Among those that already have an established presence in China, not too many found themselves riding the tailwinds of last year’s 5.2 per cent growth of the world’s second-biggest economy.
In a revealing sign of the uneven recovery, industrial output among foreign entities in the country grew in 2023 by a meagre 1.4 per cent, year on year, underperforming the 5 per cent growth reported among state-owned enterprises (SOEs).
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And many of those concentrated in more economically dynamic coastal regions have even endured negative growth. In Shanghai, which boasts the biggest cluster of foreign companies’ headquarters in China, foreign industrial output slumped by 5.4 per cent in all of 2023 while that of SOEs grew by 5.3 per cent. In the southern manufacturing powerhouse of Guangdong from January to November, foreign manufacturing contracted by 1.7 per cent, compared with SOE growth of 7.3 per cent.
Signs of the imbalance could be seen before the pandemic, as geopolitical strife and trade disputes started to take hold. In 2018, foreign manufacturer output expanded by 4.8 per cent, compared with 6.2 per cent among SOEs, and it marked the first time foreign firms trailed SOEs in that regard since 2013.
The year 2021 was the only exception, as foreign output recovered slightly faster than SOE output, against a low comparison base in 2020, when the pandemic snarled up business and production.
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Beijing raids offices of consulting firm Capvision in widening crackdown over national security
Thus, with questions swirling in the murky business climate, foreign firms are left wondering not only how much more they might become marginalised or eased out by the expanding state sector, but – more fundamentally – whether a more inward-facing China still needs or welcomes their investments.
“Foreign businesses being outpaced by SOEs could be due to the yawningly different policy effects brought to bear on SOEs and foreign ones. Some policies could benefit SOEs to the detriment of others,” said Zhu Tian, a professor of economics at the China Europe International Business School (CEIBS) in Shanghai.
“Foreign companies are more susceptible to market fluctuations and cycles, and there is also the factor of flagging confidence … Foreign and private firms growing slower than SOEs goes against market-economy norms,” Zhu said, adding that China’s private economy also faced a similar squeeze when the share of the state sector crept upward in recent years.
Small- to medium-sized foreign enterprises, in particular, have seen their growth taper off in the past year amid the nation’s bumpy economic recovery and geopolitical complications.
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Trend Micro, a mid-sized cybersecurity company based in the US, decided in November to shed its China operations, making at least 70 researchers redundant at its research centre in Nanjing, Jiangsu province, according to local media.
“We were told to go, as sales had dropped when big companies and government bodies preferred domestic products and antivirus software, as seen in procurement notices,” one professed employee said on Weibo, including what appeared to be a termination letter.
Another said: “The business wasn’t holding out much hope.”
Jiangsu, among the largest provincial recipients of direct foreign investments into China, saw foreign industrial output grow by a wafer-thin 0.8 per cent last year, contrasting the 6.4 per cent growth in SOE output.
Despite the upbeat economic growth last year, Beijing is facing the daunting challenge of fostering strong economic growth, creating enough jobs, and addressing low demand and weak expectations that it hasn’t seen in several years.
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Jens Eskelund, president of the European Union Chamber of Commerce in China, noted how foreign businesses were profit-motivated and would make investments only when the demand existed. But when it comes to SOEs, “the dynamics would be different”.
“It’s not that foreign companies have stopped investing, but because they don’t see the growth as they saw before, they wonder if they will still search for a bottom, or whether they’ll see stabilisation in 2024,” he said. “Many factors show we are not going to see a significant, rapid rebound.”
SOEs, in contrast, are usually assigned political undertakings to cushion impacts or lead recoveries in key sectors where they operate.
“The imperative to ramp up growth amid the pandemic and in its aftermath, as well as the West’s tech war to corner China, has Beijing betting more on SOEs and the state sector to fend off national security threats and to solidify control,” said Alex Ma, an assistant professor in public administration at Peking University.
The controversial trend in recent years of the “state sector advancing and private economy retreating”, Ma added, has had a strong spillover effect on foreign firms.
Headwinds in consumption, the property market, the stock market and trade aren’t abating
Foreign business executives also weighed in with observations.
According to Marco Civardi, CEO of global logistics giant JAS’ China operations, foreign companies in the country have experienced a significantly more challenging and complex business landscape in recent years than before Covid-19.
“There is an ongoing recalibration of strategies that see China as an opportunity. China’s growth has entered a new normal – still high in relative terms, but lower than in the past. Headwinds in consumption, the property market, the stock market and trade aren’t abating,” said Civardi, who is based in Shanghai.
The tepid foreign industrial output growth also reflects the fact that some foreign players are losing out to their rising home-grown challengers.
In China’s fiercely competitive car market, Japanese and German automakers – once key drivers of foreign industrial output in the country – are ceding market share to domestic brands such as BYD.
But even in highly competitive segments, Beijing’s industrial policies are seen tilted toward domestic producers.
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CEIBS’ Zhu said some non-competition issues were also to blame for the waning fortunes of foreign firms.
“Beijing’s measures to tackle overcapacity between 2016 and 2018 benefited SOEs and helped them grow output and profit faster than others, as overcapacity issues were more prevalent among private and foreign manufacturers,” he said.
“Upstream SOEs hiked prices of raw materials and sub-assemblies, which tore into the profits and output of downstream private and foreign ones.”
For years, Beijing has made little headway in addressing perennial issues despite lofty promises, according to various foreign business chambers whose members continue to be beset with issues concerning national- and data-security law compliance, cross-border data flows and market-access hurdles, as well as policy unpredictability and local deviations in law interpretation and enforcement.
Meanwhile, Beijing’s bid to attach self-reliance in the hi-tech realm, coupled with a more inward-looking policymaking tone and emphasis on national security amid heightened geopolitical complexities, have left foreign-business sentiment weak and wary.
Foreign companies can also report to us problems they encounter during the delivery of these pro-business measures
“Most American companies continue to view China as a strategic market and have not divested their operations. But it remains to be seen if more pro-business measures at state and local levels may reverse the trend of FDI flows,” said Eric Zheng, president of the American Chamber of Commerce in Shanghai.
For its part, Beijing has stressed the importance of making progress in its campaign to retain and reel in overseas investments, by sending reassurances and engaging in charm offensives to woo and welcome foreigners.
At a press conference earlier this month, Zhu Bing, the chief of foreign-investment administration for the Ministry of Commerce, said that more than 60 per cent of the measures and ratifications promised in a 24-point policy package announced by the State Council in August had been implemented, and that its survey revealed an “overwhelmingly positive” response from foreign firms.
“Foreign companies can also report to us problems they encounter during the delivery of these pro-business measures, and we will report new progress in government procurement, standard setting, investment facilitation and other aspects of concern,” Zhu with the commerce ministry said.
The National Development and Reform Commission, China’s top economic planner, has also vowed to further winnow down the so-called negative list – which outlines areas in which foreign investments are restricted or forbidden – with intentions to remove all access barriers in the manufacturing sector.
Commerce authorities also said the ministry would make better use of an online portal for foreign firms to lodge complaints, especially small and medium-sized enterprises (SMEs) whose struggles and concerns would typically be less heeded.
“Foreign companies are still going to invest in China, particularly big ones with a significant exposure in China,” said Eskelund with the European chamber. “But foreign SMEs are hedging a bit more and considering whether they would be better off diversifying away. A number of SMEs are leaving, and not so many come in.
“The European industry is characterised by a lot of SMEs, and China is missing out on very significant potential if it’s not able to attract them. Working towards making China more attractive to SMEs ought to also be a priority.”
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“From them, we can seek more cooperation and transfers of technologies. There is great uncertainty as we select and trial new technologies and new business models. We need more foreign SMEs during the process. Big players of tomorrow may also be born from small firms today,” said Pan, calling for more tailor-made policies.
Eskelund said China needed to bring back the “reliability, predictability and stability that pre-Covid China was famous for”.
But messages from Beijing are often perceived as mixed. Fresh attempts at reassurance followed a recent Politburo meeting at which leadership put the onus on politics and party discipline.
“Beijing often leaves the impression that politics is above the economy,” said James Zimmerman, a partner with international law firm Perkins Coie and a former chairman of the American Chamber of Commerce in China.
“No level of indoctrination is going to magically correct the economic slide and build investor confidence so long as the economic plan remains rudderless,” he said. “They need a real, actionable plan that supports market forces.”
