SEB's China Financial Index, which measures the business outlook among northern European companies' subsidiaries in China, continues to show a positive recovery in the business outlook for China following the coronavirus outbreak at the beginning of last year. Corporates are expecting order intake to increase over the next six months but profits to remain under pressure on the back of increased raw material and shipping costs. On the other hand, we note that many corporates report that they are still negatively affected by the COVID-19 pandemic despite the domestic situation being kept under control through comprehensive epidemic prevention measures. The latest SEB China Financial Index stands at 61.3, up from 57.3 in November and 47.6 one year ago. We expect northern European corporates to benefit from the strong growth momentum in China through 2021.
Positive view on sales development but profitability expected to develop slower
There is a strong positive development in the profit outlook for the next six months, supporting the recent performance and the recovery sentiment. While companies are relatively positive on sales growth, the profitability outlook has developed almost flat compared with the survey in November for two reasons. Firstly, after a period with low economic growth across the board, market intelligence suggests that many corporates are gradually facing tough price competition and need to sacrifice margins to maintain volumes and market shares. Secondly, the development in commodities and shipping costs are impacting profit margins in the short term.
“Overall sentiment in China indicating a continuing growth path is very positive,” says Thilo L. Zimmermann, General Manager of SEB Shanghai. “The strong rebound of the economy has triggered some additional investment discussions and projects for a number of companies. Continuous cluster outbreaks in other Asian countries seem only to strengthen the Chinese economy for the time being. The high dependency on exports as well as the still somewhat unbalanced recovery (with private consumption as a laggard) need to be followed closely.”
On the back of recent surges in commodity prices and freight rates, material costs had the biggest increase amongst the categories we ask corporates to list as their main concern for the next six months. This puts material cost as the main concern among our clients for the next six months, followed by supply chain and competition.
China remains important
Northern European companies are still expected to invest more in China, either through expansion or acquisitions, but the investment index remains below pre-COVID-19 levels. When it comes to doing business, more corporates are experiencing the regulatory landscape to be more cumbersome and that doing business is becoming more difficult. As the world is watching the development in US-China relations, European multi-national companies are trying to find their place in a deglobalizing world but decoupling still seems to be a topic that receives a mixed view. In the recent survey, the number of respondents that are not concerned about decoupling has increased from the survey in November, with 40% of respondents stating that they are not worried.
The recovery continues with positive momentum
Helped by strong containment efforts by the Chinese government, economic activity is continuing to pick up and corporates are reporting good growth numbers. As vaccination outside of China increases, we are slowly returning to a ‘normal’ world, at the same time as there are changes to how the world’s two largest economies see themselves in relation to each other. Dealing with decoupling is likely to continue to be on the agenda for corporates and should be a topic addressed by corporate headquarters sooner rather than later, to assess the impact on their Chinese operations.
SEB’s China Financial Index is a unique semi-annual survey, whose purpose is to mirror changes in expectations among northern European (Nordic, German, Austrian, Swiss and UK) corporates in China, in order to facilitate understanding of economic and financial developments in the country. The latest survey was carried out between 7 May and 21 May 2021 and includes a total of 17 questions related to the business climate, investment plans, recruitment plans and views on currencies. An index level above 50 signals overall positive sentiment. The full report can be downloaded from www.sebgroup.com/press