European firms souring on China, lobby group warns

6 months ago 16

The proportion of European firms that rank China as a top investment destination has hit a record low, a European business lobby group said on Friday (10 May), warning that it could take years to restore confidence in the world’s No.2 economy.

The European Chamber of Commerce in China said in the latest edition of its Business Confidence Survey that the outlook for doing business in China was also at its lowest in the report’s 20-year history, with over a quarter of respondents pessimistic about their current growth potential and 44% downbeat over future prospects.

With China’s economy facing headwinds and President Xi Jinping urging self-reliance and for officials to push on with a production-focused, debt driven development model despite pushback from the West, foreign firms are feeling less welcome than before.

EU Commission chief Ursula von der Leyen and French President Emmanuel Macron urged Xi on Monday to ensure more balanced trade with Europe, but the Chinese leader showed little sign of being ready to offer major concessions while in Paris.

BASF, Maersk, Siemens and Volkswagen are among the members of the chamber.

Just 13% of firms said they currently see China as a top investment destination, the chamber said, down from 16% in 2023 and far lower than during the pandemic, when Beijing’s strict zero-COVID regime saw that figure fall from one-fifth to 17% in 2019, 19% in 2020, 27% in 2021 and 21% during 2022, the year the curbs were finally lifted.

“The lifting of pandemic-related control measures initially provided companies with a sense of optimism,” the chamber said. “However, it soon become evident there would be no rapid recovery.”

“China’s deeper structural issues – including sluggish demand, high levels of government debt and the continued challenges in the real estate sector – were going to continue affecting the prospects of both domestic and foreign companies,” the chamber added.

The pandemic and a property crisis have laid bare the limits of China’s development model, analysts say. And as China’s investment-consumption imbalance is deeper than that of Japan in the 1980s – before its infamous “lost decades” – the economy risks slowing to such an extent that it feels like it is in recession.

European firms are feeling the pinch, the chamber said, with the number of companies reporting revenue increases also at its lowest on record. In tandem, close to 40% of respondents said China’s ailing economy was their biggest business challenge, with a slowing global economy coming in a distant second at 15%.

“Companies are continuing to shift investments that were originally planned for China to alternative markets that are perceived to be more predictable, reliable and transparent,” the chamber said.

“As investment decisions are made in cycles and are not taken lightly, reversing them will not be possible overnight.”