It is becoming increasingly difficult for European companies to make money in China as growth slows and excess manufacturing capacity increases, according to a new study by the EU Chamber of Commerce in China.
China is actively seeking foreign investment to boost sluggish economic growth, but the slowdown itself is taking a toll on companies’ plans to grow their businesses in the world’s second-largest economy, an annual survey of more than 500 European companies showed.
Slowing economic growth was the dominant concern for respondents to a European Chamber of Commerce survey in China, the results of which were published on Friday. China continues to rank highly as an investment destination, but the share of companies considering expanding to the country this year fell to 42%, the lowest figure in the study’s history.
“Prospects for business development are still the most pessimistic: expectations of companies regarding growth and profitability have decreased, and concerns about competition have increased,” the chamber’s review of the business confidence index says.
The economic concerns are on top of long-standing complaints about regulations and practices that companies say favor their Chinese competitors or are unclear, creating uncertainty for businesses and their employees. Other organizations, including the U.S. Chamber of Commerce in China, express similar concerns.
According to Jens Eskelund, president of the European Chamber of Commerce, these old problems are now being exacerbated by the weakening economy, which is undermining business confidence.
“Companies are starting to realize that some of these challenges that we’ve seen in the local market, whether it’s competition, low demand, are becoming perhaps more permanent,” he told reporters earlier this week. “And it’s starting to influence investment decisions and the way companies think about local market development.”
The government is launching programs to stimulate consumer spending, but the confidence index remains low due to a weak labor market. In the first three months of this year, economic growth exceeded the expected 5.3% annualized rate, but most of the GDP growth was provided by government spending on infrastructure and investment in plants and equipment.
Massive investment in industries such as solar panels and electric cars has fueled fierce price competition, driving down profits. More than a third of the survey participants said that there is excess production capacity in their industry. Chinese enterprises 15% of companies will end 2023 in the red. Foreign companies need growth in domestic demand, not production capacity, says Eskelund.
“For foreign companies, it is not so much the GDP figures – 5.3% – as the composition of the GDP,” he said.
About 40% of companies said they have already transferred or are considering transferring future investments from China. Southeast Asia and Europe are the biggest beneficiaries, followed by India and North America. Almost 60% of companies said they are sticking to their investment plans for China, but those plans are smaller than last year.
“Without significant improvements in business conditions, companies will continue to look for opportunities in other markets, which, in their opinion, are more reliable, predictable and transparent,” the chamber’s report on the results of the survey states.
About a third of companies are optimistic about their business growth this year, compared to more than half in 2023, and only 15% are optimistic about profit growth.
More than half of companies plan to cut costs in China this year, with 26% planning to reduce their workforce, which the report’s authors say will “put even more pressure on an already tight labor market.”