Japanese Firms Grow Increasingly Wary of China’s Business Climate, Anticipation for Future Prospects Dims

Chinese Premier Li Qiang adresses the assembly during the annual meeting of the World Economic Forum (WEF) in Davos on January 16, 2024. Fabrice Coferini/ AFP via Getty Images

Recent developments have highlighted a growing skepticism among Japanese companies operating in China, with expectations for future business prospects declining sharply. This sentiment aligns with broader indications that Japan and Taiwan will intensify their economic and other collaborative efforts.

At the World Economic Forum (WEF) in Davos on Jan. 16, Chinese Premier Li Qiang made a robust pitch for international investment in China, portraying the Chinese Communist Party (CCP) as a “trustworthy” partner. However, this claim starkly contrasts with the financial strategy outlined by the CCP’s top leadership on the same day, which diverges fundamentally from Western models.

The WEF’s theme this year, “Rebuilding Trust,” saw Mr. Li highlighting China’s steady economic recovery, with an expected GDP growth of about 5.2 percent in 2023. He emphasized the CCP’s commitment to further “opening up” and creating a more “market-oriented, lawful, and international” business environment.

Despite these assurances, Mr. Li’s call for continued global investment in China was somewhat overshadowed by contradictory statements from the CCP’s leadership, which advocated for a unique financial path divergent from Western norms and calling for stringent financial regulations to boost international rule-making influence.

Zhuge Mingyang, a China affairs commentator and independent writer, critiqued this dual approach as a classic example of CCP leader Xi Jinping’s leadership style, which he described as “attempting to have it both ways,” resulting in contradictory and ultimately self-defeating strategies.

Survey Reveals Japanese Companies’ Growing Concerns in China

These developments come in the wake of the Japanese Chamber of Commerce in China’s (JCC) second “Member Business Climate and Operating Environment Survey (pdf),” conducted from Nov. 23 to Dec. 13, 2023. The survey’s findings paint a bleak picture for Japanese businesses in China, with over half expressing dissatisfaction with the current business environment and lowered expectations for fiscal year 2024.

The JCC, representing 8,000 corporate members in China, received responses from 1,713 companies, including 1,037 in manufacturing, 665 in non-manufacturing, and 11 public enterprises and units.

This response rate, significantly higher than the first survey conducted between Sept. 8 and Sept. 22, 2023, underscores the escalating concerns of Japanese enterprises regarding China’s business climate.

The survey aims to assess the business situation of Japanese companies in China and to advocate for an improved operating environment. The increased participation and frequency of these surveys reflect the urgency and gravity with which Japanese firms view the evolving economic landscape in China.

Key Survey Findings

The findings highlight a severe assessment of both the business situation and economic conditions faced by these companies.

A significant 48 percent of surveyed businesses reported a decrease in their investment in China for 2023, with reasons ranging from uncertain economic prospects and unclear investment returns to the complexities of new regulations like the anti-espionage act.

Comparatively, investment attractiveness in regions like Southeast Asia and India is rising, leading to a reevaluation of business strategies in China. This trend is further complicated by issues like restrictions on marketing activities following environmental concerns, prompting internal discussions about the future of their operations in China.

Regarding the economic outlook for 2024, a concerning 39 percent anticipate a worsening situation, versus the 25 percent who foresee improvement. Despite this, over half of the respondents still view China as a crucial market post-2024.

The survey also delved into satisfaction levels with the business environment in China. While 54 percent of companies expressed satisfaction, citing stable utilities, the availability of Japanese-speaking talent, and the large consumer market, 46 percent voiced a desire for improvements.

These improvements include issues like visa entry processes, talent development alignment, equal treatment with Chinese enterprises, consistent regulatory interpretations, and transparency in law enforcement.

Management challenges identified by the respondents are noteworthy, with 65 percent citing increasing labor costs, 42 percent having been impacted by the international situation, and 51 percent facing a decline in sales prices.

Broader Implications and Perspectives

Despite feedback from over 1,700 Japanese companies in China, more than 6,000 did not participate. This silence could indicate similar or more severe challenges, possibly due to reluctance to reveal their true situation.

The survey underscores key concerns deterring continued investment: unclear economic forecasts, legal uncertainties, and operational difficulties following environmental issues. These factors clash with the principles of market liberalization, openness, and internationalization, fostering a pessimistic outlook for 2024 among these Japanese enterprises.

Commentator Shi Ping, an expert on Chinese affairs, emphasizes the political risks. Incidents like the abrupt ban on Japanese seafood exemplify the unpredictability and potential dangers in China. Mr. Shi warns of the increasing risks to employee safety and human rights, suggesting that companies should now consider withdrawal strategies.

Similarly, European and American businesses are experiencing escalating challenges in China. Reports from the European Chamber of Commerce in China and the American Chamber of Commerce in Shanghai in September 2023 echoed these sentiments.

They highlighted the increasingly stringent and complex regulatory environment under the CCP, which prioritizes national security over foreign investment. Nearly two-thirds of European companies find these changing regulations a significant barrier to business growth.

Experts agree that the unpredictability of the CCP’s policies poses a substantial risk, with Western companies often finding themselves vulnerable to sudden policy shifts. This unpredictability, coupled with the challenging regulatory landscape, suggests an increasingly difficult business environment for foreign companies in China.

Japan and Taiwan Poised to Deepen Economic Ties

As Japanese enterprises navigate a challenging regulatory environment in China, particularly since the anti-espionage law’s implementation last July, a trend of diversification and “de-Chinaization” is emerging. With this backdrop, Japan and Taiwan are poised to deepen their economic collaboration, signaling a shift in regional economic dynamics.

Japanese companies, traditionally optimistic about China’s vast market, are now grappling with Beijing’s unpredictable policy shifts. This uncertainty, coupled with the Japanese government’s encouragement for businesses to return to Japan, has led to a strategic reconfiguration of supply chains, with many companies expanding into Southeast Asia and other regions.

Notable corporate shifts reflect this trend. Teijin, a leading Japanese material company, withdrew from China’s automotive materials sector last August, redirecting focus to North America. Similarly, Mitsubishi Motors divested its interests in China, selling its shares to Guangzhou Automobile Group in October. The retail giant Isetan Mitsukoshi Holdings also announced the closure of two department stores in China, including Tianjin Isetan, by February 2024.

This “de-Chinaization” process coincides with Taiwan’s incoming new leadership under President-elect William Lai, fostering expectations of enhanced Japan–Taiwan economic ties. Analyst Shi Ping advocates for bolstering this relationship, emphasizing a global economic perspective.

Taiwan's Vice President and president-elect from the Democratic Progressive Party (DPP), Lai Ching-te (C), speaks to supporters at a rally at the party's headquarters on January 13, 2024, in Taipei, Taiwan. Taiwan voted in a general election on Jan. 13 that will have direct implications for cross-strait relations. Annabelle Chih/Getty Images

Mr. Lai’s election victory was swiftly followed by proactive engagement with Japanese representatives. In discussions with Keiji Furuya, head of Japan’s Taiwan friendship parliamentary group, Mr. Lai articulated a strong commitment to fortifying economic and cultural exchange. He highlighted the semiconductor industry as a key area for collaboration, expressing eagerness to expand investment and trade.

A tangible example of this burgeoning partnership is the nearing completion of TSMC’s JASM factory in Kumamoto Prefecture, Japan. This 1 trillion yen (about $7.69 billion) investment underscores Taiwan’s commitment to deepening economic ties with Japan, particularly in technology and innovation.

In recent years, Taiwan has actively pursued closer cooperation with Japan across various sectors, including diplomacy and economics. This alignment reflects a strategic pivot in the region, as businesses and governments adapt to the evolving geopolitical landscape.