European firms in China express growing scepticism about the government’s ability to boost demand in the struggling economy and fulfil long-awaited reforms, according to a European business lobby group.

The European Union Chamber of Commerce in China highlighted in its recent Position Paper that many of its over 1,700 member companies now view their challenges as permanent rather than temporary.

Jens Eskelund, the chamber’s president, noted investors are scrutinising their China operations more closely as difficulties in doing business begin to outweigh the benefits. “It has become increasingly difficult to profit in the Chinese market,” he remarked during an event releasing the paper.

In 2023, EU foreign direct investment (FDI) flows to China fell by 29% from the previous year, totalling 6.4 billion euros, according to European Commission data. The chamber reported that profit margins in China had dropped for about two-thirds of its members to levels equal to or below the global average.

The chamber’s report emphasised that with other markets offering greater predictability and legal certainty along with similar returns on investment, maintaining previous levels of investment in China is becoming harder to justify.

European firms also face issues such as Chinese competitors receiving unfair subsidies, a politicised business environment, President Xi Jinping’s increased focus on national security, and ongoing market access and regulatory barriers. However, the primary concern remains China’s economic slowdown.

After a poor second quarter, policymakers indicated a shift from their usual strategy of funding infrastructure to targeting fresh stimulus at households. Yet, European firms are growing weary of unfulfilled promises.

“At the start of the millennium, foreign companies viewed Chinese government reform plans as credible,” the report stated. “Now, after more than a decade of largely unmet pledges, doubts over China’s commitment to reform are rising.”

Economists are still waiting for more detailed plans to revive the consumer market beyond a pledge by the Communist Party’s top decision-making body in July and a recently introduced subsidised trade-in scheme for consumer goods. The chamber noted the trade-in programme is unlikely to significantly boost domestic consumption, given its budget amounts to just about 210 yuan per capita.

Eskelund stressed the need for the government to consider measures to restore China’s position as a prime destination for European firms and FDI.