Japanese companies have become more reluctant to expand investment in China, criticizing the Communist-led government's radical "zero-COVID" policy, including the frequent imposition of lockdowns in major cities, as a political risk.
China's tough restrictions on people's movements, which have disrupted domestic supply chains for more than two years, have prevented Japanese firms from mapping out their business strategies in the world's second-biggest economy with a population of 1.4 billion.
Many Japanese enterprises have also been eager to reduce their staff in China, given that the country's strict quarantine requirements, even for those not infected with the novel coronavirus, adversely impact mental health.
Even if they are well, people in China are forced to quarantine for at least seven days once they are designated as close contacts of virus carriers. Such people are confined to their homes under strict surveillance by the health authorities.
In Shanghai, China's commercial and financial hub, stringent quarantine rules prohibited drivers from delivering goods during the two-month lockdown that began on March 28, making it difficult for residents to obtain adequate supplies of food and daily necessities.
"As long as the zero-COVID policy is in place, we cannot craft a management strategy," said Tadashi Sato, a 57-year-old employee of a Japanese food product company operating in China, adding, "We just have a country risk here."
Since 2020, China has pledged to uphold a "dual circulation" model to bolster domestic demand while attempting to boost exports, but it has recently focused more on earning foreign currency against a backdrop of slumping private spending and production at home.
Sato, however, said, "Who wants to increase investment in China? We are willing to scale back our business here."
China has vowed to maintain its zero-COVID policy, even after the end of the Beijing Winter Olympics and Paralympics earlier this year.
The ruling Communist Party is expected to continue implementing drastic measures to stem coronavirus outbreaks until the end of its twice-a-decade congress in the fall, at which Chinese President Xi Jinping is set to secure a controversial third term as leader.
The lockdown in Shanghai for over two months through May 31 significantly impaired domestic logistics networks centered on the country's largest port and dealt a crushing blow to the broader Chinese economy, dubbed the "world's factory."
A survey by a corporate research agency showed 66.3 percent of Japanese firms had suffered a "negative impact" from the lockdown in Shanghai, home to 25 million people, with many of them citing difficulties in the procurement of materials or components.
Tokyo Shoko Research said it conducted the online survey over nine days from June 1 and received responses from 5,799 large and small Japanese enterprises.
Japanese companies are "likely to be compelled to review" their business plans and strategies for operating in China in the face of the "vulnerability" of the country's supply chains and logistics, the credit research firm said.
In Beijing, the city government effectively sealed the capital for more than a month from late April as it ordered residents to work from home, all schools to shut and restaurants to provide only takeout and delivery services.
Even now, individuals who have not tested negative for the coronavirus within the previous 72 hours cannot enter public spaces. If someone is confirmed to have tested positive, the apartment building or residential district in which the person lives is suddenly locked down.
Residents of Beijing have lined up at COVID-19 testing sites every day, with a source familiar with the Chinese government's thinking saying that hiring people to work at such places has "helped ensure job security" in the nation's capital.
A 56-year-old Japanese employee of an electronics company, who has lived in Beijing for two years, said, "We have decided to move some of our factories to the Southeast Asian region from China, where we cannot envision a future for our business without risk."
"I have become irritable due to the threat of a lockdown or quarantine and many of our Japanese colleagues do not want to come and work in China. With investment in China decreasing, the country's economy may shrink," he said on condition of anonymity.
Such sentiment is shared not only by Japanese enterprises but those headquartered in the United States and the European Union.
In May, the American Chamber of Commerce in China said 26 percent of its member firms had already cut investment in the Asian nation, while a similar EU organization said 23 percent of its members had considered withdrawing from the Chinese market.
Still, a Japanese government source said, "Japan will not see its economy grow unless its companies increase investment in China's giant market."
In 2021, Japan's imports from China expanded 16.4 percent from a year earlier to 20.4 trillion yen ($148.9 billion), with its exports to the nation rising 19.2 percent to 18.0 trillion yen.
The Japanese government "must take steps to prompt the country's firms to expand their business in China to win the economic competition with other nations" such as South Korea, the source said.
Yuya Yamauchi, a researcher at Nikko Asset Management Hong Kong Ltd., said China "cannot achieve its big goal of retaining foreign investment" without adopting a "with-COVID" policy, under which economic activities are undertaken in a more flexible manner.
"We will continue closely watching for when China shifts from its zero-COVID policy," Yamauchi added.