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Foreign companies in China are reaching a “tipping point” on investing in the world’s second-largest economy as market access barriers, low growth and fierce competition cloud the outlook, according to the EU chamber of commerce in the country.
European companies complain that operating in China is becoming tougher because of a growing web of ill-defined data, cyber security and anti-espionage laws while a weak domestic economy means lower profits.
“For some companies, a tipping point has been met,” said Jens Eskelund, president of the EU Chamber of Commerce in China, which released its annual position paper on Wednesday.
“Companies are beginning to conclude that, considering supply chain risks, considering anticipated lower profits in China, considering the continued barriers . . . that maybe other markets are becoming more competitive, more attractive,” Eskelund said.
China’s policymakers are grappling with a two-speed economy in which a property market slowdown has undermined domestic demand and created deflationary pressures, while exports have risen, helped by cut-throat competition among manufacturers.
Foreign businesses have long complained about barriers to market access in China, particularly in government procurement procedures, but in the past rapid economic growth encouraged them to continue investing.
Beijing has set a 5 per cent target for real GDP growth this year, still high for a large economy, with state banks supporting investment in high-tech industries.
But many foreign investors worry they are not seeing the benefits of this growth, with 70 per cent of respondents to a chamber survey saying overcapacity in their industries had driven down prices. About 44 per cent of respondents were also pessimistic about their likely profitability over the next two years, a record high.
The position paper on Wednesday said chamber member companies were becoming “defensive”. It cited a 29 per cent year-on-year fall in foreign direct investment in China in the first half of 2024.
While European companies were not “running for the exit”, they had begun “siloing” their China operations to separate them from the outside world and make them more resilient to changing regulatory conditions and lower growth in the domestic market, the position paper said.
This included investing in separate IT and data storage to meet Chinese national security requirements and localising jobs rather than beefing up research or trying to capture market share.
“Similar defensive trends can be seen when it comes to diversification of supply chains,” the report said, adding that European companies were looking offshore for new production bases.
The chamber said a paper China released last year on optimising foreign investment, which included measures such as streamlining procurement procedures, had failed to produce much improvement.
“With national-security considerations increasingly being balanced against — and sometimes taking precedence over — economic growth, it raises the question of whether Chinese officials have sufficient space to introduce pragmatic, pro-business policies,” the report said.
The paper said market access barriers that were still in place included obligatory technology transfers for foreign rail industry companies and the alleged favouring of Chinese state-owned enterprises in rail project procurement tenders.
“China remains attractive but China is no longer the only game in town,” Eskelund said.
“We saw in our business confidence survey that 52 per cent of our members are planning on cost-cutting in China, 26 per cent are planning on reducing the headcount. So if you want to change these developments, the time is now.”
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