Beijing The level of foreign investment in China is a highly political issue. New records are being reported in the People’s Republic to prove that the country – despite all the isolation and lockdowns – remains attractive to investors. In Germany and Europe, these are in turn used as evidence of a growing dependency on China – and as a justification for the need to take political countermeasures.
However, the strong growth can be explained almost entirely with a billion-dollar purchase by the car company BMW. In the first quarter, the Munich-based company completed the acquisition of a majority stake in the ailing joint venture BBA for 3.6 billion euros. The decision for the deal was made in 2018. If this special effect is factored out, investments in the first quarter actually declined compared to the same period of the previous year.
Another major investment comes from the chemical company BASF. The majority of the 1.7 billion euros is likely to have flowed into the construction of the new Verbund site in southern China. The decision to build this facility was also made in 2018. Announcements of new major investments, on the other hand, have become rare.
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A further analysis of the data from the Bundesbank shows that more than half of the investments made by German companies in the first half of 2022 are so-called reinvested profits of the respective Chinese subsidiaries. Minus the profits generated and reinvested locally, investments in China were even negative in 2021.
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Many European companies have put their China business “on autopilot” in view of the growing risks, says Jörg Wuttke, President of the European Chamber of Commerce in Beijing. Although they are not leaving China at the moment and some are still investing, the company headquarters are increasingly looking for alternatives.
China has largely locked itself down for more than two years. Strict corona restrictions and recurring lockdowns are strangling the world’s second largest economy. In the second quarter, it only grew by 0.4 percent. But there is no sign of a departure from the strict zero-Covid policy.
Everyone hopes for “Santa Claus,” says Wuttke. “But it won’t come.” He assumes that China will not be able to open again until next summer at the earliest – provided that enough citizens have been vaccinated and boosted by then. He once again expressed incomprehension that the state leadership would neither allow foreign mRNA vaccines nor force a vaccination campaign with domestic vaccines for ideological reasons.
The chamber warns of the consequences of China’s continued isolation. “Ideology beats economy” is the title of a 430-page position paper that was presented on Wednesday. It contains 967 recommendations to the Chinese government, among others, but also to the EU and the member states. China is at a crossroads ahead of the National People’s Congress on Oct. 16, it said.
Wuttke, who has lived in China with interruptions since 1982, sees an increasing break with the successful reform and opening policy initiated in 1987 by then party leader Deng Xiaoping. Although China’s leadership continues to profess its “open-door policy” like a mantra in public speeches, doubts are now growing. Since words were not followed by deeds, more and more Western politicians and business leaders were getting tired of these “promises”, according to Wuttke.
Isolation is costing China dearly
In 2021, the World Bank calculated how expensive a departure from the reform course would cost China: With comprehensive market reforms, per capita income in the People’s Republic could rise to more than 55,000 US dollars by 2050, with limited reforms only to around 33,700 dollars. “Is China really willing to sacrifice $22,000 per capita income to become more self-sufficient?” asks Wuttke.
In view of the increasing unpredictability of the state leadership as well as the continuing isolation of the country, corporate bosses in the European corporate headquarters are increasingly looking for alternatives. China has always been reliable, explains Wuttke. In the meantime, you need “a plan B or plan C,” he says, with a view to recurring lockdowns, but also energy shortages.
“China’s reputation as an investment location is eroding,” warns the chamber president. Much of the investment that used to go to China is now being “redirected” to other countries. As an example, he cites the establishment of a new iPhone production facility in India.
In addition, the war in Ukraine has changed the way corporate headquarters look at Taiwan. There is growing concern that the Chinese leadership could be misled in the same way as Russia’s head of state Vladimir Putin. That leads to a rethink.
In a recent study, the French investment bank Natixis came to the conclusion that mergers and acquisitions (M&A) with foreign participation in China “decreased sharply” in the first half of the year. The People’s Republic accounted for only 13 percent of all M&A investments in Asia. That’s the lowest percentage since 2006. Adhering to the strict zero-Covid strategy “is hampering foreign direct investment in China,” says Alicia Garcia Herreo, chief economist for Asia Pacific at Natixis.
Doubts among China investors are growing
A recently published analysis by the US think tank Rhodium shows how much the field of China investors has recently narrowed. Over the past four years, nearly 80 percent of investments in China have come from just ten investors. Almost half came from Germany, above all from the car manufacturers BMW, Daimler and Volkswagen as well as BASF.
Smaller and medium-sized companies, on the other hand, are increasingly holding back in view of the growing risks. New companies have not dared to enter the market since the end of 2020, explains Chamber boss Wuttke. But doubts are also growing among loyal China investors. “They don’t want us here anymore,” says the representative of a German Dax group.
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