New EU investment screening rules: What changes would it bring to the China-EU relations?

2018 marks the 15th anniversary of the China-EU comprehensive strategic partnership. Chinese investment in the European Union (EU) has been increasing exponentially, with a record of EUR 35 billion in 2016, compared to only EUR 1.6 billion in 2010. The continued sophistication and expansion of the Chinese economy and its foreign direct investment (FDI) creates new realities in EU-China relations.

In September 2017, the European Commission proposed a new regulation for screening foreign investments in the EU and the European Parliament has recently confirmed that it is ready to work together with the Council of the EU to towards the adoption of this new  legislation by the end of 2018.

The EU has one of the most open investment regimes in the world and the new legal instrument without doubt will be a game-changer for business relations between China and the EU. The Commission’s proposal aims at more transparency of investments from non-EU entities into European firms in strategic areas where the Union’s technological edge and security could be at risk.

During the debates around the new framework, several Members of European Parliament (MEPs) voiced concerns over security and anti-competitive behavior in Chinese takeovers of European companies. MEPs often referred to national security risks such as military application of the technology of recently bought German semiconductor company Aixtron. Reciprocity being one of the key pillars of the EU trade policy, MEPs also  called for the removal of barriers to EU investments in China. To illustrate, these barriers have since 2010 instigated a fall of 25% of European direct investment in China.

In China, the FDI screening proposal has been  politically considered as a protectionist move from the EU’s side; at the World Economic Forum President Xi Jinping urged world leaders to “say no to protectionism”, warning that “no one will emerge as a winner in a trade war”. At the 19th Communist Party Congress a few months ago, Xi vowed that “China will become a global leader in terms of international strength and global influence”. The EU’s scrutiny is increasing towards Chinese investments in high technology and other sectors, and President Xi Jinping is finding other ways to push for the needed reform in its economy. Now that the EU might impose additional burdens on Chinese investments into EU firms, China is eager to negotiate a bilateral investment protection treaty with the EU.

China has invested heavily in developing bilateral relations with EU Member States through its “Belt & Road Initiative” and other programmes such as the 16+1 group – which links China with 16 Central and Eastern European countries, 11 of which are in the EU. At its 6th annual meeting in December 2017, Chinese Prime Minister Li Keqiang announced to increase Chinese investment in several prestige projects, such as strengthening cooperation in the field of healthcare and the construction of a Budapest-Belgrade highway. With the EU tightening its grip on foreign investment, these bilateral relations are only becoming more important. As trade relations with the US are escalating, a strategic partnership could benefit both the EU and China while an efficient EU foreign direct investment screening mechanism would safeguard strategic EU industries.