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EU’s new FDI policy: Consequences for Chinese businesses

Over the past years, China’s outbound investment in Europe has emerged by both state-owned and private Chinese enterprises looking for long-term investment opportunities. New data from Baker McKenzie and Rhodium Group, reported that foreign direct investment into Europe has fallen with 26% reaching the lowest level since 2015. Still, China’s footprint in European investment already increased to approximately 35 billion euros (2016) and outpaced the European investment flow into China by almost four times. Chinese investments bring up much concerns for Europe leading to discussions about protection of IP rights, price distortions caused by dumping, asymmetric market access (Chinese protection of the domestic market), and the risk of Chinese government getting control over Europe’s sovereignty and security through state-owned enterprises establishing in Europe.

Chinese investors have diversified their strategy in European investments across the west, the south, and the east of the continent based on variances in economic wealth, technological advancement, geographic location and institutional framework. The greatest investment is attracted by the advanced European countries in the west with investments in strategic assets and research and development properties. In particular, SMEs in Germany, France, the UK, and the Netherlands own advanced technologies and are target of Chinese investors that wish to transfer the know-how to their Chinese businesses. On the other hand, China is acquiring important enterprises in Southern European countries who suffered a lot from the economic crises. For instance, the Greece of port of Piraeus is considered to be China’s gateway to Europe and its stake is majority in the hand of the state-owned company COSCO Holdings Company. Other important fields that China engaged in are assets in electricity, transportation, oil, financial services, insurance, health and real estate. Investments of China in Central and Eastern Europe form part of the country’s strategical approach to achieve its main objective of creating a transportation network for the One Belt One Road Initiative and to expand China’s capital across Europe. According to the numbers, the vast majority of Chinese investments in Europe are mergers and acquisitions, whereas greenfield projects only account for less than ten percent of the total.

On the contrary, European inflow into China has increased moderately as result of China’s persistence and a large number of restrictions on foreign direct investment in the country. China is one of the most restrictive economies with respect to inward FDI. For instance, the country maintains a negative list published by the National Development and Reform Commission and MOFCOM. The negative list includes a number of sectors that forbid or allows limited foreign investment in Free Trade Zones.

European countries are actively promoting incoming FDI and do their best to attract Chinese investments. However, China’s growing geopolitical and geoeconomic ambitions are leading to concerns among European policy makers. The main concerns are related to:

  1. The one-sided transfer of technological and business expertise – China’s outward FDI in R&D fields is a way to achieve technological catch-up for its own industrial policies
  2. Unfair competitive advantage – as many outgoing Chinese companies are politically protected and subsidised Chinese companies, these companies benefit from government subsidies and other privileges that they can use while operating in the European market and competing with European companies (e.g. outbid mergers and acquisitions with the help of the Chinese government)
  3. National security concerns – China is not a security ally of the European Union and its rising geopolitical ambitions in combination with its growing superpower through economic influence across Europe relates to risks of leakage of militarily sensitive technology and transfer of sensitive technologies

To strengthen the role of the European Commission (EC) with regard to foreign direct investment in Europe, the EC is focusing on two policy initiatives: Common European Framework for Screening FDI and EU-China Investment Agreement.

Common European Framework for Screening FDI

In March 2019, the European Commission published a new EU regulation to establish a framework for screening FDI into the European Union in order to protect strategic sectors. The regulation is announced to be applied from 11 October 2020 onwards. At the moment, there is no centralised mechanism to screen FDI on grounds of public order or security at EU level, neither is there any form of formal coordination among and between member states. The key feature of the new EU framework is to set minimum requirements for national screening mechanisms and aims to enhance the cooperation and information exchange between the EC and the member states on specific FDI. The regulation creates legal ground for member states to prohibit or condition FDI on the basis of national security and public order as well as on economic grounds.

The member state of FDI destination may be required to provide information with regards to the FDI planned or completed whereas other member states may provide comments on what they consider is likely to affect their security or public order. Further, the European Commission is allowed to issue a non-binding opinion on the FDI. Screening factors that are relevant for the consideration include the FDI’s potential effect on critical infrastructure, critical technologies and dual use items, supply of critical inputs, sensitive information, or freedom and pluralism of media. Worth noting is that the outcome of the screening framework cannot hinder a FDI into a certain member state. Member states are obligated to provide an annual report concerning all FDI’s in their territory, but the final decision remains to the responsibility of the concerned member state.

EU-China Investment Agreement

The negotiations of the agreement started in 2013 and much negotiations have already happened in the past few years. This agreement should replace the 26-existing different bilateral investment treaties between China and the EU member states with the purpose to promote mutual investments. Especially for the EU, the aim is to lower the market access barriers for European investors in China and to guarantee non-discriminatory treatment. China has already accepted the negative-list approach that includes a form of market access provision in the agreement.

Both the EU and China agreed on that investment screening on grounds of national security or public order must be possible under the agreement. The main focus of the agreement is to solve the unfair and discriminatory European companies are still facing in China. Further the treatment of state-owned enterprises and rules with respect to investor-state dispute settlement (ISDS) will be better defined. Many contentious issues are related to the agreement and is yet unknown how successful the negotiations will be in the future. In the last EU-China top held in April 2019, it was announced that both China and the EU strive for an investment agreement by 2020 to guarantee fair competition for investors from foreign investors.

More information

Dr2 Consultants will continue to monitor the developments on the European Union’s FDI policy closely. If you are interested in receiving more information, or advice tailored to your strategic investment situation, please contact Ms. Stefanie Ros by email via s.ros@dr2consultants.eu

 

 

Sources:

https://www.bakermckenzie.com/en/newsroom/2019/07/chinese-fdi-into-europe-new-low

https://thediplomat.com/2019/03/mapping-chinas-investments-in-europe/

https://zakendoeninchina.org/2019/07/22/china-past-negatieve-lijsten-voor-buitenlandse-investeringen-aan/

https://www.bakermckenzie.com/en/insight/publications/2019/04/new-eu-framework-for-screening-fdi-into-the-eu

https://www.ifo.de/DocDL/CESifo%20Forum-2018-4-bickenbach-liu-chinese-FDI-december.pdf