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Chinese economy: factories leave China as big companies move

Apple. Amazon. Google. Samsung. Volvo. These are just a few of the big names closing up shop and leaving China.

“A weakening economy. Lockdowns related to Covid. Reciprocal Trade Sanctions. Possible conflict on Taiwan. Companies have many reasons to limit their operations in China,” says Derek Scissors, senior fellow at the American Enterprise Institute (AEI) think tank.

Doing business with China has never been easy.

Access to its cheap labor and infrastructure has always come at an indirect cost.

Human rights violations. Theft of intellectual property. Trade Restrictions. Market manipulation. Compulsory participation in the board of directors of the Communist Party.

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A recent political risk survey conducted by Willis Towers Watson found that 95% of multinational companies are concerned about China. That’s up from 62% in 2020.

“An overwhelming majority of respondents believed that trends of geostrategic competition and economic decoupling between China and the West would intensify in the future,” the report said.

“A majority of respondents expressed concern that private companies would be targeted in international diplomatic disputes.”

And it is this risk of becoming a political plaything – just as the European gas economy has been manipulated by Moscow – forcing companies to move.

Apple is transferring part of its iPhone production to India. Its AirPods, Apple Watch and iPads are going to Vietnam.

Amazon is now getting its FireTV devices from India. And it recently closed its Chinese Kindle factory.

Samsung led the charge in 2019 by moving its manufacturing to Vietnam. Now Microsoft and Google are following suit with their production of Xbox Pixel phones.

political toys

President Xi called on Communist Party members this weekend to embrace their “historic mission” and prepare for the “great struggles” ahead.

“Our party must be united to lead the people to effectively meet major challenges, defend against major risks, overcome major barriers and resolve major contradictions. We must continue our great struggles under new historical characteristics,” he wrote in the CCP newspaper Qiushi. “We will not return to the old path of isolation and dogmatism, and we will never take the wrong path of changing the flag (revolution).”

It is precisely this kind of belligerent but vague rhetoric that makes companies nervous.

In August, China accused Dutch automaker Stellantis (maker of Peugeot, Citroen, Crysler, Opel, etc.) of “disrespecting customers in the Chinese auto market”.

It was a veiled call for a boycott of the company’s products after it decided to shut down a Chinese factory due to excessive “interference” by Communist Party officials.

“Companies exporting from China are already shifting their small-scale operations – Xi’s aggressiveness overseas and insistence on near absolute control make the business risk too high to ignore,” says AEI’s Scissors.

“Exporters to China have long faced hurdles such as protecting state-owned enterprises from competition. Xi Jinping’s desire to be less dependent and global tensions could see barriers rise more.

Part of that is the US-China trade war initiated under President Donald Trump. Tariffs make Chinese imports unattractive. Restrictions on technology transfer stifle development.

Then there is the loss of productivity caused by President Xi Jinping’s large-scale and draconian Covid-19 lockdowns. And widespread electricity problems caused by flooded coal mines and drought-stricken hydroelectric plants.

It’s just business

“China’s slowdown is much more than an arithmetic event,” said Stephen Roach, former chairman of Morgan Stanley Asia.

“Three powerful forces are also at work: a structural transformation of the economy, the recuperation of past excesses, and a profound shift in the ideological underpinnings of Chinese governance.”

None are proving popular with international players.

And local entrepreneurs have no choice but to toe the Party line – or disappear.

A recent survey by the European Union Chamber of Commerce in China revealed that 23% of respondents said they were considering leaving the country. Additionally, more than 50% said companies have become “more politicized” than they used to be.

“The only predictable thing about China today is its unpredictability, and that’s toxic to the business environment,” said European Chamber Vice President Bettina Schoen-Behanzin. “A growing number of European companies are pausing investment in China and reassessing their market positions as they wait to see how long this uncertainty will continue, and many are looking to other destinations for future projects.”

Meanwhile, business in India, Vietnam, Malaysia and other Southeast Asian countries is booming.

And one of the least cited reasons is the cost of labor.

Apple’s Foxconn factory in Vietnam urgently wants to fill 5,000 new jobs. It offers US$300 per month for an entry-level position. That’s against the $650 paid for the same job in China.

Indian labor is also poorly paid.

“Companies will continue to run their operations in the places that make the most financial sense because they are accountable to their shareholders, not to former workers or the general public,” says AEI comrade Elisabeth Braw.

“And while a few CEOs may feel a moral obligation to their company’s home country, such feelings will not come between them and their quarterly results.”

State of the economy

The Chinese economy was booming. Beijing was opening up to the world. It encompassed global markets, trade agreements and regulations. It recorded an annual growth of 10% between 1980 and 2010.

“Then came Xi,” Roach said.

“Initially, it was hoped that his 2013 “Third Plenum Reforms” would usher in a new era of strong economic performance. But new ideological campaigns waged under the broad rubric of Xi Jinping’s thought, including a regulatory crackdown on once-vibrant internet platform companies and associated restrictions on online gaming, music and tutoring… have virtually dashed those hopes.

He says Xi Jinping’s thinking is about political power, central control and ideological constraints.

Australian wine, coal, beef, barley, coal, seafood, cotton and other exports fall victim to this ideology. As well as many other international companies, such as the Swedish company Ericsson, the pineapples of Taiwan and the whole economy of Lithuania.

“China doesn’t play fair,” says Braw. “The measures are often not officially announced or have no legal value, just forced slowdowns at ports or pressure on consumers or suppliers to cut ties.”

But China also suffers from these political maneuvers.

Its coal supplies, for example, have become erratic and expensive.

“With the upcoming 20th Party Congress likely to usher in an unprecedented third five-year term for Xi, there is good reason to believe that China’s growth sacrifice has only just begun,” Roach adds.

On Friday, Chinese Premier Li Keqiang told local CCP branches that China had had an “extremely unusual” year and was facing “complex and difficult domestic and international situations.”

“Our economy is currently facing many challenges and difficulties. Time waits for no one. We must focus all our efforts on implementing measures to stabilize the economy. We still have the confidence and ability to maintain our economic growth within the accepted range. »

Meanwhile, the World Bank cut its growth outlook for China to 2.8 for the year from 5.0%.

“If correct, it would be the first time that China’s growth has lagged the rest of the Asia-Pacific region in more than three decades,” the former said. The Economist editor Bill Emmott.

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