Nearly one in four European firms consider shifting out of China

Nearly one in four European companies in China are considering shifting their investments out of the country as the ongoing Covid outbreaks and lockdowns dim the outlook for the world’s second-largest economy, a survey showed.

Some 23% of the businesses that responded to the survey are thinking of moving their current or planned investments away from China, according report released Monday by the European Union Chamber of Commerce in China. The survey was conducted at the end of April, when Shanghai was still in shutdown and restrictions in places like Jilin disrupted business activity.

The number of European firms reassessing their options in China was the highest proportion in a decade in the survey, and also more than double the 11% recorded in a February poll, according to the chamber. Some 372 businesses responded to the April poll, whereas 620 responded to the February one.

China’s current policy — with no exit strategy from its zero tolerance approach to combating infections — “leaves headquarters no option but to look for other locations,” said Bettina Schoen-Behanzin, vice president of the chamber. “The world does not wait for China.”

Of the firms considering a shift in investment, 16% said they were looking at relocating to Southeast Asia, while 18% said they were looking elsewhere in the Asia-Pacific region. Some 19% said Europe, 12% said North America and 11% said South Asia.

China has started easing some of its Covid restrictions, but the economic recovery has been mixed. In May, industrial production unexpectedly increased, while consumer spending and the property market continued to contract. The outlook for the rest of the year remains uncertain as Beijing continues to rely on lockdowns and other curbs to contain the virus.

“Nobody is leaving China” but the issue is new investment, European Union Ambassador Nicolas Chapuis said in an interview Monday. European companies “are delaying decisions because everyone is waiting for an exit strategy in China for Covid restrictions.”

“We will have to wait to see if the government of China will decide to align itself with the rest of the world,” Chapuis said.

Foreign businesses have struggled significantly with the curbs: Foreign industrial firms operating in China saw a profit drop of 16.2% from January-to-April, much worse than the 0.6% decline at private Chinese firms. State-owned enterprises recorded an uptick in profits of 13.9% during that time.

It’s not clear when the property and the automotive sectors — two major drivers of the economy — will recover, Schoen-Behanzin said.

American firms have also reported challenges recently. Just 31% of manufacturing and services companies surveyed by the American Chamber of Commerce in Shanghai earlier this month said they were fully operational. Of those operating at less than full capacity, most reported that staff found it difficult to travel to work.

Other highlights of the European chamber’s report:

• Almost 60% of respondents in the April survey downgraded their revenue projections for the year as a result of China’s Covid curbs
• Some 78% of respondents reported that China’s business environment has become less attractive because of the country’s Covid strategy

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