Optimism at an All-Time Low for U.S. Businesses in China

Political tensions, China’s decelerating economic growth, and intensifying domestic competition are shaking the confidence of U.S. businesses operating in the region. According to a survey released by the American Chamber of Commerce in Shanghai, optimism about the five-year business outlook has dropped to a record low. Only 47% of U.S. firms expressed optimism about their long-term business prospects, marking a decline of five percentage points from the previous year. This is the lowest level of optimism since the introduction of the AmCham Shanghai Annual China Business Report in 1999. The survey also revealed that the percentage of firms reporting profitability in 2023 had plummeted to 66%, another record low.

Factors Behind the Declining Business Confidence

AmCham Shanghai Chairman Allan Gabor attributed the decline in profitability and optimism to several key factors, including weak domestic demand, deflation, and concerns over the geopolitical landscape. Gabor emphasized that these challenges affect both investments and operating plans for American firms in China, forcing them to reassess their future strategies in the region. The survey gathered insights from 306 U.S. firms across various industries, and the findings align with U.S. foreign direct investment into China dropping by 14% to $163 billion in 2023.

Geopolitical Uncertainty Looms Over U.S.-China Relations

Geopolitics continues to be the top concern for U.S. businesses operating in China. With the U.S. presidential election approaching, uncertainty about the future of U.S.-China relations is at its peak. Tariff hikes announced by President Joe Biden earlier this year—100% on electric vehicles (EVs), 50% on semiconductors and solar cells, and 25% on lithium-ion batteries—remain a looming threat. Though the tariffs were scheduled to take effect on August 1, they have been delayed twice, adding further ambiguity to the trade landscape.

China, in response, has urged the U.S. to lift all tariffs and has vowed to retaliate if the duties remain. For 66% of U.S. businesses, this strained bilateral relationship is their most significant challenge, while 70% consider it the greatest obstacle to China’s economic growth.

Shifting Investments Away from China

As businesses grapple with these challenges, many are rethinking their investment strategies. The same proportion of U.S. firms as last year—40%—are currently redirecting or considering redirecting their investments away from China. While Southeast Asia remains a top alternative destination, India is also emerging as a potential market for future investment. This declining sentiment mirrors the European Union Chamber of Commerce’s recent report, which stated that the costs of doing business in China are increasingly outweighing the benefits.

Mixed Feelings on China’s Regulatory Environment

While the overall mood may be gloomy, there was a minor improvement in perceptions of China’s regulatory environment. The survey noted a slight increase to 35% in businesses that view China’s regulatory framework as transparent. However, 60% of companies reported growing favoritism toward local firms, further complicating the business landscape for U.S. enterprises in the country.

In this evolving environment, the outlook for American businesses in China remains uncertain, driven by a complex mix of geopolitical, economic, and domestic forces.