U.S. Companies In China Worried Covid Surge Will Damage Prospects After Upbeat G20 Meeting

U.S. companies in China are worried that a surge in Covid cases in the country will hurt consumer and investment spending right after an upbeat G20 meeting bought a welcomed thaw in official contacts between the two sides, the chairman of the American Chamber of Commerce in Shanghai Sean Stein said in a telephone interview on Thursday.

“I was talking to the China CEO of a large U.S. company and asking him what was on top of his problem list,” said Stein, who spent more than two decades in the U.S. foreign service before joining American law firm Covington as a public policy practice advisor in Shanghai last year. “His answer was: No. 1 is consumer demand. No. 2 is demand from consumers. No. 3 is how much consumers want to buy. And then No. 4 is Covid — because that’s driving all of it. No. 5 is consumer demand.”

Chinese consumers “are concerned about losing their jobs and concerned about the value of their house. They’re concerned again that businesses aren’t investing and expanding. All of that is the problem,” said Stein, a former consul general at the U.S. consulate in Shanghai.

As a result, foreign businesses feel pressured. “Every day we look at those (Covid) numbers, and business community sighs. It’s bad for business, it’s bad for China, and it’s bad in the sense this problem could go on longer,” he said.

The country on Friday disclosed more than 32,000 new domestic Covid cases, the highest daily total to date. The Covid surge comes after the government, facing huge costs of mass testing, suggested earlier this month it was trying to ease restrictions. “We’re running into a new problem that mass testing is an enormous financial burden on district governments. They are trying to save money, but they are going to start making testing harder,” Stein said.

China needs to solve the “zero-Covid” fallout because of economic demands, he said. “China’s becoming a less attractive investment destination,” Stein said. An American Chamber of Commerce in Shanghai survey in October found that the percentage of respondents describing themselves as optimistic or slightly optimistic about the five-year business outlook in the country fell to 55%, the lowest in the survey’s history and a 23 percentage point drop from 2021. Less than 20% of members said China is the number one investment destination; in addition, only 37% described the regulatory environment in their industry as transparent, a 10 percentage point drop from last year, while 56% of respondents said government policy shows favoritism towards domestic companies, up five percentage points from last year and the highest level since 2017.

“What our members are reporting is investments are being delayed in China, investments are being are reduced in China, and investments are being redirected from China,” Stein said. “There are a lot of factors that go into it, but the biggest single factor, of course, is the unpredictability of the Covid policies,” which hurts supply chain and workforce management, along with domestic spending and investment, he said.

The bad news about Covid comes after an upbeat G20 gathering in Indonesia this month. The meeting between President Joe Biden and Communist Party Secretary Xi Jinping “may be indicative of something good,” Stein said.

“One thing that gives me optimism coming out of this is we’ve heard from multiple people that the two countries agreed to resume more regular contact,” he said. Already, U.S. trade policy chief Katherine Tai met China Commerce Minister Wang Wentao at the APEC Summit in Bangkok following the G20 meeting. “That can only be good because the alternative to regular contact, discussions and meetings is only going to more suspicion and sort of fear and resentment on the other side.”

“Where I’m less positive is in what the U.S. business community was looking for. For two decades, the U.S. government has said the relationship with China is really big, it’s really important, it encompasses a lot of facets, and we’re going to look at it in two baskets – the economic basket, which is trade access, IPR, financial services – all of that, and the strategic basket – military-to-military agreements, climate and food security. The mistake of the Trump administration was to only focus on one tiny part of the economic basket” – the U.S. trade deficit with China, Stein said.

“I fear the Biden administration risks making the mirror image of that mistake. So far they have focused on a couple of issues in the strategic basket, and they happen to be some of the hardest ones,” such as Taiwan and Xinjiang, he said. “If those are the main issues the two sides are talking about, then we’re going have a really tough series of conversations with very little to show for it at the end. What we’re still waiting to see is if the Biden administration engages on the economic side.”

On a brighter note, he said, visa processing for foreign businesspeople is improving. ”It’s like someone flipped a switch” after the Communist Party congress in October, Stein said, in which Xi won a third five-year term as party leader. “It seems that they are following foreign investment numbers, and realize it’s not in China’s long-term economic interest to lock out so many foreigners.”

And yet the Covid problems that are dragging down the economy and hurting business may not improve anytime soon, he said. “As long as the weather is bad, it’s going to be harder for anybody to open up because there will be more cases” that will be met with the country’s “zero-Covid” response, Stein said.

The American Chamber of Commerce in Shanghai is one of the world’s largest Amcham groups with more than 3,000 members. They include Microsoft, Novartis, Hormel Foods, Cisco, General Mills and Deloitte.

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