The EU is fast-tracking a vetting process for Chinese FDI. Nothing brings fractious Europeans together like getting tough on a non-member state. The British have singularly failed to crack EU unity in the Brexit talks, and Russian sanctions have been continually renewed since 2014 thanks to heavy Polish and Baltic pressure. Now the EU is fast-tracking legislation to tighten its ability to vet and control inbound Chinese FDI. The new rules aren’t officially that beefy – but they are the latest evidence of a rapidly toughening climate for Chinese investment, and their effects will be more far-reaching than their formal scope might suggest.
European attitudes to Chinese investment are changing rapidly. It wasn’t long ago that Europe couldn’t get its hands on Chinese capital fast enough. As China’s largest EU investor and trade partner, Germany was enthusiastically Sinophile; southern Europe badly needed the money; and Cameron’s governments in the UK actively wooed the Chinese to the extent that they became a founding member of the AIIB in 2015, to Washington’s displeasure. The trigger for the change came around 2016. That year, Chinese direct investment in the EU surged to a peak of around €36bn, up around 3500% since 2008, of which €12bn went to Germany.
Europe is worried about China buying up its “crown jewels” – not to mention potentially turning into a competitor. In particular, the autumn 2016 takeover of the leading robotics manufacturer KUKA made Berlin sit up. It was closely followed by a bid for the semiconductor manufacturer Aixtron, and it sparked a wave of media rumours about possible Chinese takeovers of German household names, from Allianz to the pharma company Stada Arzneimittel. With declining German outbound FDI to China suddenly swamped by the scale of the inflow, the country’s public and policymakers suddenly realised that China was more than just a market. A foreign power was buying up the country’s commercial “crown jewels”. And the more unspoken worry is similar to one in the US: that as this potential competitor used these acquisitions to pull itself up the value chain, it would undercut Germany’s manufacturing base in the same way as it had done to that of Italy over the previous two decades.
These fears only became more pronounced with the surprise announcement by Geely earlier this year that it had quietly built up a 10% share in Daimler. And the money has kept coming: while Chinese inflows to the US have dramatically fallen since the start of the Trump trade wars (falling 92% to $2bn in the first half of 2018), they have only mildly slowed in Europe, with around €10.5bn of completed Chinese FDI over the same period.
EU countries have also become worried about China buying political influence. These mercantilist fears have become overlaid with geopolitical concerns. EU foreign policy decisions are made by consensus, so member states have to be wary of cuckoos in the nest. But around that very time, in summer 2016, Hungary and Greece – two big recipients of Chinese investment, in the latter case with the port of Piraeus a vital link in the Belt and Road Initiative – vetoed an EU statement supporting a ruling in The Hague against China’s militarisation of the South China Sea. The following year (Hungary in March, and Greece in June), both blocked EU criticism of China’s human rights record. In other words, it has become increasingly apparent that China has been buying not just technological know-how – but political leverage.
National legislation is getting tougher… So Europe is toughening up its stance. Of course, unlike in the US, goods trade protection is only a major issue in certain specific sectors such as steel. In general, the EU and China are both export-dependent economies with a lot to lose from a gumming-up of the world trading system and a rise in tariffs. The problem is FDI; and the Europeans are taking inspiration from the US’s powerful CFIUS committee to set up their own mechanisms for screening foreign investment.
In 2017, Germany expanded the scope of the federal government’s powers to block investment, and is considering furthering lowering the threshold for takeovers it can block from 25% to 15% of voting rights. France is expanding its existing powers to new sectors; and the UK government has this summer published its latest proposals for substantially expanding its own relatively limited vetting processes. Unusually, the UK proposals go beyond takeovers to cover other acquisitions of assets or IP, or even just large shareholdings.
… and national capitals more active in using their blocking powers. Just as importantly, national capitals clearly have the political will to deploy the powers they hold. So far this year, the German government alone has blocked the sale to Chinese investors of the highstrength materials company Leifeld Metal Spinning, and the public-owned development bank KfW announced it was buying a 20% share in the grid operator 50Hertz Transmission GmbH to head off a bid by the Chinese state operator SGCC. This spring, the French government decided not to sell a 10.1% stake in Toulouse airport to a Chinese consortium that already owns 49.99% of the hub; and back in 2016, the new May government came close to reconsidering the UK’s approval of the Hinkley Point C nuclear power station project over concerns over the involvement of the state-controlled China General Nuclear. The one country bucking the trend is Italy, where the new populist government is far more anxious to attract Chinese investment than was its predecessor.
The new EU-level legislation does not give the Commission powers to block takeovers. Early French hopes of a powerful centralized vetting system were quickly dashed, after investment-hungry southern Europeans and free-trading northern Europeans ganged up to water down their proposals. The resulting mechanism essentially aims to coordinate member states’ vetting procedures, by providing minimum requirements for national systems and enhancing information-sharing. It also provides for the Commission to screen deals and issue a non-binding opinion: it will have to do so if they affect programmes “of Union interest”, or if the member state concerned or 1/3 of other member states request them to.
But they will be used to lean heavily on member states The powers to actually investigate, impose conditions on, block or undo FDI will remain with the member states. But these will have to take “utmost account” of the Commission’s opinion – strong language, by EU standards. In other words, the Commission and the larger, more China-sceptic member states will use the new mechanism to heap heavy pressure on neighbours to block FDI they see as undesirable. Chinese investment in Greek infrastructure or in Swedish manufacturing will de facto become an EU matter. So the absence of formal jurisdiction does not mean that the new vetting process will not be a powerful tool of influence.
We would expect the new system to be in force by early 2020. And it has a lot of political weight behind it. Around a year since the proposals first surfaced, political agreement between the Council and Parliament has now been reached, which leaves the next stages little more than a formality. With only minnows such as Greece and Malta still opposing it, we would expect it to be approved by the European Council in early December and by the Parliament by March, likely to come into force over the subsequent year.
Chinese FDI into Europe will face a much tougher climate. The upshot of this is that Chinese FDI in Europe, and above all M&A activity in high-tech sectors and major infrastructure, is becoming significantly more politically fraught. This will even play out in countries where the national government is sympathetic to Chinese investment, as European pressure makes itself felt. And we would expect it to spill over into other politically sensitive sectors – the French are concerned about the possibility of takeover bids of prestigious vineyards, for example. So less FDI will be launched in the first place, and significantly more mooted deals will fall through. The EU and China may be anxious to keep global trade flowing – but in the realm of investment, the coming process of regionalisation is well underway.
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