European firms are growing wary of China's market potential as the country's economic slowdown takes a toll, according to an annual survey by the European Chamber of Commerce in China.
The survey, which gathered insights from over 500 companies, was released on Friday and highlights that China's decelerating growth is now the primary concern for European businesses operating there. Despite China actively courting foreign investment to bolster its economy, the survey revealed that only 42% of European companies are considering expanding their operations in China this yearthe lowest percentage ever recorded. "
The business outlook is the most pessimistic yet, with companies' expectations for growth and profitability taking a hit, and concerns about competition intensifying," the chamber stated in its business confidence survey. Long-standing grievances regarding regulations and practices that seem to advantage Chinese competitors or remain ambiguous have created additional uncertainty for these companies and their staff.
Similar issues have been voiced by other groups, including the American Chamber in China. Jens Eskelund, president of the European Chamber, noted that these longstanding problems are now exacerbated by the faltering economy, further undermining business confidence.
"Companies are beginning to realize that some of these pressures that we have seen in the local market, whether it's competition, whether it's low demand, that they are taking on perhaps a more permanent nature," he said earlier this week. "And that is something that is beginning to impact investment decisions and the way they go about thinking about development of the local market."
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The government is launching programs to boost consumer spending but confidence remains low because of a weak job market. Economic growth came in at a faster-than-expected 5.3% annual pace 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 investment in industries such as solar power panels and electric cars has created intense price competition, squeezing profits. More than a third of the survey respondents said they have observed overcapacity in their industry.
For 15% of the companies, their China operations finished 2023 in the red. Foreign companies need growth in domestic demand, not manufacturing capacity, Eskelund said. "What is important to foreign companies is not necessarily sort of a headline GDP number - 5.3%, whatever - but the composition of GDP," he said.
Close to 40% of companies said they have 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 are sticking with their investment plans for China, but that was down from last year. "It's not that companies are giving up on China, it's just that we are beginning to see other countries emerging as a serious competitor to China," Eskelund said.
The survey report said "China's allure as a top investment destination is fading" and warned that companies will pursue opportunities elsewhere unless there are improvements in the business environment. The proportion of companies that are optimistic about expanding their China business this year fell to about one-third, down from more than half in 2023. Only 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 staffs - which the report said "will further increase the pressure on an already strained job market."
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