European enterprises operating in China have reached a critical juncture in their investment decisions, prompting urgent calls for action from Beijing to address the growing pessimism among these companies. According to the EU Chamber of Commerce in China, the future of European businesses in the country hangs in the balance, with many questioning whether to continue investing amidst a deteriorating business climate as detailed in a CNBC report.

“We truly believe we are at a critical juncture. If action is to be taken, it must occur now,” remarked Jens Eskelund, the chamber’s president, during a recent press briefing. This sentiment reflects the widespread concern among European businesses about the viability of their operations in China.

Deteriorating business climate and economic downturn; decline in Foreign Direct Investments

The growth rate in China, the second-largest economy globally, has experienced a significant downturn. Despite its long-standing promises to enhance the business climate, China has not made substantial progress, leading to a sense of “promise fatigue” among foreign investors. This fatigue is highlighted in the chamber’s latest position paper, which underlines the need for immediate and decisive measures from Beijing to restore confidence.

Data from China’s Ministry of Commerce reveals a stark decline in foreign direct investment, plummeting by 29.6 per cent during the first seven months of the year compared to the previous year. This decline is attributed to an elevated baseline from the previous year, further worsening the concerns of foreign investors.

In response to the concerns raised by foreign businesses, Chinese authorities have made several policy adjustments. These include permitting foreign enterprises to fully own hospitals in select cities and regions, as well as conducting human stem cell research and treatments in designated areas. Additionally, the government has announced plans to relax restrictions on foreign investment in manufacturing, aiming to open the Chinese market further to overseas firms.

However, these advancements, while positive, do not significantly impact European businesses. Jens Eskelund emphasized that despite these changes, optimism about profitability in China over the next two years remains at a record low among chamber members. “Perhaps there is a need to expedite the resolution of regulatory hurdles given the current market conditions, which do not seem to provide the same returns as they did prior to the pandemic,” he stated.

Economic projections and long-term implications on the Chinese economy

Official projections indicate that China’s economy is expected to expand by approximately 5 per cent this year. However, retail sales increased by only 2 per cent in June compared to the previous year and by 2.7 per cent in July. Imports measured in U.S. dollar terms saw a mere 0.5 per cent increase in August year-on-year, reflecting ongoing weak domestic demand.

While the long-term potential of China as a consumer market and its capabilities are not in question, the immediate need for concrete actions to infuse confidence among investors is paramount. “Long-term, I don’t think anyone truly questions the potential of China and its capabilities. That is not the issue here,” Eskelund remarked. “We observe remarkable supply chains and recognize the long-term prospects of China as a consumer market. What we need is to witness concrete actions that infuse confidence, allowing us to believe that investments can be made within a reasonable timeframe”.