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Almost half of the big US companies operating in China have been adversely affected by overcapacity in the country, according to a new survey, underscoring deepening concerns about sluggish demand and rising deflationary pressures in the world’s second-largest economy.
An annual survey by the US-China Business Council found that overcapacity had hit 42 per cent of respondents, up significantly from the 25 per cent that reported an impact last year.
This year was the first that overcapacity was among the 10 biggest challenges to business since 2016, according to the business lobby, which between March and May polled 130 member companies, more than half of whom have annual China sales exceeding $500mn.
“Rewards are falling and at the same we see an increase in risk . . . it shouldn’t surprise the Chinese government that investment is falling,” said Sean Stein, president of USCBC.
The group said the survey results, released on Wednesday, showed that China’s overcapacity problems have spread from primarily affecting industrial sectors such as steel to broader swaths of the economy, including healthcare and consumer goods.
Eighty-one per cent of affected companies said the overcapacity crisis was driving down prices in their sectors. Companies also reported shrinking profit margins.
“As investment and production drive a larger share of China’s economic growth, concerns over overcapacity are intensifying,” the report said.
Overcapacity remains a sensitive issue for Beijing. Chinese officials have vigorously disputed complaints by its trading partners, including the US and EU, that its industrial policies and subsidies were flooding global markets with artificially low-priced goods and outcompeting local enterprises.
More recently, however, China’s leadership has acknowledged the consequences of overcapacity, using the term neijuan or “involution” to denounce excessive price competition in some sectors. President Xi Jinping and other leading officials have penned a number of articles attacking overproduction and price competition caused by neijuan.
More widely, the USCBC survey found that 88 per cent of respondents were concerned about the state of the Chinese economy, which has been grappling with a prolonged property sector crisis and weak domestic consumption.
Official data this week showed China’s GDP expanded 5.2 per cent year on year in the second quarter. In nominal terms, which reflect actual market prices and include the impact of deflation, growth was slower at 3.9 per cent, according to Macquarie.
Geopolitical tensions were also hurting US companies in China. Surveyed American companies said tumultuous US-China relations were a major challenge, with tit-for-tat exchanges of tariffs and US export controls disrupting supply chains, damaging their reputations and causing lost sales.
The US and China are currently in a tariff truce, after the sides signed an agreement in May to lower their tariffs from rates as high as 145 per cent while they negotiate a more comprehensive trade accord.
Collectively, the issues have hit business confidence. Fewer than half of respondents expressed optimism about their five-year outlook in the country.
More than a quarter of the surveyed groups were moving or considering moving operations out of China, up from 19 per cent last year.
Kyle Sullivan, who leads USCBC’s business advisory unit, said the lobby had observed a record number of member companies pulling back from further investment.
There was “a dramatic drop-off in the number of companies that are allocating new investments to China this year”, said Sullivan.
