European companies are being forced to “reduce, localize and isolate” in China.

European companies are being forced to “reduce, localize and isolate” their operations in China as the country loses its appeal as an investment destination, executives said in a somber report on operating conditions in the world’s second-biggest economy.

The assessment of the European Union Chamber of Commerce in China is by far its most pessimistic since its inception in 2000, executives said, citing President Xi Jinping’s official measures against previously booming industries and his government’s enforcement of draconian lockdowns and travel restrictions to contain Covid -19 to destroy. 19 outbreaks.

“Ideology beats economy,” said Chamber President Jörg Wuttke. “Predictability has been challenged by frequent and unpredictable policy changes, particularly in relation to Covid. [Zero-Covid] is a real drag on the economy.”

In what Wuttke called the “darkest” of the chamber [position] paper of all time,” the organization warned that “the commitment of European companies [in China] is no longer a matter of course”. It added that China is rapidly “losing its appeal as an investment destination” and that China and the EU are “growing apart”.

The warning was issued as the EU reassessed its economic and political ties with China. Brussels and Beijing have reached an impasse on a proposed trade deal after exchanging sanctions over China’s mass incarceration of Uyghur Muslims in Xinjiang. EU representative Josep Borrell described the sides’ annual summit in April as a “dialogue of the deaf”.

Brussels is preparing to introduce a range of tools to retaliate against trading partners who block European companies from entering the market. These measures are expected to be applied to China.

“Discussions used to revolve mainly around investment opportunities. . . are now focused on building supply chain resilience, the challenges of doing business, managing the risk of reputational damage and the importance of global compliance,” said the European Chamber.

Xi’s zero-Covid policy has made it near impossible to visit the country, halted travel by headquarters executives and prompted an exodus of foreign employees frustrated by conditions in China. According to the Chamber, no new EU companies have entered the Chinese market since the start of the coronavirus pandemic.

Wuttke noted his last trip from China was in February 2020 but said he hopes to visit his native Germany by the end of the year. “It’s high time,” he said. “I haven’t seen mine [older] children in Germany in two and a half years.”

Rapidly changing protocols for importing goods — including disinfecting and sometimes confiscating packages — have also disrupted business supply chains, while strict lockdowns imposed across the country have sapped consumer demand.

“China is no longer the stable sourcing destination it used to be,” said Wuttke. “It was a stone [but] the Shanghai lockdown [in April and May] was a shock to our companies and the global economy.”

Beyond the challenges posed by the pandemic, the chamber described a growing political divide as companies come under “increasing domestic scrutiny” for their practices in China.

The Uyghur Forced Labor Prevention Law passed in the US this year, as well as two forthcoming EU regulations on forced labor and corporate due diligence, “pose a compliance challenge for European companies operating in China. . . due to the inability to conduct independent third-party audits of supply chains in Xinjiang,” the chamber said.

Fears of further Covid supply chain disruptions and, to a lesser extent, the prospect of a Chinese invasion of Taiwan have prompted companies to diversify their suppliers and redirect investment.

Companies evaluate “reshoring, nearshoring or ‘friendshoring,'” the chamber said, referring to practices that move production home, closer to consumers or to allied countries.

The Russian invasion of Ukraine and subsequent sanctions have also caused EU companies in China to worry about their investments in the event of a Chinese invasion of Taiwan. In a European Chamber poll in April, a third of respondents said the war in Ukraine had made China a less attractive investment target.

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