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International firms in China are reaching a “tipping point” on investing on the planet’s second-largest financial system as market entry limitations, low progress and fierce competitors cloud the outlook, in line with the EU chamber of commerce within the nation.
European firms complain that working in China is turning into more durable due to a rising net of ill-defined knowledge, cyber safety and anti-espionage legal guidelines whereas a weak home financial system means decrease earnings.
“For some companies, a tipping point has been met,” mentioned Jens Eskelund, president of the EU Chamber of Commerce in China, which launched its annual place paper on Wednesday.
“Companies are beginning to conclude that, considering supply chain risks, considering anticipated lower profits in China, considering the continued barriers . . . that maybe other markets are becoming more competitive, more attractive,” Eskelund mentioned.
China’s policymakers are grappling with a two-speed financial system through which a property market slowdown has undermined home demand and created deflationary pressures, whereas exports have risen, helped by cut-throat competitors amongst producers.
International companies have lengthy complained about limitations to market entry in China, notably in authorities procurement procedures, however previously fast financial progress inspired them to proceed investing.
Beijing has set a 5 per cent goal for actual GDP progress this yr, nonetheless excessive for a big financial system, with state banks supporting funding in high-tech industries.
However many overseas traders fear they aren’t seeing the advantages of this progress, with 70 per cent of respondents to a chamber survey saying overcapacity of their industries had pushed down costs. About 44 per cent of respondents have been additionally pessimistic about their possible profitability over the subsequent two years, a file excessive.
The place paper on Wednesday mentioned chamber member firms have been turning into “defensive”. It cited a 29 per cent year-on-year fall in overseas direct funding in China within the first half of 2024.
Whereas European firms weren’t “running for the exit”, that they had begun “siloing” their China operations to separate them from the surface world and make them extra resilient to altering regulatory situations and decrease progress within the home market, the place paper mentioned.
This included investing in separate IT and knowledge storage to fulfill Chinese language nationwide safety necessities and localising jobs relatively than beefing up analysis or attempting to seize market share.
“Similar defensive trends can be seen when it comes to diversification of supply chains,” the report mentioned, including that European firms have been wanting offshore for brand spanking new manufacturing bases.
The chamber mentioned a paper China launched final yr on optimising overseas funding, which included measures comparable to streamlining procurement procedures, had failed to supply a lot enchancment.
“With national-security considerations increasingly being balanced against — and sometimes taking precedence over — economic growth, it raises the question of whether Chinese officials have sufficient space to introduce pragmatic, pro-business policies,” the report mentioned.
The paper mentioned market entry limitations that have been nonetheless in place included compulsory know-how transfers for overseas rail trade firms and the alleged favouring of Chinese language state-owned enterprises in rail mission procurement tenders.
“China remains attractive but China is no longer the only game in town,” Eskelund mentioned.
“We saw in our business confidence survey that 52 per cent of our members are planning on cost-cutting in China, 26 per cent are planning on reducing the headcount. So if you want to change these developments, the time is now.”
