China's economic woes to dampen investment appeal, says Economist Intelligence Unit

Thu 17 Aug 2023
Posted by: Danielle Keen
Trade News

Man holding globe in hands

Following a challenging economic year, China has fallen eleven places in an esteemed global business ranking.

The Economist Intelligence Unit (EIU)’s quarterly Business Environment Rankings (BER), released yesterday (16 August), assessed the attractiveness of 82 countries for prospective investors.

The BER’s damning assessment of China’s investment appeal serves as a further blow to its financial prospects, after diminishing exports and a sluggish property market led to downgraded growth forecasts.

ASEAN ascent

Other Asian countries fared better in the rankings, including Vietnam and Thailand, which rose twelve and ten places respectively. They, along with Malaysia, now rank higher than China.

EIU economists said firms adopting a  ‘China +1’ policy – whereby they are establishing supply chains in China and another Asian market – were taking a sensible approach. The policy was considered a shrewd move in the wake of China’s restrictive zero-covid policy, and to mitigate risk from US – China tensions.

Explaining this phenomenon at the EIU’S webinar yesterday, which announced the latest Business Environment Rankings, EIU analyst Prianthi Roy, said:

“This is very interesting because US-China risks have been a source of concern for businesses operating in this region for some time now, because successive US administrations have led efforts to decouple economic and trade ties.

“This language has recently been sucked into the goal of de-risking from China, in line with EU efforts to do the same. What this has done is result in tangible benefits for China's competitors across Asia.

“Vietnam has strongly benefited from this, and it's our overall biggest mover worldwide.”

Taking China’s mantle as a reliable manufacturing exporter aided Vietnam’s impressive growth of 8% last year. This growth is expected to continue this year and next, according to the World Bank.

Singapore retained top spot, as the world’s most welcoming business environment.

Divided Europe

Ten of the BER’s twenty top-ranked countries were in Western Europe, despite inflationary pressures and money tightening dampening the short-term economic outlook. This was attributed to political stability and economic agility when responding to the unforeseen economic challenges that have arisen from Russia’s war in Ukraine.

By contrast, countries further east dropped further in the rankings as a result of supply chain disruption from the conflict. Slovakia fell seven places, while Serbia and Latvia both fell by six.

Workforce weaknesses in these countries were also cited as a cause for concern. Skills shortages, low labour participation and high levels of emigration among younger workers all undermined investment potential.

Latin America

The LatAm region attracted substantial investment in 2022 thanks to the appeal of its commodities sector ahead of the green revolution. Investors have also shown interest in services and manufacturing.

Costa Rica rose six places, a result of its commitment to building a more global outlook. Over the last decade it signed a raft of free trade agreements and became a member of the OECD in 2021.

Conversely, left-wing governments pushing for greater state involvement in the economy cost Chile and Columbia several places. Although still the highest ranked LatAm country at 30, Chile still fell nine places.

MEA challenges

The Middle East and Africa region fared worst in the rankings. Over-reliance on oil was responsible for knocking Bahrain and Kuwait nine and six spots down the list respectively. Although supplying oil to Europe to fill the void created following sanctions imposed on Russia has bolstered Middle East exports.

Despite not rising in the rankings, the BER regards the prospects of Qatar, Saudi Arabia and the UAE positively, with projected growth from 2023 to 2027.

General political instability and poor corporate governance is an ongoing obstacle to attracting investment, however.

As in Latin America, the green revolution could spur future investment, as international mining companies seek to capitalise on the vast stores of metal required for electronic vehicle manufacture.

This could bode well for the Democratic Republic of Congo (DRC), which holds 70% of the world’s cobalt. South Africa, the only country in the region to rise in the rankings, could also prosper as the world’s leading producer of chromium, manganese and platinum.

Methodology

The report makes uses 91 indicators across 11 categories, including foreign trade and exchange regimes and controls, and foreign investment policy.

Although it’s not an investment forecast, the BER has been strongly correlated with changes in investment flows.