Foreign Businesses Retreat from China Amid Economic Uncertainties

In recent months, foreign businesses have been withdrawing capital from China at a pace surpassing their investments, according to official data. The apprehension stems from a combination of factors, including China’s economic slowdown, low interest rates, and heightened geopolitical tensions with the United States. The upcoming meeting between Chinese leader Xi Jinping and US President Joe Biden is eagerly anticipated, as it may offer insights into the future economic landscape. However, businesses are already exhibiting caution, expressing concerns about geopolitical risks, policy uncertainty, and slowing growth.

Nick Marro from the Economist Intelligence Unit (EIU) highlights the prevailing sentiments, stating, “Anxieties around geopolitical risk, domestic policy uncertainty, and slower growth are pushing companies to think about alternative markets.”

The data reveals a noteworthy shift, with China recording a deficit of $11.8 billion (£9.6 billion) in foreign investment in the three months ending September – a first since records began in 1998. This suggests a trend where foreign companies are not reinvesting their profits in China; instead, they are choosing to relocate their funds elsewhere.

A spokesperson for Swiss industrial machinery manufacturer Oerlikon, which withdrew 250 million francs ($277 million; £227 million) from China last year, emphasized the need for corrections in the face of China’s economic slowdown. Despite the challenges, China remains a vital market for Oerlikon, with close to 2,000 employees, representing over a third of its sales.

Oerlikon’s spokesperson remarked, “In 2022, we were one of the first companies to transparently communicate that we expect the economic slowdown in China to impact our business. Consequently, we began early to implement actions and measures to mitigate these effects.”

The impact of the pandemic has added another layer of complexity for businesses operating in China, the world’s largest market. The stringent “zero-Covid” policy implemented by China disrupted supply chains, affecting companies like Apple, which diversified its production to India. The tensions between China and the US, with fresh export restrictions on critical materials for advanced chips, have also contributed to the shift in business strategies.

While established multinational firms may not be exiting the Chinese market, there is a noticeable reassessment in terms of new investments. Nick Marro notes, “We aren’t seeing many companies pulling out of China. Many of the big multinational firms have been in the market for decades, and they’re not willing to give up market share that they’ve spent 20, 30 or 40 years cultivating. But in terms of new investment, in particular, we are seeing a reassessment.”

Interest rates play a significant role in this reassessment. While many countries raised rates sharply last year, China took a different path by reducing the cost of borrowing to support its economy and struggling property industry. This, coupled with a depreciation of the yuan by over 5% against the dollar and euro, has prompted businesses to redirect their funds overseas for higher investment returns.

The European Union Chamber of Commerce in China emphasizes this trend, stating, “Those with excess cash and earnings in China have been increasingly transferring these funds overseas, where they will earn a higher investment return compared to investments in China.”

Michael Hart, president of the American Chamber of Commerce in China, notes that the withdrawal of profits does not necessarily indicate dissatisfaction with China but rather signifies the maturation of investments. He views it as encouraging, indicating that companies can integrate their China operations into their global operations.

Canada-based aerospace electronics company Firan Technology Group exemplifies this trend. Having invested up to C$10 million ($7.2 million; £5.9 million) in China over the past decade, the company withdrew C$2.2 million from the country last year and in the first quarter of 2023. Firan’s president and chief executive, Brad Bourne, clarifies, “We are not exiting China at all. We are investing and growing our business there and taking out any excess cash to invest elsewhere in the world.”

As uncertainties loom over future interest rates and China-US ties, analysts anticipate potential moves by China’s central bank to lower interest rates further to support the economy. However, this decision comes with challenges, as lowering interest rates could exert additional pressure on the depreciating yuan.

The business community remains cautiously optimistic about the upcoming meeting between Presidents Xi and Biden. Nick Marro suggests, “Direct meetings between the two presidents tend to exert a stabilizing force on bilateral ties.” However, he also notes that until companies and investors feel confident navigating the uncertainties, the drag on foreign investment into China is likely to persist.

The evolving economic landscape in China, coupled with geopolitical tensions and global economic shifts, has prompted foreign businesses to reassess their investments. While established companies may not be abandoning the Chinese market, the trend of redirecting funds overseas reflects a cautious approach influenced by economic uncertainties and a desire for higher investment returns. The upcoming meeting between leaders Xi and Biden is anticipated to provide some clarity, but until then, businesses remain vigilant in navigating the complex dynamics of the Chinese market.