According to an economist, Western investors are rapidly fleeing China due to the country’s Covid pandemic, policy abuse, and rising costs.

Milton Ezrati is chief economist at New York-based communications company Vested. He was a former market strategist at Lord, Abbett & Co. and former chief investment officer at Nomura Capital Management, where he oversaw its investment in the Americas.

In an opinion article on June 13, Ezrati pointed out the various risks the China economy is facing, including foreign capital flows.

He wrote: “Rising costs, abusive government policies, and, more recently, Covid-19 and war sanctions have prompted Japan and the West to rethink the risks of investing in China. Money is going elsewhere.”

Ezrati said that Beijing would have to make many changes to restore the old cash flow and profits.

All the comments from the U.S. and Europe point to their tendency to decouple from China.

From the U.S., Congress appears to be passing legislation to limit American investment in China.

From Europe, Joerg Wuttke – president of the EU Chamber of Commerce in China – summed up the prevailing attitude among European companies towards China. He said that China’s credibility as the best place to source resources is being lost.

Ezrati said that though a few investors are prepared to pull operations out of China, almost everyone seems willing to move new investment elsewhere, either to other emerging economies in Asia or to bring it back home.

According to this economist, the new approach reflects the impacts of the lockdowns and quarantines created by China’s zero-Covid policy. Beijing’s insistence on such a strategy has made production in China difficult and expensive.

The EU Chamber of Commerce in China released a survey result on May 5. It showed that about 60% of Western businesses had lowered their revenue forecasts for this year.

A significant 77% of European firms concluded that China’s attractiveness as an investment destination has decreased because of its erratic Covid containment measures.

The survey shows that 39% of EU companies agreed that the Russia-Ukraine war and sanctions have made China more attractive as an investment destination. However, about 32% said the opposite, citing political uncertainty. 

In his opinion, Ezrati said that the war appears to be neither a help nor a hindrance for China.

There is another reason why foreign companies decide to leave China. Ezrati said Beijing had shown less honesty in its approach to patents and copyrights. 

Foreign investors have long complained about Beijing’s insistence that foreign companies in China must have a Chinese partner and must share technology and trade secrets with the partner. They have also complained about blatant theft by Chinese agents. 

Hopes rose in January 2020 when China signed a “phase one” trade deal with the Trump administration. In the deal, Beijing pledged to simplify the process for foreign companies to file complaints about patents and other thefts. But since then, it has become clear that China has no intention of delivering on that promise.

China has sometimes made sudden changes in trade policy in response to temporary problems. For example, it has recently threatened to stop exporting rare-earth to the U.S. and other countries due to some diplomatic tensions. It did the same with Japan a few years ago.

Beijing has recently slapped massive tariffs on Australia simply because Canberra went after questions about the origins of the Covid-19 pandemic.

Another fundamental issue for foreign investors is rising wages and costs. A disciplined and affordable labor force in China has attracted foreign investment.

However, in recent years, this situation has begun to change. Wage rises in China surpassed those in the rest of the world. 

Between 2011 and 2021, China’s wages grew by an average of about 10.5% per year, more than double the rate of wage growth in the U.S. and Europe and faster than most other Asian countries.

Compared with other Asian economies, China has lost much of its low-cost appeal. 

Though the Covid pandemic has slowed wage growth in China, it won’t last. In addition, the lockdowns in many Chinese cities have increased transport costs.

Milton Ezrati said that the combined influences of these factors may not have reached the point where Western and Japanese companies cut off existing investment in China. However, these realities have prompted foreign companies to move their new investment jobs to cheaper and less troublesome locations. 

Some might conclude that China’s position will not be shaken much, but Ezrati said that such conclusions misunderstand the nature of business.

The economist said that the focus of any business follows new investments. With foreign capital being pulled out, this trend would reduce China’s position as an economy in global trade and commerce.

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