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An increasing number of Japanese companies operating in China are transferring their production bases to countries in the Association of Southeast Asian Nations (Asean).
This comes as Chinese economic growth slows and concerns rise over the risks of doing business in China, where foreign residents have been arrested on vague grounds.
The Chinese economy is stagnating, and this can clearly be seen in production, consumption and investments. The country’s gross domestic product (GDP) for the second quarter (April-June) of 2024 grew 4.7% year over year, which was 0.6 points lower than the first quarter (January-March). Economic data from August shows that retail business sales, an indicator of consumption trends, grew only 2.1% year over year.
The slump in the real estate industry is a major factor behind this. The real estate market and related industries make up a fourth of China’s GDP, but investments in real estate development fell 10.2% year over year in the period between January and August 2024.
During the COVID-19 pandemic, China implemented a “Zero-COVID Strategy,” which kept citizens indoors, dealt a major blow to the tourism and restaurant industries, and led to investments being concentrated in real estate. Home prices rose exponentially.
In response, the Chinese government placed heavy restrictions on risky deals. This caused home prices to drop drastically, and the businesses of many major real estate developers declined. Down payments were made, but buildings never got built, and as similar cases followed one after another, the consumption trend cooled among the population.
Furthermore, the Chinese government, which places utmost importance on national security, established the Counter Espionage Law in 2014. This has resulted in many foreigners, including Japanese, being arrested for “espionage acts,” which are only vaguely defined.
Starting in July 2024, new regulations have been implemented that allow authorities to inspect the contents of electronic devices of individuals and organizations for acts of espionage, raising further concerns that even regular economic activities could be scrutinized. With little hope for significant growth in the Chinese market, coupled with the risks of doing business in China, direct international investments into the country fell 29.1% year over year between January and June 2024. There are also other issues, such as the risk of high tariffs on products produced in China and exported to the USA due to the ongoing tension between the two countries, as well as rising labor costs in China.
