European firms doubt China has credible plan to turn economy around, lobby group warns

EUROPEAN firms in China doubt the government has a credible plan to boost demand in the ailing economy or will carry out long-promised reforms, diminishing their appetite to invest in the country, a European business lobby group said on Wednesday.

The European Union Chamber of Commerce in China said in the latest edition of its Position Paper that many of its more than 1,700 member companies were now reconciling themselves to the fact that the problems they face may have become permanent features rather than “growing pains” of an emerging market.

“A sentiment is emerging at company headquarters and among shareholders that the returns on China investments are no longer commensurate with the risks faced,” the chamber said, noting that profit margins in China had sunk for around two thirds of its members to equal to or below the global average.

In 2023, EU foreign direct investment flows to China dropped by 29 per cent from the previous year to 6.4 billion euros (S$9.2 billion), European Commission data shows.

“With many other markets offering greater predictability and legal certainty along with the same return on investment, continuing to invest at previous levels in the China market is simply becoming harder to justify,” the chamber said.

European firms must wrestle with Chinese competitors receiving unfair subsidies, a highly politicised business environment, President Xi Jinping’s heightened focus on national security, and perennial market access and regulatory barriers, the chamber said.

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But the “central concern” was China’s economic slowdown.

After a dismal second quarter, policymakers signalled they were ready to deviate from their playbook of pouring funds into infrastructure, instead targeting fresh stimulus at households.

But economists are still waiting on more specific plans to reinvigorate the US$19 trillion economy beyond a pledge from the top-decision making body of the ruling Communist Party that it will do so and a subsidised trade-in scheme for consumer goods.

“The intention to ‘step up efforts to develop a complete domestic demand system’ is asserted, but the document contains nothing concrete as to how consumption will be stimulated,” the chamber said, referring to a plan put out following the Party’s so-called third plenum in July.

“Given that the total amount budgeted works out to approximately 210 yuan (S$38.50) per capita, only a portion of which will reach household consumers, it is unlikely that this scheme alone will significantly increase domestic consumption,” the chamber added, pointing to the trade-in programme.

BASF, Maersk, Siemens and Volkswagen are among the members of the chamber. REUTERS