European Firms Grow More Pessimistic on Doing Business in China

A record share of European companies say doing business in China is getting more difficult, with some already following through on plans to divest from the world’s second-largest economy, according to a new survey.

(Bloomberg) — A record share of European companies say doing business in China is getting more difficult, with some already following through on plans to divest from the world’s second-largest economy, according to a new survey. 

Some 64% of respondents said it became more challenging last year to do business in the country, according to the survey published Wednesday by the European Union Chamber of Commerce in China. That’s an all-time high dating to when the chamber first asked the question, for its 2014 report. 

“The deterioration of business sentiment that has taken place over the last three years has been significant and cannot be reversed overnight,” the chamber wrote in its report, which included 570 responses received during February and March of this year. 

“As a result of China’s more challenging and unpredictable business environment, European companies’ investment and operational strategies are being adjusted accordingly.”

European companies face a perfect storm of challenges in China that have prompted them to consider ways to de-risk or otherwise hedge their bets. 

The Chinese economy’s recovery after shedding coronavirus controls has been uneven as still-weak business and consumer confidence weighs on growth. That economic slowdown was cited among respondents as the top business challenge, ranking above global growth concerns, the US-China trade war and Covid-19. 

Geopolitical tensions with the West also remain high, forcing companies to “carefully monitor” sanctions and export controls that might have an impact on their operations. The EU is set to propose new oversight on critical technology this year as it seeks to strengthen the security tools at its disposal to counter strategic rivals, particularly China. In the EU chamber survey, decoupling ranked fifth among top business challenges. 

Referring to the geopolitical disputes, the survey’s authors said, “European companies are facing increased political pressure from Chinese, European and third-party stakeholders, and are being pulled in different directions as consumer demands become increasingly politicized.”

The waning confidence among foreign firms operating in China is already trickling down to their investment plans. Foreign investment into China has declined over the past few months. Some 11% of respondents to the survey said they have already shifted some investments overseas — the same number that said they were considering doing so in last year’s report. 

The proportion of respondents who ranked China as a top-three destination for future investments dropped to 55%, a record low.

There have been some recent signs of hope among foreign companies still looking at China as a critical opportunity for business. In the survey, 63% of respondents said they would be willing to increase their China investments if market and regulatory barriers were removed.

“There is a window of opportunity for the government to demonstrate that the pro-business promises recently made by its leadership are more than just words,” the European Chamber wrote in the report. 

The American business community has also expressed encouragement recently, particularly after US Secretary of State Antony Blinken’s trip to China this week, where he met President Xi Jinping. He was the most senior American official to visit the country in five years. 

Read More: Biden Says Xi Was Unaware of Wayward Balloon, Wants Relationship

The Blinken-Xi meeting “was a big signal to the business community and to the Chinese community that American business was welcome in China,” said Michael Hart, president of the American Chamber of Commerce in China, in a Wednesday interview on Bloomberg Television.

Hart acknowledged, however, that American firms — like EU ones — have reconsidered their investment. 

“Certainly companies are saying they are re-looking at whether they are derisking their supply chains, absolutely,” he said. But “the number of companies who say they are staying here is still the majority.”

–With assistance from James Mayger and Lucille Liu.

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