(Bloomberg) -- European businesses are becoming increasingly “defensive” toward investing in China, according to a lobby group that represents companies from Volkswagen AG to Unilever Plc, as sentiment shifts around ties unsettled by trade tensions.
A report published on Wednesday by the European Union Chamber of Commerce in China offered a more pessimistic assessment of the country’s growth outlook but sounded hopeful about containing the scale of the trade conflict between the two sides. Still, the prospect of less investment is alarming after a quarter when China saw a record amount of money pulled by foreign entities.
“For some European headquarters and shareholders, the risks of investing in China are already beginning to outweigh the returns, a trend that will only intensify if key business concerns are left unaddressed,” Jens Eskelund, the chamber’s president, wrote in its annual position paper.
“After another year of mixed messages from the Chinese government, it appears we are no closer to an answer” to the question of what China wants from foreign companies, Eskelund wrote in the report containing 1,043 recommendations.
The challenging business environment is a result of the economic slowdown in China, coupled with the deteriorating outlook for profitability and limited progress on reforms. China’s fading appeal to foreign firms underscores the tough job facing the Chinese government in trying to lure in new foreign investments.
The European Union’s trade standoff with China is another complication. A growing tussle over subsidies has spurred a tit-for-tat dispute that started with electric vehicles, and has since spread to pork, dairy and brandy.
In the report, the chamber said “the scale of the trade conflict so far remains limited,” adding it sees “room for dialogue and a negotiated solution.”
“It will be important that this leads to meaningful progress on key European concerns, if a rekindling of EU-China ties is to be possible,” the chamber said.
China was the single largest source of EU imports last year and the third-biggest destination for its exports of goods.
For the chamber’s more than 1,700 member companies, almost two-thirds are now seeing their profit margins in China equal or below the global average, and pessimism about the future is at an all-time high. That’s prompting them to shift focus to other markets that can offer better returns and prospects.
“What has emerged as a key trend is that around 20%-25% of our companies have either moved parts, which is the majority, or the entirety of the supply chain out of China,” Eskelund said at a media briefing this month.
Even for European companies that are considering adding investment in China, their purpose is geared to “siloing” China operations, including by creating separate IT and data storage systems as well as localizing business functions, according to the report.
But the issue with such new investments is that they won’t create new jobs or drive innovation in China, and may also set the EU and China on course for a future of reduced cooperation.
Though China’s government has stepped up work with foreign businesses in an effort to try to address their concerns, the report said that companies are still waiting to see real outcomes from those discussions with officials.
“We do not really see how all this engagement is actually resulting in concrete improvements on the ground for our member members,” said Eskelund. “We want these engagements to continue, but I think it’s also important that we begin to focus on ensuring that these engagement also need to turn to tangible actions on the ground.”
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