Biden and President Xi Jinping set a floor under the relationship. The conversation should continue with US Secretary of State Anthony Blinken’s visit to China meeting with the new Chinese Foreign Minister Qin Gang. In our recent survey, US-China tensions were ranked as one of the top three challenges for US companies doing business in China. We are hopeful the two governments will try to find ways to improve relations while managing their differences.

Bruno Weill: Europe has labeled China as a systemic rival, but also as a competitor and a partner. Visits to China by European Council President Charles Michel and President Emmanuel Macron of France signal a reengagement between China and Europe. That sentiment extends to the corporate level.

With the end of zero-COVID, the size of the business delegations accompanying the government leaders will be much bigger. The leaders of European companies will be able to meet their local partners and teams, to develop local business, and to make new deals.

Raymond Yin: It is clear that China is committed to opening its capital markets to the rest of the world. It is for China’s benefits, as well. For many decades, China’s growth has been funded by the real estate sector. But that can only go so far. An excess supply of properties exists, especially in secondary or tertiary cities. There is no shortage of new airports, highways or highspeed rail lines in China. The next stage of growth will have to funded more by capital markets.

In the US, 80% of the growth is funded by the capital markets, and only 20% by banks. The opposite is true in China, which exposes China to the risk of a banking crisis. To mitigate that, the Chinese government is transitioning the growth model from indirect financing by the banks to direct financing by the capital markets. It is opening the markets not only to attract foreign capital but also to take advantage of foreign technologies for capital management, risk management and governance. This trend is accelerating, with further loosening of ownership rules across asset management, banking and insurance sectors.

Eric Zheng: The Chinese authorities are promoting a concept called ‘dual circulation’. This includes external circulation, which is focused on foreign trade and investment, and domestic circulation, which is focused on the Chinese market. Foreign companies should seek to take advantage of both trends by sourcing products from China to export, while also focusing on the domestic China market. China is a long-term play, and companies have to be here for the long term. Most of our American companies are committed to this market.

Bruno Weill: European companies, like American companies, are here to stay in China. The larger companies are reinforcing their presence and investing further. With the end of zero-COVID, executives of European companies can come to China to develop new business, new cooperation, and new partnerships. We are optimistic about the potential.

Raymond Yin: We expect to see a huge pickup in global visitors to China. We have a lot of events planned in China for ÃÛ¶¹ÊÓƵ leadership. Take the opportunity to get to know China better by coming to visit. Did you know in Shanghai close to 50% of the cars on the road are electric vehicles? China is making progress. Come see the changes yourself.