The recent crackdown on consultancy and due diligence firms, including Capvision Partners, US law firm Mintz, Deloitte and US management consultancy Bain & Co. in China has further eroded investor confidence in the Chinese economy. EU’s Chamber of Commerce and the American Chamber of Commerce in China have warned that the crackdowns would increase the uncertainty being faced by foreign companies in China.
Foreign firms were already losing confidence in China as an investment destination due to its harsh Covid policy and inward looking policies. Increased interference by the Communist party in businesses was also harming China’s attractiveness. Concerns among foreign investors about the sustainability of the current recovery in the Chinese economy and the increasing geopolitical tensions as China sides with Russia in its war against Ukraine has already eroded investors’ confidence, which is already directly affecting their long-term business considerations for China. Besides, rising labour costs in China and pressure to transfer technology to Chinese companies is keeping foreign investors away.
Many global companies are already looking to shift their investments to other markets such as India, Vietnam and Thailand. During 2022, the number of foreign manufacturers and other companies in the industrial sector in China fell by 0.5% as compared to 2021, the first decline in the last three years. According to New York-based Rhodium Group, there has been almost no new entries by European companies in China in the recent past.
FDI into China declined by 73% to USD 42.5 billion between July and December 2022 as compared to the same period of 2021, the sharpest since 1999. It is due to geopolitical tensions, falling growth in the Chinese economy and fears of the government backtracking on economic reforms. Actual utilized FDI, which includes reinvested profits, fell by 35% in the last quarter of 2022, compared to the same period of last year, the steepest drop since the availability of comparable data in 1996. China’s FDI in 2023 may also take a hit as according to a recent survey, US companies do not plan to make new investments in China this year.
Investors are unsure about the long term prospects of the Chinese economy. Foreign institutional investors are cutting their investments in China’s financial markets over concerns of the slowing economy and irritants government policies to revive it. In April 2023, the Hang Seng China Enterprises Index of Chinese stocks, listed in Hong Kong, lost more than 5%, the second-worst performer among more than 90 global equity gauges. According to data provider
Wind, foreign investors pulled out RMB 4.55 billion out of Chinese stocks in April 2023, which has caused concern in official circles.
Besides foreign investors, local private entrepreneurs have also become more reluctant to invest amid high levels of business uncertainty due to the economic slowdown, tense global geo-political situation and Government’s regulatory campaigns. Private businesses have also losing confidence due to greater emphasis by Chinese leadership on supporting state-owned enterprises and their access to finance. The IMF has warned that the persistent weakness of private investment and private consumption would keep China’s economic growth under pressure.
According to Arthur Kroeber, founding partner at Gavekal Economics, China is placing a lot of emphasis on technological self-sufficiency and self-reliance since Xi Jinping sees the US as fundamentally hostile and determined to retard China’s technological progress. However, he warned that though China is developing its own alternatives to technology that it imports from the US and its allies, it cannot do so without participation by foreign investors and their know- how, capital and technology. He noted that foreign capital is a critical component for technological upgrading.
The falling foreign investment in the Chinese economy, would have long term effects on the already dire employment situation in China. Besides the exodus of foreign investment, large Chinese tech companies have also been downsizing their workforce due to the government’s high-profile anti-trust probes and regulations on privacy protection and data security. Already unemployment among young people in cities has been in double digits for months, and 11.5 million college graduates are poised to enter the job market later this year. The jobless rate for 16 to 24 year-olds increased to hit 18.1% in the January-February period of 2023 from 16.7% in December 2022. The overall unemployment rate also increased to 5.6%. Though there were signs of pickup in the Chinese economy in the first two months of this year, the economic recovery does not look solid yet due to property downturn, weaker global demand and financial uncertainty. In March 2023, China’s factory activity growth fell due to slowing production and weaker global demand. A downturn in foreign and domestic investment has further raised doubts about the strength of China’s economic rebound.