At November’s APEC summit in San Francisco, President Xi Jinping made a pitch to investors, promising to create a “world-class business environment.” He cited several steps “designed to make it easier for foreign companies to invest and operate in China.”
No doubt, that’s what investors wanted to hear. However, many remain skeptical, and will wait for actions to match his rhetoric. Surveys show executives in America, Europe, and Japan all more reluctant to make new investments in the People’s Republic of China.
Indeed, in November, foreign direct investment turned negative for the first time in 25 years. This reflected companies removing “more than $160 billion in total earnings from China during six successive quarters.” Foreign investors also were net sellers of Chinese stocks in the latter part of 2023. According to Bloomberg, the outflow “reflects less willingness by foreign companies to re-invest profits made in China in the country.”
Although rising interest rates are one reason companies are repatriating earnings, another is mounting concern with Beijing’s increasing restrictions on business. Even though draconian COVID rules are over, other challenges include “tepid economic activity, unpredictable regulation, worries over employee safety and curbs on transferring data overseas.”
Business executives have not hesitated to make their views known to policymakers. In recent meetings at the Council on Foreign Relations, “financiers ticked off their concerns: China’s economic slowdown is deepening. An unprecedented property slump is scaring investors who hold hundreds of billions of dollars of debt issued by Chinese developers. And Chinese leader Xi Jinping’s emphasis on national security has restricted access to data and sparked raids and investigations involving foreign firms assessing investment risks in the country.”
This doesn’t mean investment could not revive. Executives complimented Xi’s speech and gave him a standing ovation. Moreover, major companies cannot easily shift operations elsewhere. Amy Celico, with the consulting firm Albright Stonebridge Group, contended that “They will be ready to ramp up activity as soon as the Chinese economy stabilizes.” However, even friendly firms will confront ever higher barriers. For instance, Western and especially US pressure on companies to “de-risk” and restrictions on investment in sensitive industries will increase.
The Biden administration speaks of having high walls but only a small garden. However, the near hysteria over China’s continued advances in semiconductor chips suggest current regulations will be tightened. Moreover, recent restrictions on investment in AI, quantum technology, and semiconductor chips bespeak additional limits to come. Compliance costs from Western sanctions, pressure to reduce supply chain risks, and fear of geopolitical conflict also will loom increasingly large.
In such an environment, Beijing cannot afford policies that enhance aversion to doing business in the PRC. Even the applauding financiers and executives at Xi’s dinner are not exempt. Observed the Wall Street Journal: “they are facing suspicion in Beijing, especially by Chinese ‘securocrats’ elevated by Xi who watch investors they think are betting against China. Earlier this year, a state-owned newspaper took aim at Goldman Sachs after its analysts recommended selling shares in some big Chinese banks, saying the firm’s analysis was based on ‘pessimistic assumptions’ about the country’s banking sector.”
No government enjoys criticism of its economic policies and performance. However, the PRC is turning economic analysis into a crime. An expanded counter-espionage law was approved in April and Xi has loosed Chen Yixin, the minister of state security, on private business. The latter’s efforts include “raids on Chinese offices of U.S. due-diligence firms and questioning of staff at the Bain consulting firm.” Beijing is punishing investors for being, in essence, careful and responsible investors.
In the Chinese government’s view, research work, “often involving interactions with Chinese nationals, has exposed state secrets, threatened the party’s control over how the rest of the world views China and helped the U.S. and its allies develop a hardline policy toward Beijing.” Thus, seeking market information when statistics are increasingly treated as state secrets amounts to espionage. Releasing critical economic assessments is also treated as a crime. Complained the Ministry of State Security: “False theories about 'China's deterioration' are being circulated to attack China's unique socialist system.”
As a result, foreign companies can no longer conduct business as required. Reported the Wall Street Journal: “Some Western firms have paused research work in China, especially when related to technology and other sensitive areas, according to business executives. Analysts at Wall Street firms, including those specializing in recommendations of Chinese stocks, said they are worried about getting their contacts in China in trouble because of the heightened government scrutiny over foreign connections.”
This is a serious hindrance to the investment climate. Indeed, by so obviously putting an extraordinarily expansive view of security before economic growth, Beijing is reinforcing other Western criticisms—of human rights practices, imperatives of a party-first system, and arbitrary treatment of foreigners. Individuals and firms now face two serious risks. The first is to play it safe politically and not do due diligence, making economic mistakes more likely. The second is to play it straight economically, risking investigation, arrest, and imprisonment. Neither is an attractive option. Even if foreign investors do not immediately exit, they are far less likely to increase their role.
As a result, the PRC will lose investment, bad in the best of times and a potentially significant hit as the economy slows. Chinese officials also will lose the benefits of a free flow of commercial information, allowing them to learn more about the Chinese as well as global economies. In the past, economic research has been reciprocal. Observed Nikkei, during the heyday of economic reform, “even Chinese researchers who had connections with national security organizations frequently traveled abroad to learn about the financial and economic systems as well as management methods of countries like the U.S. and Japan.” But no longer.
Recharging business investment in China will require more than a good speech. President Xi needs to address the increasing disincentives for individuals and companies to do business with and especially in the PRC. Starting the reform process decades ago required tough decisions. So does maintaining its fruits today.
