US Firms’ China Outlook Worst in Decades: Report

The closed office of the Mintz Group in an office building in Beijing on March 24, 2023. Five Chinese employees at the Beijing office of U.S. due diligence firm Mintz Group have been detained by authorities, the company said on March 24. Greg Baker/AFP via Getty Images

Vague laws, tensions with Washington over technology, geopolitics, and a slowing economy are key impediments for U.S.-based firms in China, according to an annual poll conducted by the American Chamber of Commerce (AmCham) in Shanghai.

“2023 was supposed to be the year investor confidence and optimism bounced back after years of Covid disruptions and restrictions,“ a report released by AmCham on Sept. 10 stated. ”According to our 2023 survey of U.S. businesses in China, however, the rebound has not materialized and business sentiment has continued to deteriorate.”

AmCham stated that those concerns—such as China’s worsening business environment and doubts about the country’s economic recovery—dampen optimism and shape how companies operate in China.

“Despite the end of COVID-era constraints, the percentage of companies describing themselves as optimistic or slightly optimistic hit a record low of 52 percent,” the report reads.

That’s the lowest level of confidence that AmCham has recorded since its first “Annual China Business Report” in 1999.

Sixty percent of the 325 respondents listed U.S.–China tensions as a key business difficulty, which is on par with the percentage of respondents who saw China’s economic slowdown as a significant challenge.

The poll found that businesses are even less optimistic than they were a year ago when China’s “zero-COVID” rules led to the shutdown of entire cities, transportation networks, and travel for days or weeks. The poll also found that U.S. companies considered the threat of such disruptions as a “push factor” for establishing themselves in markets outside of China.

As the world’s second-largest economy, China had become an attractive destination for U.S. corporations, with worries about missing out on opportunities eclipsing the risk of being embroiled in the country’s geopolitical rivalry with the United States.

More than 8,600 U.S. corporations currently operate in China, according to China Briefing, with 1,992 U.S.-owned companies running subsidiaries, according to Global Trade Alert.

Optimism Keeps Sliding

Yet many U.S. companies say that the recent economic upswing has slowed or even reversed, as 60 percent of firms surveyed agree that greater openness and predictability in the regulatory environment are significant factors in inspiring greater confidence for them.

That aside, “intensifying competition has also been worsened by policies that favor local companies over foreign ones and courts that tend to favor Chinese companies in decisions on protection of intellectual property such as patents and trademarks,” AmCham stated.

The poll found that 56 percent—9 points more than in 2020—of respondents thought that local businesses were benefiting from bias, highlighting the need for Chinese officials to create a more predictable regulatory environment that, while supporting local firms, guarantees national treatment for international enterprises.

While some of these issues have been addressed in the recommendations for enhancing the climate for foreign investment that the State Council issued in August, AmCham noted, “whether or not they are effectively implemented remains to be seen.”

According to respondents, other regulatory challenges that are becoming increasingly daunting include data localization and other cybersecurity requirements (70 percent), a lack of intellectual property (IP) protection, and enforcement (63 percent).

Decoupling From China

U.S. businesses consider the threat of such disruptions as a “push factor” for establishing themselves in markets outside of China.

While two-thirds of companies polled haven’t changed or aren’t considering changing their China strategies and business models, “the reluctance—so far—not to proceed toward full localization speaks to the nature of [the] multinationals,” AmCam stated.

These U.S. corporations are hesitant to give their China-based employees more operational autonomy as well, and in some cases, they’re rolling back some of the localization processes and removing a few local powers.

However, the two most popular options for the remaining third of companies that have changed or are considering changing their China strategies and business models were preparing for spinoff/localization (44 percent) and bifurcating systems and standards between China and the rest of the world (29 percent).

More explicit evidence of the decoupling may be found in recent Bloomberg research that reveals that foreign ownership of Chinese equities and debt has declined by about 1.37 trillion yuan (about $188 billion), or 17 percent, from a peak in early June a year ago to the end of June this year.

Chinese equities encountered an outflow of about $15 billion in August, marking the single largest outflow month on record for China, according to a private note by the Washington-based Institute of International Finance that The Epoch Times accessed.

Likewise, China’s debt securities have sustained outflows of $5.1 billion.

US Pressure

The AmCham report also highlighted that the primary issues contributing to this pressure of decoupling were uncertainty over future Chinese policy direction and ambiguity over future U.S. policy direction, followed by tariffs and trade barriers, and finally, the potential of armed war.

While 72 percent polled said that Chinese competitors would replace their operations in China, the rest feel that unnecessary decoupling would disadvantage U.S. companies by separating them from a competitive environment.

AmCham stated, “Any ring-fenced China business would lose the benefits of a U.S. headquarters, including the cross-fertilization of ideas, risk assessment skills, and two-way transfer of industrial knowledge.”