Many foreign companies developing in China have withdrawn one after another, and the total foreign direct investment has turned negative, calling into question the Chinese government’s commitment to opening up. What factors have impacted foreign investment confidence? Which types of businesses are most affected? How attractive is the Chinese market to foreign investment?
After three years, the China International Import Expo resumed its offline activities this month. However, this exhibition, which declared China’s determination to open up to the outside world, was overshadowed by several news stories that occurred at the same time.
On the one hand, the media has successively exposed that three large American companies have decided to withdraw from the Chinese market, including fund management giant Vanguard, polling giant Gallup, and cloud computing software group, the parent company of business software Citrix. Cloud Software Group).
On the other hand, data released by the China Administration of Foreign Exchange on November 3 showed that the total overseas direct investment (FDI) in the balance of payments account, which reflects investment in China, recorded a negative US$11.8 billion (negative S$15.9 billion) in the third quarter. ), the first negative value since records began in 1998, indicating that more direct investment flows out of China than flows in.
Previously, data released by the Chinese Ministry of Commerce in October showed that in the first three quarters of this year, the actual amount of foreign capital used in China fell by 8.4% year-on-year. Statistics from the Wall Street Journal show that as of the end of September, foreign companies had withdrawn profits from China for six consecutive quarters, totaling more than $160 billion. The data from the State Administration of Foreign Exchange has made the market even more worried. Is this the beginning of a large-scale flight of foreign companies from China?
Chen Long, a partner at the consulting firm Plenum, analyzed in an interview with Lianhe Zaobao that the current interest rates in China are far lower than most regions in the world. Multinational companies can obtain higher returns by remitting the profits they earn in China to other countries. , “This is a normal financial operation.”
Chen Long pointed out that in addition to financial considerations, the epidemic control in the past two years has caused some multinational companies to have no new investment projects, which is reflected in the amount of investment this year; in order to diversify geopolitical risks, companies have transferred some of their investments in China to other countries. is a possible reason for the decline in investment.
The China Business Environment Survey Report released by the American Chamber of Commerce in China in March this year showed that 24% of the US companies surveyed were considering or had already started to move their supply chains out of China, which was higher than the 14% a year ago. A briefing issued by the European Central Bank on November 6 stated that 40% of multinational companies expect to relocate production out of China in the next few years.
The most direct impact of the outflow of overseas direct investment is to put further pressure on the already weakening RMB exchange rate. As investors’ appetite for assets such as Chinese stocks and bonds wanes, the onshore yuan’s exchange rate against the U.S. dollar has continued to slide this year, and in early September fell to its lowest level since the 2007 global financial crisis.
If foreign capital continues to flow out, it will have a longer-term impact on the Chinese economy. Official statistics show that although foreign companies account for less than 3% of the total number of Chinese enterprises, they create 40% of foreign trade, more than 16% of tax revenue and nearly 10% of urban employment. The official Xinhua News Agency said: “Multinational companies have brought capital, technology and management experience to China and are one of the main driving forces for China’s economic development… They have become an important part of China’s open economy.”
Beijing has repeatedly courted foreign companies this year after China’s economic growth fell well below official targets last year. The Politburo meeting of the Communist Party of China held in April emphasized that attracting foreign investment should be placed in a more important position and stabilize the fundamentals of foreign trade and foreign investment. In August, the State Council issued 24 measures to increase efforts to attract foreign investment. Chinese President Xi Jinping announced at the opening ceremony of the “Belt and Road” International Cooperation Summit Forum in October that restrictions on foreign investment in the manufacturing sector will be completely lifted.
Counterespionage laws and data controls impact confidence of foreign companies
However, other policies and actions implemented by the government at the same time not only caused the market to question the above-mentioned opening-up commitments, but also made foreign companies in China worry that the CCP’s decision-makers have placed more emphasis on national security than the need to attract foreign investment.
The revised Counterespionage Law, which took effect in July this year, expanded the scope of the definition of espionage activities and did not clearly define the prohibited transmission of “information related to national security and interests.” This has caused some foreign company executives to worry that business activities and topics discussed in China may become restricted areas.
What confirms the market’s concerns are the raids and restrictions on movement suffered by many foreign-funded companies and employees since March. The offices in China of foreign companies such as due diligence company Mintz Group, consulting companies Bain and Capvision, and GroupM, a subsidiary of advertising company WPP, were successively raided by relevant authorities. Many employees Was arrested. Hong Kong-based executives from U.S. consulting firm Kroll and Japanese brokerage Nomura have also been banned from leaving mainland China.
Most of the targets of this series of actions are American companies. This year, most of the companies that have announced their withdrawal from the Chinese market are American companies. The tense relationship between the two largest economies in the world has become the biggest risk challenge for American companies in China. An April survey by the American Chamber of Commerce in China showed that about 27% of respondents prioritized investing in other countries rather than China, much higher than 6% last year.
Michael Hart, president of the American Chamber of Commerce, admitted in an interview that member companies have a long-term commitment to China and in most cases still see business opportunities in China, “but almost everyone is affected by concerns about Sino-US relations.” He added that previous restrictions on international travel may have caused U.S. headquarters personnel who had not had the opportunity to come to China to be less optimistic about China’s prospects.
At the same time as the new version of the Counterintelligence Act, there are also increasingly stringent data regulations. The “Standard Contract Measures for the Transfer of Personal Information Abroad”, which came into effect on June 1, requires information providers that process personal information of less than 1 million people to also sign a standard contract with overseas recipients to assess the purpose and risks of personal information transfer abroad. and file it with the local provincial cybersecurity and informatization department.
According to a survey conducted by the European Chamber of Commerce in China last month, one-third of the member companies surveyed pointed out that if they did not pass the data export security assessment of the Cyberspace Administration of China, they would have to spend millions of euros (1 million euros is approximately S$1.46 million). ) stores data in China. Another 11% of companies believe that the related costs can reach trillions of euros.
The service industry, which relies heavily on data, has become the area most affected by the new regulations. Data from the Chinese Ministry of Commerce also showed that the actual use of foreign capital in the service industry in the first three quarters of this year was 630.23 billion yuan (S$120.49 billion), a year-on-year decrease of 15%, the largest decline among all fields.
But it’s not just the service industry that’s been affected. In an interview, Wang Miao, Vice Chairman of the Fashion and Leather Goods Action Group of the European Chamber of Commerce in China, revealed that in order to comply with cross-border data transmission requirements, his leather goods company has set up data centers in China and Europe since last year. In addition to undertaking the resulting infrastructure expenses, changing vendors and systems, and spending a lot of time training employees. “This is a huge undertaking and a heavy burden on everyone.”
Chen Long pointed out that strengthening data supervision is in line with global trends, but there are still many unclear definitions in the new regulations, such as what is important data and what kind of data has the risk of illegality. “Enterprises hope that the rules will be clarified and detailed as soon as possible to reduce uncertainties.”
Jens Eskelund, President of the European Chamber of Commerce, said in an interview that growing risks and a more unstable operating environment have prompted European companies to re-evaluate their investment and operating strategies in China. Companies are not seeking to exit, but to further localize and build operational resilience by decoupling China from global operations, including by shifting investments.
Yanci bluntly said: “The overall confidence in China as an investment destination has dropped to the lowest level on record, and more and more member companies are seeking to invest in other markets that are more predictable and reliable.”
Policy adjustments bring about turnaround
As the argument of “foreign capital fleeing China” became increasingly popular, Chinese officials quickly adjusted relevant policies. The Cyberspace Administration of China issued the “Regulations on Regulating and Promoting Cross-border Data Flows (Draft for Comments)” on September 28, exempting certain outbound situations from regulatory requirements, and clarifying that data that has not been informed or has been publicly released as important does not need to apply for an outbound security assessment. .
The European Chamber of Commerce regards the draft opinion as a positive signal, believing that it shows that the Chinese government is listening to the concerns of enterprises and is willing to take measures to solve them. The Chamber of Commerce calls for further clarification of some contents of the opinion draft and its implementation as soon as possible.
On the other hand, the high-profile China-U.S. Presidential Meeting was held on Wednesday (November 15), San Francisco time. The two heads of state agreed to promote and strengthen dialogue and cooperation between China and the United States in various fields. This discussion, described by U.S. President Biden as the “most constructive and fruitful” discussion to date, has helped foreign companies in China regain confidence in the recovery of Sino-U.S. relations.
Michael He emphasized that confidence is important for both the economy and investment. “Our member businesses need to ask: Are we welcome? Will we be treated fairly? Can we win over all customers, including state-owned enterprises and governments? Is the media environment friendly to us and our country? If the answer is yes , investment is more likely to come. If the answer to any of these is no, investment will fall and companies may exit the market.”
The local government is enthusiastic about attracting foreign investment and wants to “invite in” foreign investment.
“Every entrepreneur comes here this time to take a good look at Shandong. If you have any ideas, just put them forward and we will definitely provide precise services.”
At the Singapore-Shandong Economic and Trade Council meeting held last week, Shandong Governor Zhou Naixiang repeatedly emphasized in his speech that local governments at all levels will provide tailor-made and personalized solutions for Singaporean companies that come to invest. Representatives of Singaporean companies attending the meeting told Lianhe Zaobao that the governments of Jinan, Yantai and Qingdao have all sent invitations to visit the local areas and arranged dedicated personnel to follow up. They are “much more enthusiastic than in previous years.”
China’s Ministry of Commerce launched the “Invest in China Year” event this year to accelerate the restart of the investment promotion process that had been delayed during the three-year epidemic. Governments in many places, including Shandong Province, are “going out” to participate in overseas exhibitions and attract investment. At the same time, they are also “inviting in” foreign investment by holding local promotions.
Data from China’s State Administration for Market Regulation shows that in the first three quarters of this year, South Korea, the United States and Japan were the main sources of new foreign companies in China, and the economically developed southeastern coastal provinces remain popular destinations for foreign investment. The number of newly established foreign-invested enterprises in Zhejiang, Guangdong and Fujian provinces increased by 112.5%, 41.4% and 29.3% respectively year-on-year.
Under the impact of factors such as epidemic prevention and control and the weakening of the property market, local governments are generally facing the dilemma of tight finances and high debts. Attracting foreign investment has become an important way to boost local investment. But for foreign companies that have been isolated from the Chinese market for three years, the uncertain economic prospects make them more hesitant when making investment decisions.
Last month, Shanghai held the first offline Mayor’s International Entrepreneurs Advisory Meeting after the epidemic. A total of 30 multinational company executives from 12 countries attended. A Middle Eastern company executive told Lianhe Zaobao that although the organizers strongly invited the company’s president to join the city consultation meeting, due to lack of confidence in Chinese investment, the senior management decided to “wait for a year.”
A representative from a Singaporean investment bank said that the three-year epidemic has disrupted China’s economic structure and growth trend, and has also made foreign companies that have not set foot in China for a long time feel like they are “seeing flowers in the smoke.” The company will also need to spend some time looking for bright spots in the Chinese market after the epidemic before making investment decisions.
Michael Hart, president of the American Chamber of Commerce in China, pointed out that although the impact of the epidemic has ended, the slowdown in China’s economic growth is still worrying, and companies are becoming cautious about new investments. Among small and medium-sized enterprise members that have been hit hard by the three-year epidemic, some have closed down, some are still recovering, and most are not yet ready to expand.
Analyst: China can continue to attract investment if it can stabilize growth
In an interview, Xie Dongming, head of research for Greater China at Overseas Chinese Bank, analyzed that China’s economic recovery after the epidemic is unstable, which has a certain impact on market confidence. But compared with short-term data, foreign investment pays more attention to long-term prospects. In areas such as manufacturing and new energy, the Chinese market still has significant advantages. “If we can stabilize growth, we can continue to attract investment.”
Singapore’s Eagle New Energy Group is one of the few companies that rapidly expanded into the Chinese market during the epidemic. Group CEO Fu Yuanling disclosed in an interview that with the Chinese government’s strong promotion of new energy, the group’s business in China has achieved an average annual rapid growth of 500% to 1,000% in the past three years.
Yige entered the Chinese market in 2020, and now more than 90% of the group’s business is in China. Fu Yuanling said that although the uncertainties of doing business in China have increased, this huge market is still very attractive to foreign companies. “Otherwise, why would major companies such as BASF and Bayer, and even Micron, which has been censored by China, continue to expand their investments in China?”
Fu Yuanling predicts that the company’s number of employees in China will double to about 200 in the next three years. He is also optimistic about the future development potential of this market. “In the past 20 years, I have not seen another country develop as fast as China; although China’s demographic dividend is decreasing, its investment in infrastructure and education in the next 20 years will lead the world. This provides us with long-term and huge opportunity.”
Tags: China Feature Chinas policies swaying foreign companies waiting reassurance Lianhe Zaobao
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