European firms doubt China's appetite to fix economy, lobby group says

By Joe Cash

BEIJING (Reuters) -European firms in China doubt the government has a credible plan to boost demand in the ailing economy or will carry out long-promised reforms, diminishing their appetite to invest in the country, a European business lobby group said on Wednesday.

The European Union Chamber of Commerce in China said in the latest edition of its Position Paper that many of its more than 1,700 member companies were now reconciling themselves to the fact that the problems they face may have become permanent features rather than "growing pains" 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 flows to China dropped by 29% from the previous year to 6.4 billion euros ($7.06 billion), European Commission data shows, while the chamber said that profit margins in China had sunk for around two thirds of its members to equal to 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.

European firms must wrestle with Chinese competitors receiving unfair subsidies, a highly politicised business environment, President Xi Jinping's heightened focus on national security, and perennial market access and regulatory barriers, the chamber said.

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

After a dismal second quarter, policymakers signalled they were ready to deviate from their playbook of pouring funds into infrastructure, instead targeting fresh stimulus at 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."

Mao Ning, a spokesperson for China's foreign ministry, said Beijing would continue to implement reforms to create a more market-orientated and international business environment during a regular news conference on Wednesday.

But economists are still waiting on more specific plans to reinvigorate the 1.4 billion-strong consumer market beyond a pledge from the top-decision making body of the ruling Communist Party in July that it will do so and a recently rolled-out subsidised trade-in scheme for consumer goods.

The chamber said the trade-in programme was unlikely to significantly increase domestic consumption as the amount budgeted for it worked out to just about 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.

($1 = 7.1133 Chinese yuan renminbi, 0.9063 euros)

(Reporting by Joe Cash; Editing by Sonali Paul)