US Firms in China Face Record Low Profits Amid Economic Slowdown

American businesses operating in China are experiencing unprecedented challenges, according to a recent report by the American Chamber of Commerce in Shanghai. The survey reveals a stark reality: only 66% of the 306 companies polled reported profitability in 2023, marking a historic low. This downturn comes amidst escalating US-China tensions and a decelerating Chinese economy.

The report highlights a significant decline in business optimism, with merely 47% of respondents expressing a positive outlook for their operations in China over the next five years. This figure represents the lowest level of confidence recorded in the survey's two-decade history.

Geopolitical friction between Beijing and Washington has emerged as the primary obstacle for American businesses in China. Eric Zheng, president of AmCham Shanghai, emphasized the delicate balance companies must strike, stating, "The perceived risks of doing business in China have gone up in the past few years, but at the same time the market is slowing down, with soft demand and overcapacity."

This challenging environment has prompted many firms to diversify their investments. Countries like Vietnam, Malaysia, and nations in South Asia are becoming increasingly attractive alternatives. In 2023, a record 25% of surveyed companies reduced their investments in China, primarily due to concerns over the country's slowing economic growth.

The economic landscape in China has indeed been tumultuous. In 2023, China's GDP growth rate stood at 5.2%, falling short of pre-pandemic levels. The country's consumer price index (CPI) entered deflation in July 2023 for the first time since 2021, indicating persistent economic pressures. Additionally, China's real estate sector, which accounts for about 30% of its GDP, has been grappling with a prolonged slump.

While just over half of the US companies anticipate revenue growth compared to the previous year, only 37% expect China's growth to surpass global rates in the coming three to five years. This cautious outlook reflects the broader uncertainties surrounding China's economic trajectory.

The challenges faced by American businesses in China are not unique. The European Union Chamber of Commerce in China echoed similar sentiments in a report published on September 11, 2024. Jens Eskelund, the European Chamber's president, expressed concern about a potential tipping point, stating, "China is becoming no longer a top priority but increasingly a top three or top five destination."

Both American and European business groups are calling on China to prioritize economic growth, implement reforms, and create a level playing field for all companies operating in the country. These measures are seen as crucial for boosting investor confidence and maintaining China's attractiveness as a business destination.

As the global economic landscape continues to evolve, with initiatives like the US CHIPS Act aiming to reduce reliance on China and the expansion of China's digital yuan program, the future of international business relations with China remains uncertain. The coming years will likely see a continued recalibration of global supply chains and investment strategies as companies navigate these complex geopolitical and economic challenges.