By Joe Cash, Ellen Zhang and Kane Wu
BEIJING/HONG KONG, November 28 (Reuters) – American furniture company chief Jordan England believes his company’s Chinese suppliers are among the best in the game, but geopolitics and a slowing economy have pushed him to source more products from Southeast Asia, Eastern Europe and Mexico.
“I’m looking to get away from it (China),” said England, CEO and co-founder of Florida-based Industry West.
“It was always ‘China plus one’,” he said, referring to the diversification strategy many businesses began implementing after Washington imposed trade tariffs on Beijing in 2018 to ensure they are not completely dependent on Chinese suppliers.
Now “it’s like ‘plus-10’ and then China,” he added, with the latter up to supplying half of Industry West’s products and being trimmed more.
Foreign investors have been sour on China for most of this year, but data released last month showed clear evidence of the negative impact that risk-off strategies are having on the world’s second-largest economy.
Activity surveys showed manufacturing unexpectedly contracted in October, while exports accelerated their decline. China recorded its first ever quarterly deficit in foreign direct investment in July-September, suggesting capital outflow pressure.
Nicholas Lardy, a senior researcher at the Peterson Institute for International Economics, said in a note that the new data imply that foreign firms are not only declining to reinvest earnings, but are selling existing investments and repatriating funds.
This trend could further weaken the yuan and cut China’s economic growth potential, he added.
“In recent years, the scale, proportion and growth rate of foreign investment absorbed by China have all remained at a relatively high level,” He Yadong, a spokesman for China’s commerce ministry, said in response to a question from Reuters.
LONG TERM OUTLOOK
Businesses have lingering concerns about geopolitics, tightening regulations and a more favorable playing field for state-owned companies. But for the first time in the four decades since China opened up to foreign investment, executives are now also concerned about the long-term growth prospects.
A survey released last week by The Conference Board, a think tank, showed that more than two-thirds of CEOs who responded said China’s demand had not returned to pre-COVID levels, with 40% expecting a drop in capital investment in the country while more than. the next six months and a similar proportion expecting to cut jobs.
China is outwardly confident of growth despite a global economic slowdown, with political advisers favoring a goal of around 5% expansion of the gross domestic product in 2024 and the country aiming to double the size of the economy by 2035.
But England said he was concerned about how his Chinese suppliers, who also produce for the domestic market, would deal with the country’s tough property market. lowering.
“I’m worried that these factories will go from 500 workers to 200, to 100,” he said.
OPEN FOR BUSINESS?
He is expected to make a similar call on Tuesday at the inaugural China International Supply Chain Expo, which it expects to use to promote its supply chain advantages.
“Foreign business executives here are eager to continue in China,” said AmCham President Michael Hart. “But boards back in the US are cautious.”
European firms rose fair competition concerns on state-directed lending to Chinese manufacturers, while Noah Fraser, executive director of the Canadian China Business Council, said “bad blood” remains over the detention from two Canadians from 2018 to 2021.
In private equity, while Asia-focused funds have allocated capital to China, Preqin data shows that as of November 24, no China-focused buyout funds had been raised in 2023 in any currency, compared to $210 million in 2022 and $13 ,2 billion. in 2019, before the pandemic.
Primavera Capital founder Fred Hu cites growing macroeconomic uncertainty, a “murky capital market outlook” and lingering concerns about the past. regulatory crackdowns on high-growth industries such as technology and education.
“Tech firms and other private enterprises need to be able to tap public markets for funding and liquidity, so the current market conditions in China are doing considerable damage to the real economy,” Hu said, adding that China-focused private companies are diverting capital to the Southeast. Asia, Australia and Europe.
Despite the challenges, foreign investment flows are not one-way. Many companies, especially in the retail sector, are still targeting China’s giant market. McDonald’s MCD.N said last week that it hit a an agreement to boost its investment in its Chinese business.
An executive of a European hotel chain, who spoke on condition of anonymity because of the sensitivity of the subject, said his company was happy to reinvest profits in China for now.
“We know what’s happening politically and yes, economically,” he said, adding that the latest data “was nothing to be proud of.”
“It’s slow, but just requires taking a ‘wait and see approach’.”
China records the first foreign direct investment deficit
Capital raised for China-focused buyout funds by currency
China records first foreign direct investment deficit (interactive)
Capital raised for China-focused buyout funds by currency (interactive)
(Reporting by Joe Cash and Ellen Zhang in Beijing and Kane Wu in Hong Kong; Additional reporting by Eduardo Baptista and Don Durfee in Beijing; Graphics by Kripa Jayaram; Writing by Marius Zaharia; Editing by Jamie Freed)
((marius.zaharia@thomsonreuters.com; +852 2843 6358;))
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