In the past, setting up factories in China used to be a necessary condition for global competition for foreign enterprises, but there have been significant changes in the past few years. Now, with a lack of confidence in China’s political and economic prospects, foreign businesses’ views on the Chinese market have changed, and the wave of capital withdrawal from China cannot be stopped.
Foreign capital withdrawal from mainland China has long been a trend, but the recent situation has become more pronounced. Last fall, American and European companies reported the most negative outlook on operating in China in decades. The European Chamber of Commerce in China listed over a thousand actions needed to address market barriers, and the unpredictable changes in new Chinese regulations and security restrictions have posed increasing challenges for businesses.
According to a 2023 survey by the US-China Business Council, over one-third of American companies reduced or paused their investment plans in China in the past year. They were most concerned about geopolitical and domestic policies.
American law firms have rapidly downsized their offices in mainland China this year. According to Leopard Solutions data, the number of employees of American law firms in China decreased from 643 in 2022 to 545 in July this year.
A report by JP Morgan in September 2023 showed that half of the foreign bond investments totaling $250-300 billion have been withdrawn since 2019. Data from Bloomberg and fDi Markets indicated that foreign investment dropped from $120 billion in 2019 to $740 billion in 2020, further declining to $410 billion in 2022, and reaching a low of $330 billion in 2023 – the lowest in 30 years.
In 2023, South Korea’s direct investment in China decreased by 78.1%, the largest drop in 30 years, with a significant contraction in manufacturing investments in China. Japanese companies directed only 2.2% of their new overseas investments to mainland China in 2023, lower than investments in Vietnam or India and only a quarter of those in Australia.
Taiwanese companies have also become less willing to increase their business operations in China, with new investments in 2023 reaching their lowest level since 2001.
Professor Qiu Junrong from the Department of Economics at National Central University in Taiwan stated that the trend of foreign capital withdrawal from China did not start recently. Samsung from South Korea was one of the early movers, setting up bases in Vietnam and gradually moving its Chinese factory equipment there. After the trade war initiated by President Trump in 2018, many foreign investors, including Taiwanese businesses, started leaving the mainland to avoid high U.S. tariffs. Subsequent events such as the pandemic, lockdowns, power shortages, and the national security law have fueled the trend of withdrawal in recent years.
He mentioned that even though some supply chains cannot completely divest from China, companies are hesitant to rely entirely on China and are opting for a “China plus one” strategy, establishing new production bases outside China for future operational security.
“I have many friends in industries such as printed circuit boards, who used to primarily operate in China but have now moved almost their entire industry to Thailand,” Qiu Junrong said. Interestingly, Chinese companies were the first to leave, even before Taiwanese businesses, showing their faster response to the changing conditions.
Associate Professor Sun Guoxiang of the Department of International Affairs and Business at Nanhua University in Taiwan pointed out that with the increasing political and economic risks, rising production costs, the need for supply chain diversification, and risk management, foreign enterprises need to re-evaluate their business layout and strategy in China.
He believes that the “China plus one” strategy will accelerate, with potential alternative locations being Vietnam, Indonesia, India, or Malaysia. If the business environment in China continues to deteriorate, this strategy will continually grow, potentially reducing China’s share until it becomes “China plus one,” “China plus two,” or “China plus three.”
American economist Davy J. Wong stated that with the changing investment environment and international relations, there is a wave of restructuring among companies, and sensitive enterprises will choose to leave.
He outlined five main factors driving foreign capital withdrawal from China: firstly, as Europe and the United States increasingly impose tariffs on Chinese goods, the advantage of manufacturing in China diminishes, prompting price-sensitive industries to withdraw; secondly, due to the pandemic causing disruptions in the global supply chain, industries sensitive to global deployment and strategic security seek alternative suppliers outside China or relocate entirely; thirdly, China’s anti-Japan, anti-American, and anti-Western sentiments have led sensitive foreign entities such as law firms and research institutes to shrink their operations or withdraw from China; fourthly, China has veered off its high-growth trajectory, and capital is searching for the next fast-growing market; fifthly, geopolitical tensions following the Russia-Ukraine conflict have created concerns about potential sanctions, prompting some companies to move part of their production from China.
Even Wall Street, once considered a close partner of the Chinese Communist Party (CCP), has changed its attitude. Goldman Sachs CEO David Solomon recently stated that pursuing growth in China at all costs is no longer wise for his company, leading Goldman Sachs to reduce its operations in China.
JPMorgan Chase CEO Jamie Dimon emphasized at the Davos Forum in January that there had been significant changes in the risk-return calculation concerning China. Louis Brennan, a business research professor at Trinity Business School in Ireland, recently wrote that the prospects of foreign companies in China seem to be increasingly restricted.
Brennan suggested that even in sectors where foreign companies are still welcomed and have advantages in China, the window of market opportunities may be temporary. For companies like Apple and Volkswagen that have achieved substantial success in China, the rapidly changing competitive, regulatory, and technological environments suggest increasing vulnerability in the future. Many foreign companies may still have a fondness for China, but the evolving regulatory and security environment indicates that normal business activities may be viewed as contrary to China’s (CCP’s) security interests, undermining potential business benefits.
Despite foreign companies withdrawing from China and continued warnings from the West, the CCP continues to enact laws and regulations detrimental to the economic environment in terms of national security.
On June 21st, various departments including the Taiwan Affairs Office of the CCP jointly issued the so-called “22 Measures” against “Taiwan Independence,” stating that persistent “Taiwan independence separatists” could be sentenced to death and undergo trial in absentia.
Reuters reported that after Beijing mentioned the possibility of sentencing “stubborn” advocates of Taiwan independence to death, some foreign companies are considering relocating their Taiwanese employees from China.
Qiu Junrong stated that the CCP’s “22 Measures” are extremely alarming, leading Taiwanese individuals and companies to begin evacuating. As a result, American or European companies hiring Taiwanese personnel may face high risks, worsening the situation even further.
From a rational perspective, western countries would never take such actions. However, China’s economy is dominated by the CCP leader, who adheres to the economic control and state ownership advocated by Mao Zedong. This kind of paranoia can lead to unsolvable issues once it turns into a belief.
Sun Guoxiang stated that since the current CCP leader came to power, he has paid particular attention to national security, political stability, and the security of the CCP’s political regime on the mainland. It is not that his predecessors did not care, but the degree of his attention has surpassed the balance Deng Xiaoping established between maintaining the CCP regime and promoting external reform and opening up.
“He is more concerned about whether the CCP can maintain long-term rule, rather than economic interests.”
Wong mentioned that the current Beijing leadership is more focused on the continuity of the national system, political system, and management model. They fear that rapid economic growth and the growth of the private economy would compromise political security. They prioritize the continuity of the political system over sustainable economic growth.
“With the immense economic development pressure, Beijing continues to enact laws and regulations that hinder economic development but favor planned economy, as that is the structure of the top leadership.”
To combat the trend of economic downturn, the CCP incessantly emphasizes the so-called “new qualitative productivity” and the “domestic big cycle,” giving the impression that they have a solution.
Qiu Junrong mentioned that the concept of “new qualitative productivity” is an idealistic dream that requires a lengthy process to realize and provide benefits to the people. Western countries innovate through internal accumulation, whereas China heavily relies on technology licensing, imitation, and reverse engineering for development. Given this context, the notion of “new qualitative productivity” may just be an appealing slogan.
“Moreover, ‘new qualitative productivity’ needs to be realized in production and sales to generate income and be beneficial. Therefore, it cannot alleviate the immediate concerns. For instance, China has struggled to develop the semiconductor supply chain despite pouring in vast resources.”
Regarding the future prospects of the Chinese economy, Qiu Junrong expressed that discussions a few years ago on the concept of a “new mediocre economy” may prove to be too optimistic for China’s economic future.
He analyzed that the economy consists of several interlocking gears, including exports, investments, and consumption. If these gears turn smoothly, the economy will soar. If exports improve and incomes rise, consumption will increase, inspiring investment. Currently, domestic consumption in China remains depressed, with around 60-70% of assets held in real estate and 20% in the financial market. However, with declines in real estate and stock markets, consumer spending capacity has significantly diminished. In western countries faced with similar issues, stimulating consumer spending through methods like vouchers would be the simplest solution. However, the CCP leader lacks this Western economic mindset and tightly controls what kind of consumption activities the people should engage in, leading to a continuous deterioration of domestic consumption.
Wong believed that various minor conflicts, busts, crises, and troubles may occur frequently in different parts of the Chinese economy, bringing forth numerous problems continuously.