Pessimism pervades Chinese economy as foreign investment fades

“No matter what you are selling, your business in China should be huge, if the Chinese people who should be buying your goods were doing it.”

Never has an “if only” clause carried more weight. In the 85 years since Carl Crow, a Shanghai-based American publicist, wrote those words in his book Four hundred million customers, China’s population increased by 1 billion people. Their combined purchasing power is now second only to that of Americans.

Yet the chasm between promise and reality in China’s storied market haunts foreign corporations as much today as it did when Crow tried to market American lipstick and French brandy to the emerging middle class of the 1930s. A host of political and regulatory issues – exacerbated by Xi Jinping’s tough Covid policies and stance on Russia’s war in Ukraine – conspire to eviscerate the dreams of many multinational corporations.

The result is that direct investment in China by foreign companies is falling off a cliff. Joerg Wuttke, president of the EU Chamber of Commerce in Beijing, said the unpredictability was prompting the European business community to suspend investment in China. “Many of our members now take a wait-and-see approach to investing in China,” he adds, citing an attitude survey this month of the chamber’s 1,800 members. “Twenty-three percent of our members are now considering moving their current or planned investments out of China, the highest level ever. And 77% say China’s attractiveness as a future investment destination has declined.

Pessimism has also infected the American business community. Michael Hart, president of the American Chamber of Commerce in China, warns that travel hassles faced by foreign executives seeking to visit their Chinese operations – including flight cancellations, visa complications and lengthy quarantines upon arrival – will lead to a “massive decline” in investment “in two, three, four years”.

The desperation and anguish of expat families holed up in their apartments for weeks in Shanghai and elsewhere is persuading many to rush to the gates as soon as they can. A survey by the German Chamber of Commerce found that almost 30% of foreign employees intended to leave China.

“Have you seen the video the guy in Shanghai shouting “I want to die”? asked a British teacher based in the city, who declined to be further identified. “Well, that did the trick here too. Many people suffer from mental health issues. It’s really hard to be locked up at home for weeks, especially with young children.

All of this may portend a fundamental change in the functioning of the global economy. For decades, China has been one of the most popular destinations for Western multinationals looking to outsource manufacturing operations or increase sales in the world’s largest emerging market.

In 2020, it reached a milestone, overtaking the United States as the world’s top destination for new foreign direct investment, according to UN data. Now a reversal appears to be underway. A tally of new foreign investment projects – which includes new factories and other plans announced by foreign companies – showed the lowest quarterly total in the first quarter of this year since records began in 2003, according to fDi Markets, an FT database.

Data collected by Rhodium Group, a consulting firm, shows a similar trend. The overall number of FDI for EU companies was boosted by a long-planned corporate acquisition, but the value of greenfield new ventures slipped to its lowest level in years. “Blossoming comes from the rose,” said Mark Witzke, an analyst at Rhodium, who notes that official figures for FDI in China are inflated by factors such as counting the profits of multinationals in China as investments.

Sure, some multinationals are still doing good business in China, but more and more stories of sudden breakups are making headlines. Boeing’s largest customer in China announcement the withdrawal this month of more than 100 of the American manufacturer’s 737 MAX jets from its planned purchases.

US sportswear group Nike and Swedish fashion retailer H&M were among the brands targeted by the Chinese consumer boycotts last year after commenting on forced labor in Xinjiang, where Chinese authorities run internment camps for Uyghurs and other minority peoples. Friction resulting from the U.S.-China trade war has increased the number of multinationals moving manufacturing capabilities out of China to Vietnam, Malaysia and other Southeast Asian countries, Latin America and Eastern Europe.

Added to this are concerns about China’s loyalty to Russia as it inflicts a massacre on Ukraine, raising fears that Beijing could one day become the West’s military adversary. Wuttke says businesses in China are compelled to “think seriously about how to mitigate the risks of any potential deterioration in EU-China relations”.

George Magnus, author of Red flags, a book on China’s vulnerabilities, sees an inflection point. “I think China’s support for Putin and the government’s zero Covid response to its own citizens are watershed moments that force people to review and reconsider the implications and meaning for the operating environment of businesses in China,” he says.

james.kynge@ft.com

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