European businesses in China are struggling to maintain profitability as growth slows and overcapacity pressures rise, resulting in a record drop in business confidence last year, the latest survey by the European Union Chamber of Commerce (European Chamber) in China revealed on May 10.
The investment outlook in China is casting a shadow of pessimism over European companies, especially as economic uncertainties and geopolitical tensions worsen, the European Chamber warned, citing responses from 529 member companies in January and February.
According to the business lobby, European businesses are increasingly cautious about expanding their investments in China. Instead, they are actively exploring opportunities in alternative destinations such as Southeast Asia and India.
The survey also noted that, rather than benefiting from the strong economic rebound that many had expected, European firms operating in China faced more uncertainty.
“There are worrying signs that some European companies are either siloing operations or scaling down their ambitions in China as the challenges they face start to outweigh the benefits of being here,” Jens Eskelund, president of the European Chamber, said in a statement.
China’s structural issues, such as sluggish demand, growing overcapacity, and challenges in the real estate sector, along with market access and regulatory barriers, continued to have a negative impact on European companies as well.
Denis Depoux, global managing director of Roland Berger, an international consulting firm that partnered with the European Chamber to conduct the survey, said: “Growing uncertainties in China confront European companies, mainly due to economic volatility and less predictable policy direction.
“While we can manage volatility, the lack of predictability may reduce the appeal of the Chinese market.”
The findings come against the backdrop of China’s economy facing challenges and Chinese leader Xi Jinping calling for self-reliance and continued focus on production-driven development, despite resistance from the West.
On May 13, EU Commission chief Ursula von der Leyen and French President Emmanuel Macron urged Xi to promote more balanced trade with Europe.
“Business confidence was further eroded due to the mixed messages coming from the Chinese Government, as it sought to balance the tightening of security-related regulations with economic development,” the European Chamber stated.
Over the past three years, Beijing has been updating the nation’s security-related regulations, focusing on data protection and cybersecurity. These include the Personal Information Protection Act, which covers regulations on cross-border data transfers; the Data Security Law; and the Cyber Security Law.
Foreign investment restrictions and inadequate intellectual property protection have undermined China’s appeal as a premier investment destination, the survey found.
The Negative List for Foreign Investment in China, for instance, imposes restrictions on foreign investments in the areas of human stem cells and gene therapy.
Experts from the Bird & Bird global law firm said in a recent report that these restrictions pose new challenges for businesses, especially for foreign firms, affecting a wide range of products and services. The laws and standards have made China an increasingly difficult market for foreign firms to operate in.
The European Chamber stated that longstanding complaints about rules and practices that favor local competitors and foster uncertainty for businesses and employees exacerbate economic concerns.
According to the survey, 55 percent of respondents ranked China’s economic slowdown as one of the top three business challenges, a 19-percentage-point increase from the previous year.
Additionally, 58 percent of respondents reported missing out on business opportunities because of market access or regulatory barriers. Almost half of the respondents, equivalent to 44 percent, expressed pessimism about profitability over the next two years.
This represents the highest level of pessimism ever recorded, with only 15 percent of respondents considering China to be a top destination for their company’s current investments. This is the lowest proportion ever recorded.
The survey found that more than 13 percent of respondents stated that they had no plans for further investment in China, the highest proportion on record.
Leaving China
The European Chamber also noted a notable uptick in the number of respondents shifting operations to different markets in 2023. More than a quarter of respondents reported this trend, up by 8 percentage points year-over-year.Mitigating the impact of decoupling between China and third countries has been a major factor in decisions or plans to shift investments. This option was chosen by 47 percent of respondents, indicating a significant increase compared to those who stated that their primary motivation is seizing opportunities in other markets.
The fact that 39 percent have already shifted or are considering shifting investments out of China because of the uncertain business environment further supports the notion that China’s appeal as a top investment destination is diminishing.
“Without meaningful improvements to the business environment, companies will continue to pursue opportunities in other markets that they perceive to offer more reliability, predictability, and transparency,” the European Chamber stated.
According to the business lobby, China’s declining attractiveness as a foreign investment destination has primarily benefited the Association of Southeast Asian Nations (ASEAN) for the second consecutive year, with 21 percent of respondents either relocating or expressing their intention to do so.
Europe is the second most favored alternative destination for these redirected or potentially redirecting investments (19 percent), followed by India (15 percent) and North America (15 percent), according to the survey.
Now that Beijing’s “strict zero-COVID” policy is a thing of the past, according to the lobby, the influence of COVID-19 pandemic control measures on business decisions has started to fade. As the risk of sudden lockdowns or other operational disruptions has disappeared, other obstacles hindering business growth in the Chinese market have become more noticeable.
The European Chamber noted that the strategies used by its member companies in China to adapt to the business environment could create a negative cycle in the country, further contributing to its economic troubles.
“While the Chinese Government is frequently signaling its intent to improve the business environment, we now need to see concrete action to restore investor confidence,” Mr. Eskelund said.
