Why US Businesses Can’t Wait to Get Out of China

Why US Businesses Can’t Wait to Get Out of China
Illustration by The Epoch Times, Shutterstock
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Foreign investments are leaving China.

Half of the $250 billion to $300 billion foreign bond investments since 2019 have exited, and U.S. private equity and venture capital investments in China have fallen by more than 50 percent, according to a JP Morgan report last month.

Foreign direct investment into China in the second quarter of this year reached a 25-year low at $4.9 billion, with a year-on-year decline of 87 percent, according to Chinese official data.
Bloomberg and fDi Markets data on new investment projects—a more telling indicator of whether foreign firms are still investing in the country—show a 40 percent drop, to $74 billion in 2020 from $120 billion in 2019, and an additional 45 percent decline to $41 billion in 2022—the lowest since 2010.

Although financial transactions are easy to track without much lag, it may take years for foreign direct investment data to reflect Western firms’ diversifying away from China.

For this reason, Beijing might be unaware of how bad things really are as far as foreign direct investment, analysts of the Rhodium Group, a leading research firm on the Chinese economy, warned in a recent report.

“Amidst a broader structural slowdown in China’s economy, the delayed reactions could contribute to further losses in productivity and economic growth,” the report stated.

The implied assumption here is that preventing economic losses is a priority for the Chinese Communist Party (CCP). However, some China experts challenge this.

“It’s not that Xi Jinping and the CCP leadership hate economic growth—it’s just not a priority,” Derek Scissors, chief economist of research firm China Beige Book and a senior fellow at the Washington-based think tank American Enterprise Institute, told The Epoch Times.

“The priority is control over the society, including the economy. So whenever there’s a trade-off between economic control and growth, they choose control,” he said.

“And when we say, ‘Oh, you know, you could be growing faster. Why are you doing these things?’ The answer is obvious: It’s because that’s not their priority.”

Mr. Scissors and other experts told The Epoch Times that overall economic growth isn’t at the top of the agenda for Chinese regime leader Xi Jinping. Instead, China is, by design, going through a paradigm shift in how it interacts with the global economy and is screening and filtering for foreign investors loyal to Mr. Xi.

As a result, China’s overall political and business landscape defies past experience, they said, and Western interpretations will make the wrong assumptions on China—even more so than before.

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Communist Party leader Xi Jinping has reversed China’s integration into the rest of the world, a trend that had defined the previous two decades, according to businessman Mike Sun. Marco Di Lauro/Getty Images

3 Phases of Foreign Direct Investment

When U.S. Commerce Secretary Gina Raimondo visited China in August, she warned that the country could become “uninvestable” if the unpredictable official behavior, such as raids on U.S. firms, don’t cease. This year, Mintz Group’s Beijing office was raided in March, Bain & Co.’s Shanghai office in April, and Capvision Partners’s offices in multiple cities in May.

The Chinese business environment for U.S. companies wasn’t always like this.

Mike Sun, a U.S.-based businessman with decades of experience advising foreign investors and traders doing business in China, recalled that the first generation of U.S. investors visited mainland China with a pioneering spirit. He spoke to The Epoch Times using an alias to protect his business in China.

In the early 1990s, he said a Jewish American businessman told him, “I want to be America’s Marco Polo,” referring to the Italian explorer who introduced Europeans to China. The businessman spoke fluent Mandarin and was married to a Chinese woman.

People walk by a McDonald’s restaurant in Beijing in 1994. In the early 1990s, McDonald's Corporation was among the pioneering U.S. businesses in China. (AFP via Getty Images)
People walk by a McDonald’s restaurant in Beijing in 1994. In the early 1990s, McDonald's Corporation was among the pioneering U.S. businesses in China. AFP via Getty Images

Back then, China was full of opportunities.

If investing in China in those years felt like an adventure, it became a no-brainer the next decade, from 2000 to 2012. One would have been foolish not to invest in China, Mr. Sun recalled.

The crowning glory for the communist regime was the 2008 Beijing Olympics, he said. When U.S. President George W. Bush and his family sat next to Chinese Foreign Minister Yang Jiechi at the China–United States basketball game, it became a symbol of the international community’s acceptance of the CCP.

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(Left) Then-Foreign Minister of the People’s Republic of China Yang Jiechi (L), then-U.S. President George W. Bush, former Secretary of State Henry Kissinger (2nd R), and then-First Lady Laura Bush attend a U.S.–China basketball game at the Beijing 2008 Olympic Games. (Jed Jacobsohn/Getty Images) (Right) China’s global share in manufacturing value added. The Epoch Times
China had become the “world’s factory” after it joined the World Trade Organization in 2001. According to World Bank data, its share of global manufacturing value-add rose from 9 percent in 2004 to 22 percent in 2012 and 30 percent in 2022.

But Mr. Xi’s ascension in March 2013 heralded a different decade. In 2015, the leader started his industrial “Made in China 2025” plan, aiming for global dominance in advanced manufacturing sectors such as semiconductors and new energy.

To achieve this goal, the regime encouraged large-scale technology theft from Western countries.

In Mr. Sun’s view, Mr. Xi has reversed China’s integration into the rest of the world, a trend that had defined the previous two decades.

“Xi doesn’t want China to be a second Russia,” Mr. Sun said.

Between 2014 and 2016, Russia suffered a financial crisis because of the sharp price decline of crude oil, a major export, and international sanctions as a result of its annexation of Crimea. Since then, Russia’s growth prospects have remained bleak because of challenges in diversifying its main industries and ongoing Western sanctions, according to European think tank Bruegel.

After Russia invaded Ukraine in February 2022, it was hit with more than 13,000 restrictions. The sanctions have severed Russia from advanced technology sectors abroad and forced the nation to resort again to energy commodities trading to sustain its economy growth, according to findings by the Carnegie Endowment for International Peace, a Washington-based think tank.

Mr. Sun said China’s changes have become more apparent in the past two to three years, coinciding with the COVID-19 pandemic, during which Mr. Xi largely completed his consolidation of power.

That’s what Meng Jun, a Chinese entrepreneur, said he experienced.

Mr. Meng had a rubber product business with an annual revenue of $15 million. In 2021, when the rest of the world reopened, his factory in Nanning, the capital of southern China’s Guangxi Province, began to receive orders again. However, he couldn’t resume production because of the regime’s COVID-19 lockdowns.

Initially, he was able to bribe local officials so his factory could run at night while other factories had to remain shut. But later, no one would bend the rules because the officials didn’t want to lose their jobs over the possibility that a COVID-19 case would be traced back to an unauthorized factory operating under China’s zero-COVID policy. He lost millions.

He closed the business last year and left for the United States.

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Empty streets during the Chinese regime's COVID-19 lockdown in Shanghai on April 1, 2022. STR/AFP via Getty Images

“Xi Jinping achieved total control of Chinese society, and he knew it,” Mr. Meng told The Epoch Times.

“He had tested it in the three years of lockdown. Just with a few people in a neighborhood committee—the lowest CCP control unit in urban areas—wearing white coats, no one in the apartment complexes with a population ranging from a couple of thousand to tens of thousands dared to defy the rules and leave.”

According to Mr. Sun, no one should view China’s economy through the lens of Western economics. “Westerners think that China’s economy is so bad with a high youth unemployment rate and an insolvent property sector, but Xi thinks it’s fine.”
Mr. Scissors agreed: “The goal for Xi and the Party is to make sure they control the economy, and that’s going fine. So they see no crisis here, and I think they’re correct.”

Intentionally Vague Laws

More than one-third of U.S. businesses have reduced or paused planned investment in China in the past year, according to the 2023 survey of the U.S.-China Business Council. Their top concerns are geopolitics and domestic policies.
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On Oct. 3, Capvision Partners, one of the U.S. firms raided earlier this year, announced that it had completed a “rectification” approved by Chinese authorities. The company repeated the CCP’s diktats and vowed to “take the lead in safeguarding the security bottom line in the consulting industry” and “contribute a small share to the Chinese style modernization.” Shortly after the raid, Chinese propaganda claimed that Capvision’s consultants engaged in international espionage.
In addition to raids, Western executives have reportedly been barred from leaving China.
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According to Spain-based human rights group Safeguard Defenders, China now has 15 different exit-ban laws that allow authorities to stop a person from leaving the country.

Mr. Sun said he was subject to an exit ban after Mr. Xi took over the CCP. Based on his experience, he said police departments, including those at the township level, can place an exit ban on a person in the public security system. Border control officers who execute a ban don’t provide a justification, unless the banned person is also arrested.

Exit bans can last from several months to years, and there’s no formal notification of when it gets lifted. People under a ban have to use their personal networks to find out the real reason for it and try to leave the country to see whether it’s still in effect.

Mr. Sun doesn’t know the exact duration of his exit ban. His lawyer guessed it was more than a year.

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Passengers at the Beijing Daxing International Airport on April 28, 2023. Exit bans allow Chinese authorities to stop people from leaving the country. Jade Gao/AFP via Getty Images

“It’s like a person is virtually locked with reasons unknown to the individual, and the key is in someone else’s hands,” Mr. Sun said. “A person may be controlled remotely; that’s the case in China.”

He said the increasing exit bans in China reminded him of the case of a former China chief of Australian mining giant Rio Tinto Group. Stern Hu, a Chinese Australian, was charged with “leaking state secrets” in July 2009 and sentenced to 10 years in prison in March 2010 for “bribery and infringement of trade secrets.”

Mr. Sun said the real reason for Mr. Hu’s fate was that Rio Tinto walked back from selling a stake in key assets to the state-owned Aluminum Corporation of China. Bloomberg reported that the company retained Henry Kissinger to resolve the arrest of Mr. Hu and three other employees, although the former U.S. secretary of state said he couldn’t do anything for them. Mr. Hu was released in 2018 after serving eight years in a prison near Shanghai. His term was reduced for “obeying management and education,” according to China’s Ministry of Foreign Affairs.

Fast forward to 2023, and the risk of compliance violation and cost of noncompliance is even higher.

“The anti-espionage law contains vague terms up to the CCP’s interpretations. The Party intentionally creates this uncertainty so foreign investors don’t know what to do and cannot avoid the risk except by obeying the CCP,” Mr. Sun said.

Earlier this year, the regime drastically expanded its 2014 anti-espionage law, giving authorities sweeping powers to probe anything deemed by the Party as affecting national security.

“It’s for creating fear so people don’t care to touch anything that may have the slightest possibility of inviting trouble,” he added.

Australian Embassy staff walk in front of the Beijing No. 2 People's Intermediate Court, where Australian journalist Cheng Lei faces trial after 18 months in detention on charges of supplying state secrets, on March 31, 2022. (Noel Celis/AFP via Getty Images)
Australian Embassy staff walk in front of the Beijing No. 2 People's Intermediate Court, where Australian journalist Cheng Lei faces trial after 18 months in detention on charges of supplying state secrets, on March 31, 2022. Noel Celis/AFP via Getty Images
The Foundation for Defense of Democracies think tank observed a similar trend. “Beijing is reengineering conditions for foreign businesses with a raft of new laws and regulations that seek to bend investors to the ruling party’s priorities and render overseas regulators irrelevant,” the group stated in a report last month.

Mr. Sun and Mr. Meng said the future “chosen ones” to make money in China would be those loyal to Mr. Xi and the CCP.

Still, there’s a price to be paid.

Mr. Meng once was awoken by a call from a provincial-level CCP official at 2 a.m. and ordered to immediately deliver hundreds of thousands of yuan because the official needed cash for gambling. Another time, he had to run a high-end hotel in Guangxi Province to entertain Party officials free of charge. His partners took over the hotel in 2005 after he began to travel between Guangxi and Beijing frequently.

While foreign businessmen may not have to go to such extreme lengths to curry favor with officials, the humiliation might be similar, Mr. Meng said, adding that the Chinese business environment was getting ridiculous with official propaganda calling on people to engrave “Xi Jinping Thought” in their “brains, hearts, and souls.”
For Mr. Meng, it would have meant living a life with no dignity. So he left China in April 2022.

What’s Ahead?

Despite the risks, plenty of businessmen are still willing to make sense of the new rules around investing in China, Mr. Sun said, because the country’s massive market is, after all, so enticing.

In the absence of sweeping sanctions on China, American capitalists won’t give up on the market. Mr. Sun said he can think of two scenarios that would trigger an exodus: a Chinese invasion of Taiwan or the regime’s violent suppression of an internal protest on a similar scale to that of the 1989 Tiananmen Square massacre.

Chinese communist leader Xi Jinping meets with Russian President Vladimir Putin at the Kremlin in Moscow on March 21, 2023. (Alexey Maishev/sputnik/AFP via Getty Images)
Chinese communist leader Xi Jinping meets with Russian President Vladimir Putin at the Kremlin in Moscow on March 21, 2023. Alexey Maishev/sputnik/AFP via Getty Images

Mr. Meng said he doesn’t think economic issues will bring Mr. Xi down. But if anti-Xi leaders could label the leader as having made a grave political mistake (e.g., having supported Russia in its war in Ukraine—if Russia is defeated), they might be able to force him to step down.

Regardless of how the future unfolds, China’s business landscape is going through a structural shift.

“I think Xi Jinping would prefer less foreign participation in the Chinese economy,” Mr. Scissors said.

“So if he can keep foreign participation in areas where he wants it, and other foreign participation declines, he’s totally fine with that.”

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