“No matter what you sell, your business in China should be huge if the Chinese who were supposed to be buying your goods would too.”
Never has an “if only” clause carried more weight. In the 85 years since Carl Crow, a Shanghai-based American advertising executive, wrote those words in his book Four hundred million customers, China’s population has grown by 1 billion people. Their combined purchasing power is now second only to that of Americans.
But the gap between promise and reality in China’s storied market haunts foreign companies today just as it did when Crow tried to market American lipstick and French brandy to the burgeoning middle class of the 1930s. A host of political and regulatory issues – exacerbated by Xi Jinping’s tough Covid policies and his stance on Russia’s war in Ukraine – are conspiring to shatter the dreams of many multinationals.
The result is that foreign direct investment in China is falling off a cliff. Jörg Wuttke, President of the EU Chamber of Commerce in Beijing, says the unpredictability is causing the European business community to put investments in China “on hold”. “Many of our members are currently taking a wait-and-see attitude towards investing in China,” he adds, citing an opinion poll this month of the chamber’s 1,800 members. “Twenty-three percent of our members are now considering moving current or planned investments out of China, the highest level on record. And 77 percent say China’s attractiveness as a future investment destination has decreased.”
Pessimism has also infected the US business community. Michael Hart, president of the American Chamber of Commerce in China, warns that the travel woes faced by foreign executives looking to visit their Chinese operations — including flight cancellations, visa complications and lengthy quarantines on arrival — will result in a “massive drop in investment” in two, three, four years”.
The desperation and fear of expat families locked in their homes in Shanghai and elsewhere for weeks is convincing many to rush to departure gates as quickly as possible. A survey by the German Chamber of Commerce found that nearly 30 percent of foreign workers had plans to leave China.
“Have you seen the video of the guy in Shanghai screaming ‘I want to die’?” asked a British teacher in the city, who declined to be identified. “Well, word got around here too. Many people suffer from mental health problems. It’s really hard to be cooped up at home for weeks, especially with young children.”
All of this could point to a sea change in the way the world economy works. For decades, China has been one of the hottest destinations for Western multinationals looking to outsource manufacturing operations or increase sales in the world’s largest emerging market.
In 2020, it passed a milestone, overtaking the US as the world’s top destination for new foreign direct investment, according to UN data. A trend reversal now appears to be underway. According to fDi Markets, an FT database, a tally of foreign greenfield investment projects – which include new factories and other plans announced by foreign companies – in the first quarter of this year showed the lowest quarterly total since records began in 2003.
Data collected by Rhodium Group, a consulting firm, shows a similar trend. The FDI headline for EU companies was boosted by a long-planned takeover, but the value of new greenfield projects slipped to their lowest level in years. “The bloom comes from the rose,” said Mark Witzke, an analyst at Rhodium, who notes that China’s official FDI numbers are being inflated by factors such as multinationals counting profits in China as investments.
Sure, some multinationals are still doing good business in China, but stories of sudden ruptures are increasingly making headlines. Boeing’s largest customer in China said it would withdraw more than 100 of the US manufacturer’s 737 MAX jets from its planned purchases this month.
US sportswear giant Nike and Swedish fashion retailer H&M were among brands targeted by Chinese consumer boycotts last year after they spoke out about forced labor in Xinjiang, where Chinese authorities run detention camps for Uyghurs and other minorities. Frictions arising from the US-China trade war have spurred the number of multinationals shifting manufacturing capacity from China to Vietnam, Malaysia and other countries in Southeast Asia, Latin America and Eastern Europe.
Adding to this are concerns about China’s loyalty to Russia, which is inflicting carnage on Ukraine, raising fears that Beijing too will one day become a military opponent of the West. Wuttke says companies in China are being forced to “reflect seriously on how to mitigate the risks of a possible deterioration in EU-China relations”.
George Magnus, author of Red flags, a book about China’s vulnerabilities, sees a turning point. “I think China’s support for Putin and the government’s zero-Covid response to its own citizens are tipping points that are now forcing people to review and reconsider the consequences and what it means for China’s business environment,” he says.
james.kynge@ft.com
