China’s slowing economy, coupled with the delayed fulfillment of the Chinese Communist Party’s promises to reform the business environment, has raised concerns among European companies investing in the country. The European Chamber of Commerce in China has warned that many European enterprises feel that the risks of investing in China have exceeded the rewards, and they find it difficult to trust the CCP’s reform commitments.
On Wednesday (September 11th), the European Chamber of Commerce in China released its latest “European Business in China Position Paper.” In the report, the Chamber stated that many foreign-funded enterprises are now accepting the fact that the various challenges they face may have become long-term challenges for the Chinese market, rather than just the “growing pains” of an emerging market.
Chairman Jens Eskelund said before the report’s release, “We do believe that we are at a turning point. If you want to do something, now is the time.”
“Making money in the Chinese market has become increasingly difficult,” Eskelund said.
The report noted that European companies are increasingly doubtful about whether the CCP has a viable plan to boost domestic demand. Despite Beijing’s statements of intent to address the challenges faced by foreign companies, most of the key measures highlighted in policy documents have made “limited progress or no progress at all.”
The report also pointed out that the Chinese authorities are “highly concerned about security-related factors” and aim to achieve “high levels of autonomy in key economic sectors,” which contradicts the market principles focused on openness and competition.
“In addition, with continuing weak domestic demand and oversupply in multiple strategic industries, other economies strongly oppose this, which runs counter to the increasingly challenging task of restoring business confidence,” the report stated.
In the first half of 2024, China’s foreign direct investment decreased by 29.1% compared to the same period last year. The European Chamber of Commerce stated that about two-thirds of its member companies have seen their profit margins in China drop to or below the global average, with the proportion of companies holding pessimistic views on future profits reaching a historic high.
“There are signs that foreign-funded enterprises have started adjusting their expectations and market entry strategies for the Chinese market,” the report said. “The investments by European and American companies in China have been reduced to about half of what they were a decade ago, with small multinational corporations and small and medium-sized enterprises tending to shift their investment to other markets.”
The Chamber stated, “Given the advantages of other markets in terms of stability of legal policies, predictability, and return on investment, maintaining the existing investment scale in the Chinese market has become increasingly difficult, and its rationality is also being increasingly questioned.”
The report highlighted that the “core issue” of concerns for foreign enterprises is the slowing growth of the Chinese economy, compounded by various factors including persistent obstacles in market access and regulation, highly politicized business environment, weak domestic demand, oversupply, opaque laws and regulations, and the authorities’ ongoing focus on national security and high levels of autonomy.
After a disappointing second quarter, the Chinese authorities claimed that they would take new stimulus measures for households to boost domestic demand.
However, the European Chamber of Commerce indicated that due to the CCP’s repeated unfulfilled reform commitments, many foreign-funded companies are experiencing “reform fatigue” and no longer believe that reforms can be implemented.
The report noted that in the 2000s, many foreign companies believed in the credibility of the reforms claimed by the CCP. However, “after more than a decade of largely unfulfilled promises, doubts about China’s reform commitments have been increasing.”
In July of this year, the CCP pledged to revitalize the consumption market for 1.4 billion people and introduced a “Trade-In and Upgrade” consumer subsidy program. Yet, the current policies have had little effect, and economists are still waiting for more specific plans to revitalize the consumption market.
The European Chamber of Commerce stated that the Trade-In and Upgrade program is unlikely to significantly increase domestic consumption, as the budget allocated for it is approximately 210 yuan per capita (about 29.52 US dollars), “and only a small portion of it can reach the average consumer.”
In the report, the Chamber also mentioned that the Chinese authorities have not improved law enforcement, and issues related to intellectual property rights persist.
The Chamber warned, “If more comprehensive measures are not taken to address business concerns, the negative trend seen in recent years is likely to continue or even worsen.”
The report pointed out that this could “lead to a reduction in foreign-funded enterprises’ investments in China, continued external migration of supply chains and businesses, and exacerbate the alienation between the headquarters of foreign companies and their Chinese branches.”