Risk factor haunts major foreign firms in China

Multinational corporations in China are facing a dilemma in 2024. Do they stay, or walk away because of the growing risks of doing business there?

Beijing’s increased scrutiny of Western firms over the past year alarmed international investors at a time of growing tensions between the United States and China. 

“De-risking” became the byword for wary enterprises.

Anna Ashton, the director of the China corporate affairs program at the Eurasia Group, a global political risk consulting firm, told VOA Mandarin in a phone interview: 

National security concerns tied to the changing geopolitical landscape and tensions with the United States have prompted Beijing to change some of the rules for doing business in ways that make the environment a lot less certain for foreign companies.

Sluggish economy

“That, plus the slower-than-expected return to normal growth after the end of the zero-Covid policies. So, this and geopolitical tensions with the US, a sort of sluggish Chinese economy … have been key drivers in terms of making the business environment difficult,” Ashton said.

China’s economic weakness may also be making foreign businesspeople wary. 

Last month, the World Bank reported in its semi-annual regional forecast that it now expects China’s growth rate of 5.2% this year will slow to 4.5% in 2024. That is down from the 4.8% it expected in April, and 4.3% in 2025.

“The outlook is subject to considerable downside risks,” the report pointed out.

Liu Aihua, a spokesperson for China’s National Bureau of Statistics, said:

Looking to the future, the internal and external environment facing our country’s development is still complex and severe. 

“To further promote economic recovery, we need to overcome some difficulties and challenges,” Liu added as reported by The Associated Press.

While Beijing still values foreign investment and is working to attract foreign firms, it is placing a higher priority on national security.

China’s newly revised Counter-Espionage Law went into effect on July 1.

Criminal activities

The US National Counterintelligence and Security Center issued a warning to American companies before the law was enacted, saying its vague definition of espionage gave the Chinese government more access to, and control over, corporate data. 

What companies considered normal business activities, such as market research, could become criminal activities.

Addressing the law’s vagueness, Elisabeth Braw, a columnist at Foreign Policy and a senior associate fellow at the European Leadership Network, told VOA Mandarin in November that for Western businesses, China is becoming an increasingly difficult environment.

“Any Western company can be targeted by various government crackdowns related to the espionage legislation,” she said. 

“Also, whenever the Chinese government wants to retaliate against [a] Western government, there is a risk that it will use a Western company operating in China as a proxy target. That’s very easy, because what can the company do? It can do nothing,” Braw added.

In an article written for Foreign Policy in April, she said the difficult business environment is reflected in the fact that political risk underwriters have virtually stopped writing new policies for companies operating in China.

Firms signaled how they felt about the changing environment with their plans to move. 

In May, Forrester Research, which focuses on technology consulting, decided to close its China office. In June, the Gerson Lehrman Group, which had planned to expand its operations in the country last year, began layoffs. 

In November 2023, American asset management giant Vanguard Group and the management consulting polling firm Gallup announced they would be shutting down their operations and withdrawing from China.

Manufacturing sector

Even companies highly dependent on the manufacturing sector such as Apple, which launched its Chinese operations in 2001, are transferring part of their production lines to countries such as India and Vietnam.

According to data released in early November by China’s State Administration of Foreign Exchange, foreign direct investments were negative US$11.8 billion in the third quarter. It was the first negative figure since record-keeping began in 1998.

Lin Feng is a producer at Voice of America.

This article is republished courtesy of Voice of America. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.