Declining Business Confidence in China

It’s not a stampede – yet – but a significant number of high-profile American companies are moving portions of their manufacturing operations out of China, or are seriously thinking about it. Most are choosing locations from among China’s neighbors in Southeast Asia..

The AmCham China Survey

This comes on the heels of a documented drop of confidence in the Chinese market as a place to invest and build. A survey conducted by the American Chamber of Commerce in China (AmCham China) earlier this year found that for the first time, well over half of its members no longer see China as a priority location.

AmCham China is a controversial organization within the China-watching community. It is the organizational force which has consistently been supportive of building and improving commercial ties between the United States and China. For many who remain critical of its efforts to maintain and expand upon business relationships between the two nations while largely ignoring human rights considerations in China, the chamber’s activities are a source of frustration.

Critics find AmCham China’s annual “Doorknock” in Washington, D.C., particularly egregious. The Doorknock is an event which sees AmCham China representatives meet with members of both houses of Congress in an attempt to push for legislation in the United States that will benefit American business in China. Many see these efforts as Americans doing business in China going to bat in Washington as essentially lobbyists for Beijing and its preferred policies. Indeed, in its Doorknock 2023 report, AmCham China says that American companies “showcase, both in and out of the workplace, the virtue of American values – including with respect to labor rights, intellectual property, environmental protection, anti-corruption, and reliance on the rule of law.” No mention is made of human rights, in an obvious bow to the Chinese.

So, when this organization, among all others, produces a report indicating that American companies in China are losing confidence in Beijing, it is something to sit up and take notice of. Essentially, AmCham China has been forced to publish a report which, to some degree, gives itself a black eye.

Some of the most important data points from the 25th annual 2023 China Business Climate Survey Report commissioned by AmCham China earlier this year include the fact that fewer than half of AmCham China’s members now view China as a top three priority destination for investment.

A full 45 percent of the chamber’s members said that the environment for investment into China is “deteriorating.” In 2022, even in the midst of the pandemic and its draconian lockdowns in China, over 60 percent of companies responded that China was either the top, or one of the top three countries, for investment priority. In one year, therefore, it appears that Chinese policies have managed to dissuade 15 percent of some of the most important and engaged American companies in China to downgrade the country’s importance in their investment portfolios. It’s the largest single drop since the survey began.

Next, in a telling indicator of the trajectory away from China, as many as 26 percent of the American companies surveyed said they are considering relocating manufacturing or sourcing outside of China. That includes 12 percent who say they have already started the process of leaving China. Another 12 percent are considering it. Overall, the indicator is up 10 percentage points over last year.

In addition, fully half of AmCham China’s members say that they are “pessimistic about the future of US-China relations in the coming year.”

The conclusion reinforced by the report overall is that the U.S.-China business relationship is souring, even among those who have been its biggest proponents. AmCham China, a leader in promoting American commercial activity in China, put itself in a position in which it commissioned a survey that reflects a reality which the chamber would likely prefer not to have to publish: Its members are increasingly pessimistic about the future of the U.S.-China commercial relationship.

A deteriorating relationship means that headquarters back home in a wide variety of industries are probably already scrambling to find additional production capacity to replace goods now made in China. Some of America’s most recognizable chains would stumble badly if they could no longer source from China. Many shelves would quickly empty, and a variety of industries would suffer until replacement manufacturing, or increased production in other existing locations outside of China, could be sourced.

But wait… hasn’t the world just experienced that? Empty shelves, normally plentiful goods from the world’s factory suddenly non-existent in American chain stores throughout the country, shortages of everything from clothing to toys to auto parts?

Yes, it has. And just as companies are finding it necessary to move out of China, production and sourcing lessons have already been learned the hard way through the pandemic: Find new production channels, bring it back home, and certainly don’t put all of your eggs into one basket. A hard price has been paid for those common-sense lessons, and many feel that now is the time to use them.

The EU Chamber’s Results Reflect AmCham China’s

The decline in confidence in China is not limited to American business. The European Union Chamber of Commerce in China recently released its European Business in China Business Confidence Survey 2023 (BCS). In nearly the same terms as AmCham China’s survey report, nearly identical data and sentiments are found among the Europeans. Even the wording is the same. “The annual survey shows that there has been a significant deterioration of business sentiment,” the press release says. EU companies are coming to similar conclusions: “Faced with growing risks and a more volatile operating environment, European companies have started reviewing their investment and operational strategies, and ensuring their supply chains are fit for more uncertain conditions.”

Of the respondents to the EU Chamber survey, 64 percent said doing business in China has become more difficult over the last year, 11 percent have taken existing investments out of China, and 8 percent are redirecting planned investments elsewhere. Ten percent have shifted or plan to move their Asian headquarters out of mainland China. And, in line with the American trend, there has been a 13 percent drop in the number of companies that see China as a top three destination for investments going forward.

Indeed, China doesn’t make it easy these days to encourage foreign companies to embrace its investment environment. An opaque and poorly-defined anti-espionage law has just come into effect banning the transfer of any information related to national security and national interests, without defining those terms.

The mood on the ground reflects the realities that the surveys of both the American and European Union Chambers have identified. In both Beijing and Shanghai, far fewer foreigners of any stripe can be seen in recent weeks. (A noticeable exception are Russians.)

In the final analysis, the welcome mat that China says it wishes to continue to extend to the world’s business community seems now insufficient and less than inviting.

Nothing exemplifies that more than China’s ban on nearly all globally-used social media. China bans Facebook, Instagram, Twitter, Snapchat, WhatsApp, YouTube, everything Google, everything Yahoo, and more. If China genuinely wants foreigners, their companies, and their technological investments to feel warm, welcome, and safe in China, then probably nothing could signal that more than lifting the ban on the social media sites that, for better or worse, are part of daily life and are here to stay. All the tools that we use today to stay in touch with children and grandchildren, friends and aging parents, are immediately taken away from us the minute we land in China.

But, the savvy traveler will say, why not just use a Virtual Private Network (VPN), which almost all foreigners and some Chinese use, in order to get around the censorship protocol known colloquially as the Great Firewall of China?

For one thing, except for Chinese-government approved VPN’s, VPN’s are illegal in China. Anecdotally, few people are fined or jailed for using them. Companies, however, particularly foreign companies, are under greater scrutiny, and Chinese specialists are getting better at detecting and thwarting VPN’s from outside of China that are intended to skirt their controls. And if they can stop you, they can probably read you, as well.

So, as a foreigner either living in or visiting China, despite how much you invest or the level of your technology, the Chinese government would have you break the law by installing an illegal VPN, and then stealthily log into Facebook to say goodnight to the grandchildren.

That is not an open-door policy.

Internet censorship doesn't just contain and curtail our social relationships. Access to financial tools is often cut off. Foreign bank accounts may become harder or impossible to log onto. The ability to make payments to keep the lights on back home may prove unreliable.

The American economic relationship with China is not shallow, but nor is it so deeply rooted and intertwined that it is impossible to break free from it. It sprouted up primarily from the mid-1990s on, and has never been on an even keel. The U.S. side has always had to fight for access and a level playing field, and has often felt it necessary to compromise its values in order to do so. There are plenty of investment destinations in the world that would welcome with open arms more American and European investment. And they won't ask you to sneak in and out of Facebook like a burglar for your nightly chat with the children, a recap of your day with your partner, or story time with the grandchildren.