With the end of China’s zero-COVID policy in December 2022, and the ebbing of the first major COVID-19 wave, the year of the Rabbit has begun with great promise. Beyond just the prospect of fewer supply chain disruptions due to COVID-19 restrictions, there have been signs of easing in a number of areas – economic policy, foreign policy and in the regulatory crackdown that has kept tech CEOs up at night.

China remains a market capable of creating high expectations and even larger surprises. But can China’s 180 degree shift in priorities from zero-COVID to economic growth deliver? Has there really been a substantial shift in foreign policy towards the US, Europe, Japan or other countries increasingly wary of China? Has Beijing decided to interrupt stringent regulatory enforcement in order to support business and investment? How can businesses correctly calibrate their risk vs. opportunity lens?

The good, the bad and the uncertain on China’s growth outlook

There are real opportunities in China’s reopening, and not just for regional sectors such as tourism in Thailand. After massive disruption and domestic uncertainty in 2022, many deals are finally moving forward in 2023, something that can be seen in the surge of global CEOs traveling to China in the first months of the year. Officials at both central and local levels are providing incentives for foreign investment and sending strong signals that they will prioritise economic growth. Many large Chinese companies are similarly looking to ramp up overseas investments.

At the same time, global MNC leaders have been put off by the strong political narrative that drove zero-COVID and need to regain confidence that such incentives will remain in place. This will be a harder sell amid headlines of financial constraints and cost-saving reforms by local governments and compounded by persistent geopolitical and regulatory uncertainties.

Geopolitical uncertainty and volatility remain

The outlook for geopolitical tensions remains fraught and will continue to occupy many China headlines in the coming year. As the recent surge in balloon sightings shows, US-China relations remain only a minor incident away from renewed diplomatic hostility, even when both sides are attempting a time out.

The underlying drivers of China’s tensions with the US, Europe, Japan and other countries have not changed. Supply chain diversification, localisation and politicisation of technology all remain strategic challenges prompting business leaders to review their long-term approach to business and conduct Worst-Case Scenario Planning.

Taiwan will remain the biggest regional flashpoint, and the few companies who have shelved their contingency planning measures are likely to pull them out again when US congressional meetings with Taiwan’s leaders occur. Both Beijing and Washington want to avoid the possibility of a military confrontation in 2023, but the triggers for miscalculation still warrant monitoring, as do the sanctions and trade and investment restrictions that now require more strategic intelligence and due diligence for those doing business in and with China.

Nevertheless, the softening of some diplomatic rhetoric is likely to help restore confidence in some areas of trade, particularly where informal restrictions can be removed. This is most likely to directly benefit the food and beverage and retail sectors, and help headquarters feel more comfortable about approving expansions to their in-China businesses that were on hold during the zero-COVID years.

Reading the room on regulatory compliance

Companies who think that the pro-growth government messaging will lead to a softer touch on regulatory enforcement may be surprised. While one major campaign focused on technology companies has likely concluded, the underlying regulatory goals haven’t changed. The concept of Common Prosperity in particular will drive enforcement against companies whose violations are seen as undermining China’s more equitable development. Tax, environmental protection, anti-corruption, antitrust, health and safety and product quality will see regular enforcement. Data security and data privacy will remain a priority area for enforcement, particularly with an upcoming deadline to complete cross-border data transfer security assessments, in March.

All these are manageable risks, even if industries viewed as more strategic from a national security or social welfare perspective will have to allocate more local resources to resolve compliance issues. Companies adept at growing alongside these new regulatory priorities – at thinking Inside the Box– will be the most resilient in China in the coming years.

Any market or business opportunity comes with risk. What determines the value of that opportunity is how effectively companies are able to mitigate the risks. If companies want to capitalise on opportunities in China in 2023, strong regulatory compliance and agility in responding to geopolitical volatility remain essential to increase value through risk management.

Persistent geopolitical volatility or uncertainty have not triggered an exodus of foreign investment from China and need not prevent the majority of investments considered for 2023. Companies should not ignore the opportunities that China’s post-COVID-19 recovery presents, even if China’s reopening will not single-handedly save the global economy. Businesses will only derive the maximum value from this policy shift if they have the right strategic and tactical approaches in place.

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