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International firms in China are reaching a “tipping point” on investing on this planet’s second-largest financial system as market entry obstacles, 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 changing into harder 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,” stated 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 stated.
China’s policymakers are grappling with a two-speed financial system during 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 obstacles to market entry in China, notably in authorities procurement procedures, however prior to now speedy 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 international traders fear they don’t seem to be 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 had been additionally pessimistic about their possible profitability over the subsequent two years, a document excessive.
The place paper on Wednesday stated chamber member firms had been changing into “defensive”. It cited a 29 per cent year-on-year fall in international direct funding in China within the first half of 2024.
Whereas European firms weren’t “running for the exit”, they’d 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 stated.
This included investing in separate IT and knowledge storage to satisfy Chinese language nationwide safety necessities and localising jobs fairly 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 stated, including that European firms had been wanting offshore for brand spanking new manufacturing bases.
The chamber stated a paper China launched final yr on optimising international funding, which included measures resembling streamlining procurement procedures, had failed to provide 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 stated.
The paper stated market entry obstacles that had been nonetheless in place included compulsory know-how transfers for international rail business firms and the alleged favouring of Chinese language state-owned enterprises in rail venture procurement tenders.
“China remains attractive, but China is no longer the only game in town,” Eskelund stated.
“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.”
