An annual report highlighting the position of European companies in China published Wednesday said the sentiment among companies and shareholders is that the returns on China investments no longer outweigh the risks of operating in the world’s second largest economy.

Market access and regulatory barriers have seen companies lose business, said Jens Eskelund, the president of the EU Chamber of Commerce in China, at a media briefing on Wednesday. National security concerns coupled with geopolitics have created a lack of regulatory predictability that is also hampering businesses’ ability to conduct business efficiently in China.

This in turn has led businesses to focus on “defensive” investments geared towards China-specific value chains, such as separate data storage systems for China and enhancing compliance capacity. The chamber said these sorts of investments won’t create jobs as they’re not geared towards developing market share in the country.

“We are concerned about there being a tipping point now,” Eskelund warned.

Some of the issues related to market access or regulation are not new and foreign businesses have long complained about them, but rapid economic growth before the COVID pandemic meant many companies found the benefits of investing in China overwhelmed the difficulties in doing so. However, slower growth post-pandemic has changed the calculus about the Chinese market for some companies.

Eskelund said before the pandemic China was the world’s “undisputed leader” in terms of attracting foreign direct investment but that has changed and countries like India and Indonesia have now replaced China as top destinations, and even smaller countries like Malaysia are able to compete with China for FDI.

Falling FDI

Inbound foreign direct investment to China dropped 29% year-on-year for the first six months this year, the chamber said. It added that the volume of investments into China by EU and U.S. firms is about half that of a decade ago, and smaller multinational firms and small and medium sized enterprises are choosing to invest elsewhere. 

The chamber proposed it was time for “more action” and not more “action plans”.

It said foreign businesses had been looking towards the recent third plenum in July for signs that Beijing would address some of their concerns, but instead of developing policies aimed at boosting consumption or continued economic opening, Beijing opted to double down on manufacturing to drive China’s growth. The third plenum is held once every five years and it maps out the general direction of China’s long-term economic and social policies.

Excess capacity accusations

Western governments have accused China of fueling overcapacity, where manufacturing output exceeds demand, in turn leading to artificially low prices. Eskelund said 42% of the chamber’s members have told the chamber they are suffering from the overcapacity issue. The chamber has a membership of 1,700 companies.

Eskelund said continued investment in manufacturing coupled with weak domestic demand will also lead to persistent trade friction, as products that cannot be offloaded in China will end up going abroad.

The chamber called on Beijing to ensure a rational balance between supply and demand, and to look at measures aimed at creating more domestic demand. Eskelund said China has “very large savings rates” and suggested Beijing could work to give consumers’ confidence about the real estate market, which would then result in consumers being more open to spending.