2023: Escape from Beijing?

"Foreign investments are welcome, and China's doors will be even more open than before," said then-Vice Premier Liu He at this year's exclusive Davos forum. Less than a month earlier, President Xi Jinping had declared, "We must ensure that foreign investments already in the country remain here and work to attract others of high quality." However, despite the words the Chinese leadership has used for months seeking to reassure foreign businessmen and investors, the uncertainty about the direction the world's second-largest economy is taking runs so deep that it is undermining confidence in the reliability of the country's system.

Since Beijing abandoned the zero-Covid policy at the end of last year, it has made efforts to communicate a renewed openness, but the combination of a series of restrictive political measures and increasingly uncertain international dynamics is making foreign investors more and more cautious; when they don't relocate their operations out of the country, they prefer to delay decisions to be sure of the direction taken by the world's second-largest economy.

An analysis by the Rhodium Group, based on data from Bloomberg and fDi Markets, has found a clear decline in announced direct investments in China: in 2020, there was a 40 percent decrease, from $120 billion to $74 billion, and the trend continued, reaching $41 billion in 2022.[1] These numbers contrast with those from China's State Administration on foreign exchange and those of the Ministry of Commerce, which analyze different data and record increases in inbound direct investments even during the years of Covid and the lockdowns: $187.2 billion in 2019, rising to $253.1 billion in 2020 and $344.1 billion in 2021, before decreasing to a still substantial level of $180.2 billion last year. The Rhodium Group questions whether, based on this one-sided view, the Beijing government is able to assess the beginning of de-risking, that is most likely already underway, in a timely manner. Indeed, according to data from the Qichacha portal,[2] which maps companies in China, the number of registrations of new foreign enterprises in the country has been declining since 2018, from almost one hundred thousand in that year to just over twenty thousand in the first six months of 2023. The slowdown in supply chains and the growing tensions with the United States, however, do not bode well.

On the first of July last year, the new law against espionage also came into effect, which broadens the definition of "state secrets" to include "documents, data, materials, and objects related to national security or interests." The vagueness and potential for interpretation open the door to arbitrary judgments and possible penalties, a risk that entrepreneurs find difficult to accept.

The annual report of the European Union Chamber of Commerce in China[3] highlights a growing pessimism among those who should invest capital in the country. The slowdown of the Chinese economy and the increasing cost of living and labor are only making the situation worse, to the point that the president, Jens Eskelund, does not hesitate to state that the confidence of foreign companies "is by far the lowest we have ever recorded" and that "there are no expectations of improvement for the next five years." Two-thirds of the 570 companies that responded to the European Chamber of Commerce survey report difficulties in operating in the world's second-largest economy, and three out of five companies complain of an increasingly "political" climate. The unexplained searches of the offices of consulting firms such as Bain & Co. and Capvision have not helped ease the atmosphere.

The propaganda emphasizing self-sufficiency in production and the preference for Chinese products over foreign ones also does not help. Various foreign companies have well-founded fears that they will soon be shut out of the market. One in ten companies has already taken new investments out of China, and one in five is waiting to do so. In the same document, we read that foreigners are not the only ones who fear for the fate of the Chinese economy; among their suppliers and customers, the trend is the same: two out of five are moving their investments out of the country.