China is no longer the “undisputed leader” for FDI, says the European Chamber of Commerce in China

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

Market access and regulatory barriers have caused companies to lose business, Jens Eskelund, president of the EU Chamber of Commerce in China, told a news conference on Wednesday. National security concerns, along with geopolitics, have created a lack of regulatory predictability that also hinders the ability of businesses to do business effectively in China.

This in turn has led companies to focus on “defensive” investments targeting China-specific value chains, such as separate data storage systems for China and increasing compliance capacity. The Chamber said that such investments will not create jobs as they are not geared towards developing market share in the country.

“We are concerned that there is a tipping point now,” Eskelund warned.

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

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

FDI decline

Incoming foreign direct investment in China fell 29 percent year-on-year in the first six months of this year, the chamber said. He added that the volume of investment in China by EU and US firms is about half of what it was ten years ago, with smaller multinational firms and small and medium-sized enterprises choosing to invest elsewhere.

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

He said foreign businesses looked to the recent Third Plenum in July for signs that Beijing would address some of their concerns, but instead of developing policies to boost consumption or continue economic opening, Beijing opted to double output for to boost China’s growth. . The Third Plenum is held every five years and lays out the general direction of China’s long-term economic and social policies.

Allegations of overcapacity

Western governments have accused China of fueling overcapacity, where manufacturing output exceeds demand, leading to artificially low prices. Eskelund said 42 percent of chamber members have told the chamber they suffer from the overcapacity problem. The chamber has a number of 1,700 companies.

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

The chamber called on Beijing to ensure a rational balance between supply and demand and consider measures to create more domestic demand. Eskelund said China has “very high savings rates” and suggested Beijing could work to give consumers confidence in the housing market, which would result in consumers being more open to spending.