UBS Evidence Lab conducted the 12th Chinese Entrepreneur Survey from March 7 to April 6, 2023. The survey involved the participation of 527 high-level executives who hold decision-making and investment responsibilities within their respective companies. As the Chinese economy resumes its growth trajectory after three years of implementing pandemic control measures, this survey aims to provide insights into the perceptions of these entrepreneurs regarding the current business landscape. It specifically explores their expectations for revenue, capital expenditure, strategic outlooks for the second half of the year, as well as any shifts in the trend of supply chain realignment.
Expectations for revenue, capital expenditure, and ease of recruitment have shown an upward trend in the first half of 2023.
The survey reveals that 81% of companies anticipate an increase in their sales revenue during the first half of 2023. Moreover, nearly 80% expect to receive new export and domestic orders, which marks a notable improvement from the September 2022 survey. This surge in demand can be attributed to the rapid reboot of the economy and the normalization of economic activities. Additionally, 63% of respondents predict an enhancement in net margins within their industry for the first half of this year, surpassing the proportion recorded in the September 2022 survey. In line with these optimistic business expectations, 33% of respondents believe that companies possess more substantial pricing power, with 6% intending to raise prices in the first half of 2023—both figures demonstrating an increase compared to previous survey results.
The survey indicates a more positive outlook on capital expenditure for the first half of 2023. On a net percentage basis, 68% of respondents anticipate an increase in capital spending among companies in their industry, surpassing the figures of 55% in the September 2022 survey and 34% in the May 2022 survey. Notably, the textile, apparel, footwear, consumer electronics, automotive, technology hardware, and utilities sectors exhibit stronger capital expenditure intentions, fuelled by the recovery in consumer demand and governmental policy support. Overall, 66% of respondents plan to allocate more capital this year compared to 2022, representing an increase from the September and May 2022 survey results. Technology upgrades remain the primary driver for capital expenditure, while investments and equipment upgrades related to the pandemic have declined in impact. The influence of export demand from both developed and emerging markets on capital expenditure has decreased, aligning with the recent slowdown in global economic growth.
Recruitment and staff retention have experienced a decrease in challenges, reflecting the weakness in the labour market, particularly with regards to high youth unemployment. During the first half of this year, 40% of respondents believe that recruiting and retaining staff has become less difficult, marking the first time since the survey’s inception in 2017 that a majority of respondents hold this perspective. In contrast, the September and May 2022 surveys indicated a higher number of respondents stating that recruitment had become more challenging. These findings align with the latest UBS China Labor Market Survey, which reported an increased willingness to hire and a decrease in hiring difficulties during the first quarter. Notably, data from the National Statistics Bureau reveals that the youth unemployment rate (16-24-year-olds) has reached a record high of 20.4%. By the end of March, approximately 2.46 million recent graduates were seeking employment but faced temporary setbacks, constituting around 40% of the youth unemployment population. Typically, improved business sentiment and operating conditions require more time to translate into increased hiring.
Enhanced New Order Expectations and Capital Expenditure Intentions for the Second Half of 2023
Entrepreneurs are expressing a more positive outlook for the remainder of the year, with expectations for revenue and new domestic orders showing improvement. An impressive 82% of respondents anticipate an increase in their company’s revenue during the second half of the year, while 75% expect a rise in new export orders. Additionally, a net share of 59% of respondents have higher expectations for net profit margins.
With the overall sentiment and expectations about business activity on the rise, companies are strategically focusing on key areas for growth in 2023. These areas encompass expanding their domestic market share, implementing price increases for products or services, and exploring opportunities for expansion in overseas markets. Notably, the proportion of companies planning to cut costs is marginally lower than last year, with 5% in 2023 compared to 9% in 2022. In fact, 28% of respondents have indicated that they have no plans to cut costs in the next 12 months, marking the highest proportion since the inception of the survey questions in 2019.
Companies are displaying a greater sense of optimism regarding their capital expenditure plans for the second half of 2023. A notable 63% of respondents expect to increase their capital spending. Equipment and machinery upgrades continue to be a key area of focus for capital expenditure, while there has also been an uptick in the proportion of spending allocated to R&D. This shift is driven by the increasing pressure to decouple from the US and China.
When considering different sectors, capital spending intentions are particularly strong in healthcare, technology and hardware, consumer electronics, utilities, and semiconductors. Conversely, companies in telecommunications services, materials, and essential consumer goods are adopting a more cautious approach. This trend aligns with the solid maintenance of manufacturing investment and explicit policy support for sectors such as innovation and technology.
However, it is important to note that the sharp decline in industrial and corporate profits during the first four months of 2023 (down 20.6% year-on-year), the decrease in capacity utilization (74.3% in the first quarter, compared to a previous high of 78%), and the recent weakening in the chain of economic growth may pose challenges to manufacturing investment. Nevertheless, if corporate profit margins and confidence improve, a higher willingness to invest in capital will serve as a driving force for investment growth in the future.
Expectations of supply chain shifts
Among 185 manufacturing exporters or suppliers heavily involved in the export business, the inclination to relocate supply chains away from Mainland China has weakened. By 2023, 37% of respondents had already moved some production overseas (compared to 46% in the September survey), and 15% had plans for further relocation. Additionally, 32% of participants expressed intentions to relocate production in the future. Overall, 46% of manufacturing exporters intend to relocate some production out of Mainland China, marking a decline from the figures in April 2021 and September 2020 (approximately 70%). This decline may be attributed to the fact that a portion of these companies have already completed their relocation efforts, with 23% having relocated some production and having no further relocation plans. This figure is slightly higher than the results from the September 2022 survey (20%) and previous rounds (11% on average for 2020 to May 2022). Among those who have decided against relocating production from Mainland China, only 15% stated they would invest the majority of their incremental export supply chain overseas, 13% acknowledged plans to do so in the future, and 73% affirmed that they had no intentions to do so.
The inclination of companies to relocate their production back to Mainland China has also decreased. Among 117 manufacturing exporters or suppliers with a notable share of exports and an established overseas production base, only 18% have either relocated some of their overseas production back to Mainland China or have plans to do so. This figure represents a decline from the 29% reported in the September 2022 survey, but it is comparable to the findings from the May 2022 survey. Conversely, 30% of respondents have no current or future plans to relocate production back to Mainland China, marking the highest proportion observed in the past few years.
Despite the current landscape, the ongoing trend of two-way supply chain shifts is expected to persist. Among those impacted by supply chain disruptions, 55% reported shifting their production from overseas to local domestic suppliers. However, 81% of these respondents expressed a possibility of re-shifting to overseas suppliers once the outbreak subsides (an increase from 75% in the previous survey), while 16% mentioned the potential for a partial shift back (consistent with the findings of the September 2022 survey). Respondents’ cautious outlook on US-China relations, the persistent pressure to decouple or mitigate risks, the gradual alleviation of global supply chain bottlenecks, and companies’ concerns about reducing production costs are expected to continue driving production relocation overseas. Simultaneously, the recovery of domestic demand and the allure of a vast consumer market are anticipated to attract more companies to consider relocating production to Mainland China.
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