American companies doing business in China are less optimistic about the future than at any other time in more than two decades. Restrictions on economic data, such as limits on youth unemployment, are making investment decisions difficult. Many of the foreign officials who left China during the pandemic are returning.
These are some of the findings of reports released on Tuesday by organizations representing nearly 2,000 European and US firms.
Documents from the American Chamber of Commerce in Shanghai and the European Union Chamber of Commerce in China illustrate a business environment that has become more difficult to navigate. Companies find themselves caught between a Beijing that is outwardly eager for their investments but also focused on its own security priorities. Nearly two-thirds of European companies in China have seen business opportunities thwarted by China’s more complex web of regulations.
The report also makes clear that despite the troubling outlook, China remains an attractive attraction for Western corporations. Many companies surveyed said they are ready to increase their investments in China if geopolitical tensions ease and government policy becomes more favorable.
“China needs to choose: Are you going for self-reliance and national security, or are you going for further openness and engagement,” said Jens Eskelund, president of the EU Chamber of Commerce in China.
Representatives of Western governments have been pushing for investment and China’s market access issues in a series of visits to Beijing in recent months. Following four senior US officials who visited China in the past three months, three top EU officials are making separate trips in the coming week. The most recent was Commerce Secretary Gina Raimondo, who expressed concerns about China’s limits on imports of cosmetics and many other American goods.
It’s getting harder to make money in China
Much of the negative sentiment is driven by deteriorating relations between Beijing and Washington. There’s also China’s faltering economy, which is being held back by highly indebted developers and a troubled real estate market fueled by falling home prices.
Another cause for pessimism: Profitability in China for American companies is at a record low and officials are lowering expectations for the next three to five years.
European companies are also worried. Mr Esklund said a modest bounce in consumer spending after three years of strict pandemic measures was not being matched by a surge in imports, as China’s various “de-risking” policies increased reliance on local production.
And staffing China operations with expatriates remains a challenge. During pandemic lockdowns, many American and European companies sent most of their managers home, usually replacing them with Chinese nationals. The groups said some migrants have flown back to China since the country reopened its borders last January after almost completely sealing them for 34 months.
The difficulties are impacting decisions about whether to pump more money into the Chinese economy. According to Japanese bank Nomura, foreign direct investment declined by 87 percent from April to June compared to the same months last year. This is the lowest quarterly level since modern records began in early 1998.
When representatives of 325 American companies were asked to grade China’s performance based on its willingness to open its markets to them, they gave an average grade of 6, barely passing on a scale of one to 10. The most bullish companies were in pharmaceuticals, life sciences and medical device sales, as well as finance and insurance companies. Technology companies and legal services firms gave the worst grades.
US companies said transparency around the policy has worsened, a complaint they have made in previous surveys. And more than half of the companies surveyed this year felt that government policy favored their Chinese rivals.
Companies face more regulations and security risks
While Chinese government officials have publicly encouraged foreign investors to invest more, saying China is eager to do business, Beijing has also doubled down on policies emphasizing security and self-reliance. It may be difficult for foreign companies to do business in the country.
China’s Ministry of State Security has called for “mobilization of the entire society”, urging the public to keep an eye on what it considers foreign-backed subversion.
Following China’s recent adoption of stringent data security and anti-espionage laws, European and American companies are discouraging officials from moving information out of China, even about day-to-day corporate operations.
Multinational companies have for several years issued temporary “burner” laptops and smartphones to executives visiting China to protect sensitive corporate information from being stolen. But this summer, some companies began adopting the reverse policy: They’re not allowing executives based in China to leave the country with their laptops, and often their smartphones.
Eric Zheng, president of the American Chamber of Commerce in Shanghai, said company limits on allowing employees to take laptops from China to other countries in Asia have made it difficult to manage regional operations from Shanghai.
Another difficulty is that when executives are out of China, the country’s data protection laws don’t allow them to access some data on company computers inside China, said Joe Biden, who helps coordinate technology policy for the European Chamber. Soren Mayer said. American and European multinationals in sectors such as finance and infrastructure have been forced by China’s new data protection laws to invest in building separate systems inside China, kept separate from their other systems.
China has issued other sweeping regulations in recent years that are forcing companies to change the way they run their China operations.
“We’re seeing more regulations being implemented in more areas, but the way they’re enforced or the way they’re defined is often, frankly, quite vague and so companies are no longer certain. That’s not where the red lines are,” said Sean Stein, president of the American Chamber in Shanghai.
