Foreign Companies Bailing on China Over Economic Fears

A spokesman for China’s statistics bureau stated on Tuesday that there is no deflation in China and that there would be no deflation in the future. The Chinese economy is facing hurdles, according to National Bureau of Statistics spokesperson Fu Linghui at a press conference in Beijing.

Nonetheless, according to Fu, the bureau expects the decrease in the producer price index to reduce further. According to official data, China’s consumer sector entered deflation in July, and factory-gate prices continued to fall.

Fu also stated that policy optimisation might eventually resolve risks for property developers. China launched a strategy to recruit more foreign investment and revive its stagnant economy, a rare admission of weakness.

The 24-point plan intends to improve the FDI climate, which has suffered as a result of the Communist Party’s unpredictable and sometimes antagonistic policies towards foreign enterprises.

In the second quarter of 2023, new foreign investment in China sank to its lowest level in 25 years. At the same time, China’s economy is suffering from deflation, local government debt, and a shrinking real-estate industry.

Watch Ian Bremmer’s discussion with Shaun Rein, founder and managing director of the Shanghai-based China Market Research Group, on this week’s GZERO World here and read our explainer here for more on China’s economic difficulties.

China Offering Tax Incentives

Beijing’s new strategy offers tax breaks and incentives to important businesses such as biopharmaceuticals and telecommunications. It also makes it easier for foreign firms to apply for visas and residency permits.

However, this comes at a time when international companies are increasingly wary about investing in China, especially since new anti-espionage rules give authorities broad authority to access and manage foreign corporate data.

US companies are fleeing China in droves, citing concerns about employee safety and escalating tensions between Washington and Beijing in the aftermath of a string of US-based consulting firms raided in China this spring.

Foreign firms are transferring investments and Asian headquarters out of China as confidence falls following the expansion of an anti-spying law and other hurdles, according to The Associated Press.

The European Union Chamber of Commerce in China report notes that this is one of several symptoms of growing pessimism, despite the ruling Communist Party’s efforts to rekindle interest in the world’s second largest economy following the repeal of anti-virus measures.

Foreign Business Confidence in China Plummeting

According to the European Chamber of Commerce, companies are concerned about security measures, government protection of their Chinese competitors, and a lack of progress on reform commitments. They are also under pressure from weakening Chinese economic growth and rising costs.

Business confidence in China is “pretty much the lowest we have on record,” according to Jens Eskelund, president of the European Chamber of Commerce, ahead of the report’s release.

“There is no expectation that the regulatory environment will improve significantly in the next five years,” Eskelund added.

President Xi Jinping’s government is attempting to attract foreign corporations to invest and bring in technology in order to boost economic growth, which fell to 3% last year. They are concerned, though, about security regulations and attempts to establish competitors for worldwide providers of computer chips, commercial jetliners, and other technology.

Subsidies and market restrictions are frequently involved, which Washington and the European Union claim violate Beijing’s free-trade pledges.

Doing business in China has become more difficult for two-thirds of the 570 companies that responded to the European Chamber’s study, up from fewer than half before the outbreak. Three out of five respondents stated the corporate environment is “more political,” up from half the year before.

Western Nations Cutting Ties With Businesses

Companies are on edge after police raided the offices of two consulting firms, Bain & Co. and Capvision, as well as a due diligence firm, Mintz Group, without providing an explanation. Authorities have stated that corporations are required to follow the law, but have provided no evidence of alleged infractions.

Companies are also concerned by Beijing’s goal of national self-sufficiency. Xi’s government is pressuring businesses, hospitals, and other organisations to hire Chinese suppliers, even if it means increasing their expenses. Foreign firms are concerned about losing access to their home markets.

The government barred using components from Micron Technology Inc., the largest manufacturer of memory chips in the United States, in computers that handle sensitive information last month. It stated that Micron has undisclosed security issues but provided no further information.

According to the European Chamber poll, one out of every ten enterprises has relocated their investments away from China. Another one-fifth is deferring or considering moving investments. In the aviation and aerospace industries, one out of every five corporations has no plans to invest in China in the future.

Because of its large and developing consumer market, China has long been a popular investment destination, but corporations have complained about market access limitations, pressure to pass over technology, and other annoyances. Since Xi seized office in 2012, the ruling party has tightened control, pressuring international enterprises to grant the party board seats and a direct say in hiring and other decisions.

Moving Headquarters Out of China

The European Chamber of Commerce observed that it is not only foreign enterprises that are relocating: According to its survey, two out of five Chinese clients or suppliers are transferring investments out of the nation.

The British Chamber of Commerce in China, a separate organisation, warned last month that its members were waiting for “greater clarity” on anti-spying, data security, and other restrictions before making fresh investments.

The ruling party’s broadening of its concept of national security to include the economy, food, energy, and politics is the most concerning, according to Eskelund.

“What constitutes a state secret?” “Where does politics begin and the business world end?” Eskelund explained. This “creates uncertainty” about “where we can operate normally as businesses.”

According to the European Chamber poll, Singapore was the leading destination for companies shifting their Asian headquarters out of China, with 43% of enterprises moving, followed by Malaysia. Only 9% have visited or intend to visit Hong Kong.

Leaders, notably China’s top economic leader, Premier Li Qiang, have promised to improve operating conditions, but firms report little tangible changes.

“Our members are not really convinced that we are going to see tangible results,” Eskelund remarked.