American companies doing business in China are less optimistic about the future than at any time in more than two decades. Restrictions on economic data, such as the extent of youth unemployment, make investment decisions more difficult. Among the many foreign leaders who left China during the pandemic, few are returning.
These are some of the lessons learned from reports released Tuesday by organizations representing nearly 2,000 European and American companies.
Documents from the American Chamber of Commerce in Shanghai and the European Union Chamber of Commerce in China paint a picture of a business environment that has become more difficult to manage. Businesses find themselves caught between a Beijing seemingly concerned about their investments, but at the same time focused on its security priorities. Nearly two-thirds of European companies established in China have seen their business opportunities thwarted by the increasingly complex web of Chinese regulations.
The reports also make it clear that despite a challenging landscape, China remains an attractive draw for Western businesses. Many companies surveyed said they were ready to increase investments in China if geopolitical tensions ease and government policy becomes more welcoming.
“China must choose: do you opt for autonomy and national security, or do you move towards more openness and engagement,” said Jens Eskelund, president of the European Union Chamber of Commerce in China.
Representatives of Western governments have stressed issues of investment and market access in China during a series of trips to Beijing in recent months. Three senior European Union officials will make separate visits next week, following four senior U.S. officials who visited China in the past three months. The most recent was Commerce Secretary Gina Raimondo expressing concern about China’s limits on imports of cosmetics and many other U.S. products.
It’s getting harder and harder to make money in China
Much of this negative sentiment is driven by deteriorating relations between Beijing and Washington. There’s also China’s faltering economy, which is buckling under a struggling real estate market marked by heavily indebted developers and an erosion of property prices.
Another reason for this gloom: the profitability of American companies in China is at a record level and managers are reducing their expectations for the next three to five years.
European companies are also worried. A modest rebound in consumer spending after three years of strict pandemic measures was not accompanied by an uptick in imports, as various “risk reduction” policies implemented by China led to dependency towards local production, Mr. Eskelund said.
And staffing operations in China with expatriates remains a challenge. During pandemic lockdowns, many U.S. and European companies brought most of their executives home, usually replacing them with Chinese nationals. Few expatriates have returned to China since the country reopened its borders last January after almost completely closing them for 34 months, the groups said.
The accumulation of difficulties weighs on the decision whether or not to invest more money in the Chinese economy. Foreign direct investment plunged 87 percent between April and June, compared to the same months last year, according to Nomura, a Japanese bank. This is the lowest quarterly level since modern records began in early 1998.
When representatives of 325 American companies were asked to rate China’s willingness to open its markets to them, they gave an average score of 6, barely a mark on a scale of 1 to 10. The companies more optimistic were those in the pharmaceutical sector. , life sciences and medical device sales, as well as finance and insurance companies. Technology companies and legal services firms gave the worst ratings.
U.S. companies said transparency on policy had deteriorated, a complaint they had made in previous surveys. And more than half of the companies surveyed this year believe that government policy favors their Chinese rivals.
Businesses face more rules and security risks
While Chinese government officials have publicly urged foreign leaders to invest more, saying China is eager to do business, Beijing has also doubled down on its emphasis on security and self-reliance, which can make it more difficult for foreign companies to do business in the country.
China’s Ministry of State Security has called for a “mobilization of the whole society”, urging the public to be wary of what it sees as foreign-backed subversion.
Following China’s recent adoption of strict data security and counterintelligence legislation, European and American companies are discouraging their executives from transporting information out of China, even about their daily operations.
Multinationals have provided temporary laptops and smartphones to their executives visiting China for several years to prevent the theft of sensitive company information. But this summer, some companies began adopting the opposite policy: They also don’t allow China-based executives to leave the country with their laptops and often their smartphones.
Eric Zheng, president of the American Chamber of Commerce in Shanghai, said the company’s limits on employees’ rights to transport laptops out of China to other Asian countries make it more difficult to manage operations regional services from Shanghai.
Another difficulty is that when executives are outside China, the country’s data security laws no longer allow them to access some data on company computers in China, said Soeren Meyer, who helps to coordinate the technological policy of the European Chamber. American and European multinationals operating in sectors such as finance and infrastructure have been forced by China’s new data security laws to invest in building separate systems in China, separate from their systems elsewhere.
In recent years, China has issued other far-reaching regulations that require companies to change how they manage their operations in China.
“We’re seeing more regulations in more areas, but the way they’re implemented or the way they’re defined is often, frankly, quite vague and so companies don’t know exactly where the red lines are,” said Sean Stein, president of the association. American room in Shanghai.