Foreign Business is Falling Out of Love With China

They certainly sound nasty: an April survey by the European Union Chamber of Commerce in China found that 23% of respondents were considering relocating existing or planned investments in China. to other markets, the highest total in the past decade.

Apple, with suppliers in China making up the country’s largest source of private-sector jobs, is pushing its contractors to produce more elsewhere. Even before the latest wave of Omicrons hit Shanghai, more than a third of American companies told the American Chamber of Commerce this spring that they would reduce investment in the country due to the policy environment there.

Large foreign companies like Apple have invested heavily in China – and are still making enough money there – so there is little prospect of a mass exodus. But the stars are aligning for a more concerted, long-anticipated but slow-coming effort by major producers to diversify away from the country. Besides slower growth for China itself, consequences could include further weakening of the yuan and a higher profile for more growth-oriented Chinese leaders such as Prime Minister Nguyen Xuan Phuc. General Li Keqiang, who has recently enjoyed a resurgence in mentions in the Chinese official media after a long stint in the wilderness.

The country’s strict anti-Covid-19 policies, which have kept much of Shanghai locked down for the past two months, is a major reason. Add in Beijing’s tacit support for Russia’s invasion of Ukraine and the massive damage to China’s domestic economy from last year’s crackdowns on key technology and asset sectors. importance, and Beijing’s policy mix is ​​starting to look toxic to foreign companies that often swim more calmly, with clarity, than in many countries.

Although the increase in foreign investment in China in 2020 and 2021 may seem to contrast with the overall decline in relations between Beijing and Western capitals at the time, it is not difficult to explain. : China, and especially China’s exports, are booming. while the rest of the world, including Asia’s other export hubs, is flat. And while export competitiveness is certainly not the only factor for outbound investment in China, it is certainly an important one. Over the past two decades, the overall trend between China’s export growth and corresponding foreign direct investment has been very good – even for the Commerce Department data series, excluding reinvested gains. of foreign manufacturers.

For now, China’s export growth has slowed sharply thanks to a combination of the Covid-19 lockdown, weakening overseas demand and most likely stiffer competition from price producers. Another cheap closed last year.

Exports may recover temporarily if Shanghai recovers. But most of these factors are likely to persist for a while.

Despite the censorship, videos shared online show growing despair and anger at the prolonged Covid-19 shutdowns in China’s economic capital Shanghai, where officials is trying to tackle problems including food shortages while doubling down on the country’s strict pandemic policy. Photo Collection: Emily Siu

There will certainly be more disruptive lockdowns in China given the very low probability of leaving the “zero-Covid” policy at the earliest until early 2023. And while alternative manufacturing locations like Southeast Asia and India both have their own set of challenges, they also have some distinct advantages, including a growing young workforce — and governments that don’t position themselves as ideological rivals. and, potentially, the militaries of advanced democracies.

Perhaps most importantly, Beijing’s resolute attack on some of its own most successful private companies, combined with its rigid approach to Covid-19 and the impact of both. has had a severe impact on Chinese consumers and the labor market for young graduates. This raises serious questions about both the future growth of the Chinese domestic market and the stability of the overall policy environment for business.

Perhaps the upcoming personnel changes at the 20th Party Congress this fall will herald the start of an adjustment process. Regardless, it will take Mr. Li more than a few speeches to convince foreign businesses that China is still the country of the future.

Write letter for Nathaniel Taplin at nathaniel.taplin@wsj.com

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Edmund DeMarche

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