European companies in China are increasingly sceptical about the government's ability to implement a credible plan to stimulate demand in the struggling economy or deliver on long-promised reforms, dampening their willingness to invest, according to a European business lobby on Wednesday.

The European Union Chamber of Commerce in China, in its latest Position Paper, noted that many of its more than 1,700 member firms are now coming to terms with the possibility that the challenges they face may be permanent, rather than temporary "growing pains" typical of an emerging market.

"A tipping point has been reached, with investors now scrutinising their China operations more closely as the challenges of doing business are beginning to outweigh the returns," Jens Eskelund, the chamber's president, said. 

"It has become so much harder to make money in the Chinese market," he added, speaking at an event where the paper was released.

In 2023, EU foreign direct investment (FDI) in China fell by 29% compared to the previous year, amounting to €6.4 billion ($7.06 billion), according to data from the European Commission. The European Union Chamber of Commerce in China also reported that profit margins for around two-thirds of its members had declined to levels at or below the global average.

"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's report read.

The chamber noted that European firms are contending with unfair subsidies granted to Chinese competitors, a highly politicised business environment, President Xi Jinping's increased focus on national security, and persistent market access and regulatory barriers.

But the "central concern" was China's economic slowdown.

Following a disappointing second quarter, policymakers indicated a shift from their usual strategy of investing heavily in infrastructure, opting instead to focus new stimulus efforts on households.

But promise fatigue has become prevalent among European firms, the chamber said.

"At the start of the new millennium, reform plans announced by the Chinese government were seen by foreign companies as credible," the report said. "Now, after more than a decade of largely unfulfilled pledges, doubts over China's commitment to reform are increasing."

Economists are still awaiting more detailed plans to revitalise the 1.4 billion-strong consumer market. So far, there has been only a general pledge from the top decision-making body of the ruling Communist Party in July to address this issue, alongside a newly introduced subsidised trade-in scheme for consumer goods.

The chamber indicated that the trade-in programme is unlikely to substantially boost domestic consumption, as the budget allocated for it amounts to approximately 210 yuan ($29.52) per capita.

"The government needs to look at what can be done for China to regain its position as a top location for European FDI," the chamber's Eskelund said.

Image source: Business Standard