German Companies Struggle with Regulatory Challenges in China

Survey highlights eroded confidence and declining foreign capital inflows

In a recent survey of 566 German member companies operating in China, it was revealed that 91% of these companies plan to continue doing business in the country. However, the findings also showed that confidence among Germany’s foreign business community has been significantly eroded due to an increasingly tightened and volatile regulatory environment. Beijing is now seeking to restore trust, as a lack of transparency and a weak economic recovery has led to a decrease in foreign capital inflows.

According to the Ministry of Commerce, although the number of newly established foreign-invested enterprises in China saw a 40% rise in 2023, reaching a total of 53,766, the total amount of yuan-denominated actual foreign capital used dropped by 8% year-on-year to a three-year low of 1.1 trillion yuan (US$155 billion).

Jens Hildebrandt, executive director of the North China branch of the German Chamber of Commerce in China, stated that companies are less optimistic in their outlook compared to the previous survey conducted in October. The survey also revealed that German companies operating in China face a range of challenges, including increased competition from local companies, unequal market access, economic headwinds, and geopolitical risks.

The survey further highlighted that legal uncertainty is considered the most significant regulatory challenge by a third of respondents. More than half of the firms involved in public procurement encountered obstacles like a lack of transparency and “Buy China” policies.

Ulf Reinhardt, chairperson of the German Chamber of Commerce in China – South and Southwest China, stated that after a disappointing 2023, when only 21% of German companies expected positive industry development, the share has doubled to 42% in 2024, with 78% expecting consistent growth within the next five years.

German companies believe that the market growth in China depends on addressing key structural problems. Reinhardt added that while the potential of the Chinese market still exists, market attractiveness has shifted, making it harder to generate profits. He emphasized the presence of both opportunities and challenges in the market.

The competitiveness of German firms is increasingly being tested, as Chinese companies gain ground in the industrial and automotive sectors. Eleven percent of companies in the automotive sector view their Chinese competitors as innovation leaders, with 58% expecting them to take on this role within the next five years, according to the report.

Amid the rising risks of operating in China, such as geopolitical tensions and uncertain economic development, nearly half of the surveyed companies said they have taken steps to ramp up risk management. This includes building China-independent supply chains, setting up additional operations outside China, and localizing research and development activities in China.

The German Chamber of Commerce in China called on Chinese policymakers to create a true level playing field for foreign businesses by implementing measures that promote fair competition and strengthen investor confidence. This would involve improving legal certainty, transparency, and simplifying cross-border data transfer. Intellectual property protection is also highlighted as a significant topic.