European companies in China have urged the country to move away from what they see as an “internal” turning point in the economy to achieve self-sufficiency, which has hampered their operations and prospects.

China has tightened its control over the supply of technologies and components by foreign companies to Chinese customers for national security reasons, according to a report by the European Union Chamber of Commerce in China. This pushes European companies to localize development and supply chains and creates an increasingly difficult business environment, according to the newspaper.

Beijing’s focus on building core technologies such as semiconductors at the national level as part of its dual circulation strategy could lead to massive misallocation of resources, according to the European Chamber, which accounts for more than 1 700 companies operating in China. A lack of openness and structural reform in the economy could also lead to a slowdown in innovation and growth, according to the document released Thursday.

“It’s a little more difficult to operate in China than it was two or three years ago,” chamber chairman Joerg Wuttke said at a recent press conference. “We have this problem of contradiction between the self-sufficiency that China is aiming for and the openness that she always talks about. “

China released a five-year plan for its economy in March, which places a high priority on increasing spending on research and development to make the nation a tech superpower. The plan raises fears that economic policy making is increasingly driven by national security concerns, according to the European Chamber, which made some 930 recommendations to the government in the report.

Green goals

Foreign companies in different industries receive drastically different treatment, according to the report. For example, government policies are favorable to companies in the machinery, chemicals, semiconductor and green energy sectors that have the technology to modernize China’s industrial sectors or support its green goals, according to the report.

For consumer goods, the authorities consider it necessary to maintain a foreign presence to maintain competition and supply. But foreign companies in network equipment, telecommunications and most digital things are increasingly unwanted, the European Chamber said.

The Cyberspace Administration’s Critical Information Infrastructure Regulation, released in August on the basis of the Cybersecurity Act, “has a huge negative impact” on European businesses, he said.

The regulation requires European providers of telecommunications equipment and services, as well as producers of certain software, to undergo a national security examination involving up to 12 ministries before they can provide new equipment or services. Many companies are localizing their production and research to face the scrutiny, while some see the inevitable result being their exit from the market, according to the newspaper.

Increasing pressure

European companies are also facing increasing pressure from government guidelines encouraging Chinese companies to adopt “autonomous and controllable” technologies and to avoid reliance on foreign suppliers, he said.

Wuttke gave the example of Swedish telecom giant Telefonaktiebolaget LM Ericsson, which only won a 2% market share in the latest bid to supply 700 MHz radios for China Mobile Ltd’s 5G network development. . That figure was down from 11% in a previous cycle and came after Sweden blocked Chinese suppliers Huawei Technologies Co. and ZTE Corp. of its own 5G deployment.

Some European-made firefighting and healthcare equipment has also been banned from sale to Chinese customers in some provinces, according to Wuttke.

“We hope this national security autonomy will not impact innovation, but we are seeing a decrease in diversity,” Wuttke said, adding that “diversity matters” to spur innovation.

Fewer foreigners

Another sign of China’s growing isolation from the world, the number of foreigners living in Beijing and Shanghai plunged 28% to around 227,000 people in 2020 from a decade earlier, according to data from the census cited in the report.

Part of that decline may be due to the many foreign residents of China who were unable to return due to restrictions enacted during the pandemic.

U.S. companies operating in China have said they are limited by the national Covid-zero policy, according to a separate report released Thursday by the U.S. Chamber of Commerce in Shanghai.

Pandemic restrictions on entry into China will hurt the country’s competitiveness if the government does not make adjustments, the report says, asking the government to allow locally-based foreign workers to bring family members to China . Bloomberg News