European Companies Are Less Optimistic About China’s Huge Market as the Economy Slows

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BEIJING (AP) — China is actively seeking foreign investment to boost its slowing growth, but that very sluggishness is weighing on companies’ plans to expand their operations in the world’s second-largest economy, an annual survey of more than 500 European companies shows resulted.

The slowing economy is now the biggest concern of respondents to the European Chamber of Commerce in China survey released on Friday. China still ranks first as a destination for investment, but the proportion of companies considering expanding operations in the country this year has fallen to 42%, its lowest level ever.

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“The business outlook is the most pessimistic yet, as companies’ growth and profitability expectations have taken a hit and there are concerns about intensifying competition,” the chamber said in its business climate survey.

The economic concerns overlap with longstanding complaints about regulations and practices that companies say favor their Chinese rivals or are unclear, creating uncertainty for companies and their employees. Others, including the American Chamber in China, have raised similar concerns.

Those older problems are now being exacerbated by the weaker economy, undermining business confidence, said Jens Eskelund, the president of the European Chamber.

“Businesses are starting to realize that some of these pressures that we have seen in the local market, be it competition, be it low demand, may be taking on a more permanent nature,” he told reporters earlier this week. “And that is something that is starting to impact investment decisions and the way they think about the development of the local market.”

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The government is launching programs to boost consumer spending, but confidence remains low due to a weak labor market. Economic growth was faster than expected at 5.3% annually in the first three months of the year, but much of the GDP growth came from government spending on infrastructure and investment in factories and equipment.

Massive investments in industries such as solar panels and electric cars have led to intense price competition that reduces profits. More than a third of survey participants said they had observed excess capacity in their industry. For 15% of companies, their China activities ended 2023 in the red. Foreign companies need growth in domestic demand, not production capacity, Eskelund said.

“What’s important for foreign companies is not necessarily some kind of overall GDP number – 5.3% or whatever – but the composition of the GDP,” he said.

Nearly 40% of companies said they have already moved or are considering moving future investments out of China. Southeast Asia and Europe are the biggest beneficiaries, followed by India and North America. Nearly 60% said they would stick with their investment plans for China, but that was down from last year.

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“China’s appeal as a top investment destination is waning,” a chamber report on the survey said. “Without significant improvements in the business environment, companies will continue to pursue opportunities in other markets that they believe offer greater reliability, predictability and transparency.”

About a third of companies were optimistic about business growth this year, up from more than half in 2023, and just 15% were optimistic about profit growth.

More than half expect to cut costs in China this year, including 26% who plan to reduce the size of their workforce – which the report says will “add further pressure on an already tight labor market.”

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