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Foreign companies are pulling investments and their Asian headquarters out of China amid expanding counter-espionage laws and other challenges, a trade group said Wednesday.
The report by the China-based European Union Chamber of Commerce added that the end of anti-virus controls had led the ruling Communist Party to revive interest in the world’s No. 2 economy, but it was one of several signs of a growing pessimism.
Companies are happy not to act on security controls, government protections against Chinese rivals and promises of reforms, the Council of Europe said. They are being overwhelmed by China’s economic growth and inflation.
European Council President Jens Eskelund told reporters ahead of the report’s release that business confidence in China was “the lowest on record.”
“There is no expectation that the regulatory environment will improve in the next five years,” Eskelund said.
President Xi Jinping’s government is trying to boost economic growth, which slowed to 3 percent last year, by encouraging foreign companies to invest and bring in technology. But they’re not happy about safety rules and plans to create competitors for global suppliers of computer chips, commercial jetliners and other technology. That often includes subsidies and market barriers that Washington and the European Union say violate Beijing’s free trade commitments.
Two-thirds of the 570 companies that responded to a Council of Europe survey said doing business in China has become more difficult, compared to less than half before the outbreak. Three in five said the business environment is “more political”, up half from last year.
Companies are on edge after police raided the offices of two consultants, Bain & Co. and Capvision, and the office of Mintz Group, which has been diligently monitoring the company without public comment. Officials said that companies are obliged to comply with the law, but did not give any indication that they might be breached.
Companies also have no trouble promoting Beijing’s national self-reliance. Xi’s government is pushing manufacturers, hospitals and other suppliers to use Chinese suppliers, even as they raise costs. They worry that foreign companies may be locked out of their markets.
Last month, the government banned Micron Technology Inc., the largest maker of memory chips in the United States, from using them in computers that store sensitive data. Micron said it had unspecified security flaws but did not provide an explanation.
In a Council of Europe study, one in 10 companies said they had pulled investments out of China. Another 1 in 5 are delaying or considering investing. 1 in 5 companies in aviation and aerospace have no future investment plans in China.
China remains a top investment destination for its huge and growing consumer market, but companies complain of limited market access, pressure to hand over technology and other irritants. After Xi took power in 2012, the ruling party tightened control, pushing for foreign companies to give party board seats and a direct say in hiring and other decisions.
The Council of Europe noted that foreign companies are not the only ones moving: 2 out of 5 Chinese customers or suppliers in the survey are shifting investments from the country.
A separate group, the British Chamber of Commerce in China, said last month its members were waiting for “greater clarity” on counter-espionage, data security and other regulations before making new investments.
The biggest concern is that the ruling party has greatly expanded its definition of national security to include economy, food, energy and politics, Askeld said.
“What qualifies as a state secret? Where does politics begin and the business world end? Eskelund said. That creates uncertainty about “where we operate as normal businesses.”
According to a Council of Europe survey, Singapore was the top destination for companies moving their Asian headquarters from China, with 43% of companies moving, followed by Malaysia. Only 9% plan to go to Hong Kong.
Leaders, including Premier Li Keqiang, China’s top economic official, have promised to improve working conditions, but businesses say they have seen little tangible change.
“Our members are not convinced that we will get tangible results,” Eskelund said.