On August 30, U.S. Commerce Secretary Gina Raimondo cautioned Chinese leaders that U.S. businesses might stop investing in China if Beijing does not “act to reduce the risk of doing business” and improve deteriorating business conditions in the country.
Raimondo’s comments were made during her visit to China as part of U.S. attempts to rekindle bilateral ties undermined by squabbles about Taiwan, technology, and security, among other matters.
In context, Raimondo’s remarks were meant to address the Chinese government’s raids on companies, sudden fines and unpredictable official behavior in recent years that made the country “uninvestable” for U.S. businesses.
“My point was U.S. business needs to see some action taken to address these issues. Otherwise, they will deem it as just too risky and, as I said, uninvestable,” Raimondo declared to reporters at a Boeing joint venture in Shanghai’s eastern district of Pudong.
“Patience is wearing thin,” Raimondo stated, highlighting pain points like technology theft and official favoritism toward Chinese competitors that are “becoming in some ways even tougher” for U.S. firms.
Business groups have claimed that confidence in China among foreign firms has plummeted to a historic low. Foreign investment has nosedived by 89 percent from last year in the three months ending in June as well, according to recent official figures. Besides, portfolio investment that flows into traded bonds and stocks has become negative.
Some may immediately dismiss Raimondo’s statements as debatable or even duplicitous, especially given the current context of Washington’s trade war with Beijing.
Furthermore, Chinese trade officials, including Chinese premier Li Qiang, declared the government’s commitment to “improve foreign investment environment” and “spare no effort in keeping foreign capital onshore”, after a July 24 meeting of the 24-member Communist Party Politburo chaired by authoritarian leader Xi Jinping. Participants in the meeting discussed the widespread slowdown in China’s economy.
Nonetheless, it can be said that Raimondo’s words reflect certain currents of discontent both within and beyond China that even the Chinese Communist Party (CCP) has been cognizant of.
The question then remains whether China has become “uninvestable” as a country or business destination, as Raimondo asserts it has been. If not, then why are foreign investors seemingly biting the bullet and leaving the largest country in East Asia with arguably the most potential for business returns?
While it may be tempting to be simplistic and attribute the recent series of investment flights from China to one root cause, the reality is much more complex. However, what is more or less certain is that investors are driven by whether they can make money out of a certain venture. Bearing that in mind, political, economic and social factors have reduced China’s attractiveness as an investment destination.
First, China’s new anti-espionage law that has taken the business world by storm in recent months has proven to be a stumbling block for foreign investors and businesses. The fear that unwanted parties could gain access to “state secrets” has jeopardized businesses carrying out even regular commercial activities. This can be seen in the fact that the Chinese authorities have raided various American consulting firms in recent months.
A senior fellow at the American Enterprise Institute, Elisabeth Braw, penned in an article for The Wall Street Journal that foreign businesses have found it challenging to procure insurance policies that cover political risks for their China ventures.
The insurance firms are retreating from the China market due to concerns that range “from political interference in companies’ operation all the way up to war with Taiwan,” Braw asserted in an interview with VOA’s Mandarin Service.
Likewise, U.S. House China Committee Chairman Rep. Mike Gallagher (R-Wis.) described the current situation: “American investors in China are like the proverbial frogs slowly boiling in a pot of water”. He elaborated that “taking on a genocidal, communist regime as a business partner is not a recipe for success” but one for “systemic risk.”
Gallagher added that “people are waking up to the risks.”
Reports that Mintz Group, an American research consultancy firm, had been fined US$1.5 million for research that Chinese authorities had not authorized in advance only serve to reinforce investors’ concerns about China’s increasingly risky landscape.
In March, Mintz Group verified that Chinese authorities had detained the five staff members in its Beijing office and closed down the company’s operations there. Based on Reuters reports, the raid happened on March 20 while employees were being kept incommunicado at venues outside Beijing.
On July 5, Beijing authorities declared the seizure of US$730,000 that Mintz Group had earned “illegally” and added that the company had been fined an equal amount.
Besides, Anders Corr, editor of The Journal of Political Risk, opined to VOA in a written interview that the contradiction between China’s wooing of foreign investors and its suppression of foreign companies showcased divisions within the CCP leadership itself.
Although some pro-business officials are “attempting to put the best face on a negative investment environment for Westerners … everybody knows that the pro-business faction is not calling the shots, and he who is calling the shots is anti-capitalist and anti-Western,” posited Corr.
“Yes, Xi wants both (Chinese Communist Party) expansion and FDI, but he clearly is prioritizing power expansion … and therefore FDI is looking for safer outlets,” Corr said.
Agatha Kratz, director at Rhodium Group, a China-focused consultancy, echoed Corr’s views.
“I do think (Li Qiang) wants and intends to bring inbound investment back, but he’s someone who’s loyal and so should he be asked to lock down Shanghai again or do anything that isn’t business friendly, he would,” Kratz said. Li Qiang is China’s premier.
Significantly, the trade war between the U.S. and China that has been going on for some years now has added fuel to the fire, further reducing China’s attractiveness as an investment destination.
Just days after taking office, U.S. President Joe Biden reinforced an executive order by his predecessor in delisting Chinese firms from U.S. exchanges.
Additionally, the Biden administration also enforced restrictions on outbound foreign investment in China’s high-tech fields, such as semiconductors, quantum computing, supercomputing, and artificial intelligence, for reasons of national security. Last year, Biden also tightened a chip-export ban to China.
When asked about Washington’s efforts to restrict sales of computer chips, chip making equipment as well as American investments in Chinese technology, Raimondo asserted that these restrictions have been “narrowly tailored” and would have limited impact on trade.
Chinese officials expressed reservations about her statements. In February, during a study session of the 24-person Politburo, one of the top decision-making bodies of the CCP, Xi said China should address issues in major technological fields from the ground up to become a global tech power and attain self-reliance, state media agency Xinhua reported, as the country grapples with a rising number of mainly U.S. export restrictions.
What is more, observers have contended that China’s recent ban on the use of iPhones or any other foreign devices by government employees for work purposes, was a tit-for-tat move to get back at America’s attempts to restrict Chinese technologies or platforms like TikTok in the U.S.
Both the U.S. and China have not displayed any vestige of compromise in their restrictions of each other’s products and technology. As Raimondo put it, such issues simply are “not up for debate, not up for compromise, not even really for discussion.”
Interestingly, it does appear that certain circles in the business world support Washington’s hostile trade policies towards China amid Sino-U.S. superpower rivalry.
At a tabletop exercise to explore the consequences of economic competition with the CCP over Taiwan, Gallagher, the U.S. House China Committee Chairman, met with several top Wall Street figures and posited that he was surprised to see a “general recognition that we need restrictions on U.S. capital flowing to China in certain areas.”
“I think we could legislate a solution that goes further than the Biden executive order, and that obviously lasts beyond the Biden administration to do this right,” he added.
“Every day that we keep funding the CCP’s military ambition,” he said at a hearing at Peterson Hall in Manhattan, “we make conflict in the Indo-Pacific more likely.”
The specter of Xi’s draconian zero-Covid measures and lockdowns still lingers around. Not wanting to take further risks on the unpredictability of a state-controlled and authoritarian business environment, prudent investors choose to exit the Chinese market.
Notably, China’s post-COVID economy is witnessing a massive nationwide slowdown, with slower than anticipated growth rates, bleak demographic trends, startlingly high youth unemployment, local government indebtedness and a housing crisis as a result of overbuilding.
Chinese investment firm Zhongrong Trust, which manages US$87 billion worth of funds for corporate clients and wealthy individuals, has defaulted on payments to corporate investors.
As Zhongrong is a part of one of China’s largest private conglomerates, it is no surprise that the firm’s missed payment has aroused widespread fears on Chinese social media.
Speculation is rife on whether the rest of the conglomerates is also experiencing financial problems. Also, the financial sector’s broad exposure to real estate could catalyze a domino effect of lost investments and defaults.
The further collapse of the Chinese economy, or a Chinese invasion of Taiwan to distract ordinary Chinese from their own economic woes, are tragedies waiting to happen. It is unlikely Chinese supreme leader Xi, in his ambition to remain in power for life, will institute the much needed political and economic reforms to save the economy.
The late former U.S. president, Ronald Reagan, said: “Socialism only works in two places: Heaven where they don’t need it and hell where they already have it.”
Photo credit: iStock/ Muhammad Farhad