American companies operating in China view tensions with Washington over technology, trade and other issues as a major hindrance for their businesses there, according to a survey by the American Chamber of Commerce in Shanghai.

The survey released Tuesday showed a continued downgrading of China's importance as an overseas destination for investment, even though two-thirds of the 325 companies responding said they had no immediate plans to change their China strategy.

Just over one in five of the companies surveyed said they were decreasing their investment in China this year, with the top reason being uncertainty about the U.S.-China trade relationship, followed by expectations of slower growth in China, it said.

Overall, the survey showed sentiment worsened from last year, when companies were embroiled in disruptions from “zero-COVID” policies that caused parts of entire cities, transport networks and travel to be shut down, sometimes for weeks at a time.

Such disruptions were a major “push factor” that companies cited in expanding their operations outside China, the survey showed.

While 52% of those surveyed said they were optimistic about their five-year business outlook in China, that was the lowest figure since the American Chamber of Commerce in Shanghai began the annual survey in 1999.

Nearly nine in 10 companies said rising costs were a big challenge.

Companies named geopolitical tensions as a major concern, followed by an economic slowdown that has foiled hopes for a strong, post-pandemic boom.

Intensifying competition has also been worsened by policies that favor local companies over foreign ones and courts that tend to favor Chinese companies in decisions on protection of intellectual property such as patents and trademarks.

Companies face a growing threat from “nimble, innovative local businesses and state-owned enterprises, which have enjoyed stronger support in recent years and whose consolidation has made them increasingly competitive with large multinational corporations," the survey said.

Companies that are limiting their commitment to the China market included those selling technology hardware, software and services — an area hit hard by trade sanctions imposed in the name of national security, mostly by Washington.

Others include education and training — industries that have suffered in a crackdown on private education companies, and banking and other financial industries.

Southeast Asia ranked as the top choice for the 40% of companies shifting their investments to places outside China, followed by the U.S. and Mexico, the survey said.

In the 2022 survey, 40% of manufacturers surveyed said China was among their top three investment destinations, while this year that dropped to 26%.

American companies also are urging Chinese authorities to clarify various regulations, saying that gray areas leave companies uncertain over what is permitted and what may have been outlawed as rules changed.

“Companies are much more hesitant,” said Sean Stein, AmCham Shanghai's chairman. He noted that the problem was acute for financial and pharmaceutical companies.

"What businesses need above all else is clarity and predictability, yet across many sectors companies report that China’s legal and regulatory environment is becoming less transparent and more uncertain,” Stein said in an online briefing before the report was released.

The survey results echoed those found by other foreign business groups. Foreign companies are on edge following unexplained raids on two consulting firms and a due diligence firm. The expansion of an anti-spying law and a push for self-reliance in technology also are seen as risks.

Foreign investment into China fell 2.7% from a year earlier in the first half of 2023, according to official data.

A survey by the British Chamber of Commerce in China found 70% of foreign companies want “greater clarity” before making new investments. The European Union Chamber of Commerce in China said its members are shifting investments to Southeast Asia and other targets.

Despite the relatively gloomy perspective evinced by the survey, some things have improved, American Chamber of Commerce members said.

China has extended preferential tax breaks for expatriates, such as tax write-offs for housing and educational expenses until the end of 2027.

A recent overall improvement in China-U.S. relations has occurred since the survey was completed, they said.