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Foreign investors souring on PRC amid new national security laws, rising geopolitical tensions

Felix Kim

As the property crisis in the People’s Republic of China (PRC) appears to worsen, the country is becoming increasingly less attractive to foreign business entities. Central to the PRC’s decades of economic growth, foreign companies and businesspeople are encountering a frosty environment created by Beijing’s restrictive policies in what many expected to be a bounce-back year for international business engagement.

“The gap between China winners and China losers is increasing,” Gábor Holch, a corporate advisor with more than two decades of experience in the PRC and author of “Dragon Suit: The Golden Age of Expatriate Executives In China,” told FORUM. “In numerical terms, meaning how many companies we are talking about here, the ones who are spiraling down are the vast majority of international companies.”

Property investment in the PRC decreased for the 18th consecutive month in August 2023, down 19.1% year-over-year, according to Reuters, with home sales down for the 26th consecutive month. With real estate accounting for about 25% of the country’s gross domestic product (GDP), with direct tie-ins to manufacturing, services and commodities, the decline is a serious concern. An even steeper drop was seen in foreign direct investment (FDI), which has fallen by more than 50% since the April-June quarter of 2022, Japan’s Nikkei Asia news magazine reported. FDI is estimated to account for one-fourth of the value of China’s GDP over the past decade.

Greenfield investments by foreign companies new to the PRC have “practically ground to a halt,” Holch said. Such investments involve a company establishing operations in another country.

Only 68% of U.S. enterprises in the PRC were profitable in 2022, while just 52% believe that 2023 will be better, according to a recent survey by the American Chamber of Commerce in Shanghai. This, despite earlier hopes that the environment for foreign businesses would improve post-pandemic.

New laws introduced by Beijing have further chilled FDI, Reuters reported. Foreign enterprises face compliance risks because of a foreign relations law that warns against “acts” damaging to the PRC’s national interests and an anti-espionage statute that prohibits the sharing of unspecified information related to national security.

“The question of legal uncertainty related to data … is causing real anxiety among European companies here in China,” European Union trade chief Valdis Dombrovskis said at the Bund Summit of financial leaders in Shanghai in September 2023, according to Reuters.

Beijing’s decision to deepen its links with Russia despite Moscow’s unprovoked invasion of Ukraine has increased skepticism among European enterprises in the Chinese market, many of which are transferring investment to other nations as geopolitical tensions weigh heavily among investors’ concerns.

The flight of international business away from the PRC may benefit other Indo-Pacific markets, Holch said.

“I think their [China’s] system is going to be more and more incompatible with the rest of the world,” he said. “Nobody can provide the kind of infrastructure that China provides yet — both fixed infrastructure like trains, roads, electricity and so on, and also the human infrastructure. But companies are trying to move production to … places like Bangladesh and at a little bit higher end, they are trying to move it over to places like South Korea and some Southeast Asian countries.”

Felix Kim is a FORUM correspondent based in Seoul, South Korea.

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