Why are Japanese and German firms skeptical about China’s 2024 outlook?

Two surveys reveal that more Japanese and German firms with operations in China anticipate the Chinese economy to worsen in 2024 than anticipated. A survey by the Japanese Chamber of Commerce and Industry in China found that 39% of Chinese branches of Japanese firms expect the situation to worsen, while only 25% anticipate an improvement. About 48% of Japanese firms reduced their investment in China in 2023, while 15% increased their investment.

The remaining 38% invested in the country at the same levels as in 2022. Meanwhile, 83% of the 566 German company branches believe China’s economy is facing a “downward trajectory” this year. German firms in China have bearish views on the Chinese economic outlook, with 64% believing it will take one to three years for China to regain robust economic development. However, 91% of respondents do not have plans to leave China, while 9% have plans to leave within the next two years or are considering it.

German Chamber of Commerce in China board chairman Ulf Reinhardt has criticized China’s economy for not achieving its predictions in 2023. China’s Foreign Direct Investment (FDI) fell 8% to 1.13 trillion yuan (US$153 billion) in actual use from 2022, with manufacturing sector FDI decreasing 1.8% to 317.9 billion yuan. FDI in the service sector fell 13.4% to 776 billion yuan, while construction industry FDI grew 43.7%. FDI in scientific and technological achievements transformation service industry increased 8.9%, while R&D and design service industry FDI rose 4.1%.

High technology sector FDI fell 4.9% to 423.3 billion yuan in 2023, but its ratio to total FDI grew to 37.3%. Zhu Bing, director of the commerce ministry’s department of foreign investment administration, argued that the fluctuation of China’s FDI was not an “exodus of foreign capital.” Some foreign firms closed factories, while others opened new ones to produce displays and batteries. Chinese Premier Li Qiang has been encouraging foreign business leaders to invest in the country since China ended its Covid rules in early 2023.

China’s Prime Minister Li Xiaoping has expressed his readiness to support businesses in China and Japan to enhance cooperation in various areas, stating that the economies of the two countries are deeply integrated and that economic and trade cooperation plays a crucial role in bilateral relations. He urged the two countries to strengthen cooperation in scientific and technological innovation, digital economy, green development, medical care, and elderly care, and ensure stable industrial and supply chains.

Political tensions between China and Japan have been heightened by incidents such as the ban on exporting Japan’s chip-making equipment to China, the release of Fukushima nuclear plant’s diluted wastewater into the Pacific Ocean, and the arrest of a Japanese company executive in Beijing. Li also highlighted the importance of attracting investment from Germany, which is strong in automobile and high-end machine manufacturing.

Germany’s foreign direct investment (FDI) outflows fell to 63 billion euros in the first six months of 2023 due to rising financing costs caused by US rate hikes. However, with potential US rate cuts this year, some economists predict global firms will boost their overseas investment. Liu Jie, head of macro strategy at Standard Chartered’s China division, predicts that the pressure of capital outflow in China will decrease this year, with the outflow of FDI from China halving in 2024.

The Economist Intelligence Unit (EIU) predicts capital inflows in China will rebound this year, but will mainly be concentrated in short-term portfolio capital. The European Union (EU) has asked member states to set up mechanisms to screen both inbound and outbound investments and ban those that will lead to the transfer of sensitive technology and know-how to other countries. The EU has invited EU member states to provide comments on the European Economic Security Package, addressing concerns over China, Russia, and Gulf Cooperation Council members.

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