Western companies are losing their enthusiasm about doing business with China. The American Chamber of Commerce in China reported in March that only 45% of surveyed companies called China a top-three investment priority, the lowest figure in the report’s 25-year history. A new survey from the European Union Chamber of Commerce in China finds that multinationals are shifting investments and Asia headquarters out of the country.
The trend is likely to accelerate, as companies struggle to find insurance against the political risks of doing business in China. “We’re witnessing a sharp contraction in underwriter appetite,” a political-risk executive at a global insurance broker said. “Companies that have multiyear coverage can continue to utilize it, but companies that need new policies are struggling. A couple of private-market underwriters are willing to sell, but many have burdensome criteria lists and will only offer to companies in sectors they assess as very benign.”
Political-risk coverage, which insures companies against politically motivated calamities ranging from expropriation to war, is the lifeblood of the globalized economy. The demand for such policies declined during globalization’s most harmonious years, but in an unstable world, companies are deciding they need it again. Last year 68% of major corporations bought political-risk insurance, up from 25% in 2019, according to a report by WTW, an insurance broker.
Underwriters stopped writing new policies in Russia months ago, and in China they appear spooked by events ranging from raids on Western consulting firms to threats against Taiwan. Two years ago, after Chinese state media declared videogames “spiritual opium,” shares in the Chinese entertainment giant Tencent swiftly plunged by more than 10%. Not even food and apparel companies, which have been considered relatively safe from political risks, can now be certain they’ll get such coverage.
Underwriters’ exposure in China, and the wide range of political risks that could materialize there, add to their nervousness. Of the 60 or so insurers that offer political-risk insurance, only four or five are still offering it for China, the insurance executive noted. Policies still being offered likely wouldn’t exceed $50 million coverage, down from around $2 billion a few years ago. Most large companies with operations in China have assets far above $50 million.
The German government, too, is shifting its China strategy. In the past few months, it has reduced its investment guarantees for German companies’ Chinese operations by more than $5 billion, and Economics Minister Robert Habeck has said he wants to guarantee more German investments elsewhere.
That’s a radical change from past years, which have mostly seen the likes of Iran and Venezuela cause political-risk headaches for businesses. Some companies planning to keep their Chinese operations going may already have political-risk insurance that lasts for another few years. Others may try to self-insure, though that means taking on risks that even insurers consider too large. The rest face having to leave the country. Even large companies eager to stay may be affected. Shareholders of Mercedes-Benz, whose CEO recently declared China the company’s “home away from home” in an interview on Chinese state television, should hope the company has reviewed its insurance.
Insurance allows globalization to thrive, but some potential globalization injuries are becoming too serious to cover. Companies and insurers, not only governments, have to decide which countries are friendly and stable enough to do business.
Ms. Braw is a senior fellow at the American Enterprise Institute and an adviser to Gallos Technologies.
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