In San Francisco, Chinese President Xi woos US business investment but welcome mat not enough, say analysts

Structural tensions continue to cloud the Sino-US economic relationship as companies look to diversify supply chains to other Asian countries
Many foreign investors remain wary given Beijing’s emphasis on national security, raids on foreign companies and strict data laws

US-China relations

Eduardo Jaramilloin San Francisco

Published: 5:00pm, 17 Nov 2023

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Chinese President Xi Jinping is courting big American businesses in China in San Francisco this week, but analysts and investors say structural tensions continue to cloud the Sino-US economic relationship as companies look to diversify supply chains to other Asian countries.

At a gala dinner in San Francisco on Wednesday, Xi aimed to reassure American business leaders, including Apple CEO Tim Cook and Salesforce CEO Marc Benioff, that China’s business environment is favourable.

The dinner came hours after Xi and US President Joe Biden’s first meeting in a year, where the two sides agreed to work together to control flows of narcotic drugs, resume military-to-military communications and cooperate on risks posed by artificial intelligence.

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“The more difficulties there are, the greater the need for us to forge a closer bond between our peoples and open our hearts to each other,” Xi said at the dinner.

Xi’s visit to the US was preceded by China announcing the largest purchase of American soybeans in months. Reports surfaced before Xi’s visit that Beijing might also place orders for new Boeing jets for the first time in more than four years, but the deal did not materialise this week.

While Xi hoped the steak dinner would allay concerns from American business elites over a tightened regulatory environment in China and high tensions between the US and China, Mary Lovely, Peterson Institute for International Economics senior fellow, said words would not be enough.

“I think that they have to see real change,” Lovely said. “Xi was charming, he said all the right things to them, but they need to see it on the ground and I think businesses are very sceptical right now.”

China needs foreign investors as its economy wobbles under the weight of a property meltdown, slowing growth, a weaker yuan and rising unemployment, which has fuelled the corporate charm offensive in San Francisco this week.

Many companies remain wary despite the proffered welcome mat, given the Xi administration’s inordinate emphasis on national security, raids on foreign companies and strict data laws.

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Foreign direct investment (FDI) has fallen recently in China as companies increasingly look to Southeast Asia for business prospects. FDI into China dropped more than 5 per cent in the first eight months of 2023 and China recorded an FDI deficit in November – the first time China’s government has found more investment flowing out of the country than flowing in since it began collecting the data in 1998.

While the meeting between Xi and Biden marked an improvement in overall US-China relations – which have been plagued by tension over recent months – intense competition over “technologies of the future” was likely to continue, said Kevin Xu, tech investor and founder of Interconnected Capital, a hedge fund.

“The outcome of the Biden-Xi summit did not materially change the cross-border tech business environment, though it did put a temporary floor on the overall downward trajectory of bilateral relations,” Xu said.

“Chinese technology companies’ struggle to obtain GPUs will continue, as they attempt to build up domestic chip design, supply chain and semiconductor manufacturing capacity,” he added, referring to graphic processing units, semiconductor chips critical to AI development.

The Biden administration has imposed strict export controls on high-end chips going to China, and has continued to place Chinese tech companies – such as AI chip makers Moore Threads and Biren Technology – on a government blacklist that regulates all exports to listed companies.

Biden’s tough tech policies have led companies such as Nvidia and Intel to worry about their bottom line as sales of certain products to China’s massive market come into question. Of its US$27 billion in total revenue for 2022, Nvidia drew US$5.8 billion from sales to China. Meanwhile, US$17.1 billion of Intel’s total 2022 revenue of US$63 billion came from China.

However, some tech CEO’s emerged from the Apec summit optimistic given some positive outcomes from the week’s meetings.

China recorded an FDI deficit in November, with more investment flowing out of the country than flowing in. Photo: Bloomberg

“It’s no doubt there is a challenge, no one denies that. [The Chinese and US presidents] openly admit that. But both sides are making efforts, trying to communicate and trying to manage the relationship,” said Yangbin Wang, CEO of Vobile Group, a software firm that serves independent content creators.

“The Apec economy leadership, CEOs coming together, they felt encouraged … there’s challenges ahead, but they felt encouraged,” said Wang, whose company is a corporate sponsor of the summit.

Multinational companies have been feeling pressure on their China operations from multiple sources in recent years. China has recently cracked down on some tech companies in the name of what Xi calls “common prosperity”, and authorities have clamped down on the free flow of financial and other business information, citing national security.

Meanwhile, tensions with the US and the spectre of future conflict over Taiwan, which Beijing says is part of China, has led some companies to view doing business in China as riskier than in the past.

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Most countries, including the US, do not recognise Taiwan as an independent state. Washington, however, opposes any attempt to take the island by force.

Some Southeast Asian countries, such as Vietnam, Indonesia, and Malaysia, have seen bumps in FDI in part thanks to these dynamics. Other countries hope to cash in on the move away from China as well.

“We’d like to encourage some of these firms that are moving out of China to come to the Philippines,” George Barcelon, president of the Philippine Chamber of Commerce and Industry, said at an event on the sidelines of Apec.

“I know sometimes we’re not shortlisted. A lot of companies will go to Vietnam or elsewhere.”

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During a fireside chat at the summit Raymund Chao, Asia-Pacific and China chairman for the accounting firm PwC, said it was not feasible for all Western companies to shift out of China quickly.

“It’s very difficult, if not even impossible, to replace China with any one location. That’s a reality that we need to understand,” he said.