U.S. companies are experiencing record-low profits in China due to geopolitical tensions and sluggish economic growth, according to a report.

HONG KONG

American companies in China are reporting record-low profits, with business confidence hitting an all-time low amid ongoing U.S.-China tensions and a slowing Chinese economy, according to a report released Thursday by a U.S. business group.

Out of 306 companies surveyed, only 66% were profitable in 2023—a record low—according to the China Business Report by the American Chamber of Commerce in Shanghai.

The report also revealed that just 47% of respondents are optimistic about their business prospects in China over the next five years, marking the lowest level in the survey’s more than 20-year history.

Tensions between Beijing and Washington have intensified in recent years over issues such as trade, manufacturing, and China’s territorial claims in the South China Sea.

China is also facing a domestic economic slowdown, with weak consumer demand and persistent deflationary pressures even after the COVID-19 pandemic.

The report identified geopolitical tensions between the U.S. and China as the biggest challenge to business operations in the country.

“There’s a balance between risk and reward,” said Eric Zheng, president of AmCham Shanghai, at a news conference prior to the report’s release. “The perceived risks of doing business in China have increased in recent years, while the market itself is slowing down due to soft demand and overcapacity.”

As a result, many companies are shifting their investments to other regions such as Vietnam, Malaysia, and South Asia, Zheng added.

The report found that a record-high 25% of companies reduced their investments in China in 2023, largely due to concerns about the country’s slowing growth.

While over half of U.S. companies expect revenue to rise compared to last year, only 37% believe growth in China will outpace global growth over the next three to five years.

The AmCham report was released just one day after the European Union Chamber of Commerce in China published a similar report expressing concerns about the growing risks of doing business in China. The European Chamber’s report highlighted the lack of progress on promised reforms and an increasingly politicized business environment.

For some European companies, the risks of investing in China now outweigh the potential returns, the report noted.

“We’re worried we may be reaching a tipping point, and so we’re calling on the Chinese government to take action to reverse the trend,” said Jens Eskelund, president of the European Chamber, at a news conference on Wednesday.

“China is no longer a top priority for many, falling to a top three or top five destination,” Eskelund added. “We believe the country’s relative attractiveness as an investment location will continue to decline unless these concerns are addressed.”

The European business group urged China to focus on economic growth and reforms while boosting investor confidence by creating a more level playing field for all businesses.