Chinese investment in post-pandemic Europe

1. Deterioration in the US investment environment

Tensions between China and the United States continue to escalate. In the past six months, hostile confrontations between the two countries have extended beyond trade negotiations and into other areas such as human rights, software and technology, control of the COVID-19 pandemic, governance of Hong Kong, and military posturing. Chinese and US leaders have, at least temporarily, damaged the Sino-US relationship, and in the process, Chinese investors are increasingly finding it difficult to put their money in US markets.

Challenges facing Chinese investors in the United States are widespread. In January 2020, the US government further increased the power and purview of the Committee on Foreign Investment in the United States (CFIUS), which reviews and scrutinizes inbound foreign transactions.¹ Although no foreign investor is immune from CFIUS oversight, Chinese investors are likely to face the most scrutiny.²

On top of CFIUS’s review, the Trump administration has claimed that certain Chinese companies that appear benign and consumer driven actually present a ­national security risk. In fact, several countries around the world have expressed concerns about the prevalence and use of Chinese technology in certain segments of society. For example, Chinese telecommunications company, Huawei, has been banned from certain telecommunications infrastructure in the United States, Australia, the United Kingdom, Sweden, among others. The US government also has threatened to ban another high-­profile technology company, Tiktok, which specializes in video sharing.³ As an alternative to an outright ban, the Trump administration pushed Tiktok to sell its US business to a US company.

In response to national security concerns from Chi­nese companies, the United States government launched a program called “Clean Network”, which focuses on five areas and includes steps to prevent ­various Chinese apps and telecommunications companies from accessing sensitive information on American citizens and businesses.⁴

Chinese companies and investors have been caught in crossfire of a deteriorating Sino-US relationship. In light of the difficulties surrounding Chinese investors and companies, Chinese investment could begin to flow more strongly to the European Union. In fact, the Chinese government might already be pivoting away from the United States and towards the European Union in an effort to pave the way for Chinese investors and companies. During the last week of August 2020, Chinese Foreign Minister, Mr. Wang Yi, visited five European countries with the aim to actively advance bilateral ­political, economic and trade agendas.⁵

2. Upcoming cornerstones of the European ­investment environment

Leading up to the outbreak of the COVID-19 pandemic, the European investment environment was favorable to Chinese investors, especially as compared to the US environment. For example, although the number of ­direct investments in Europe by Chinese investors has shown a downward trend in recent years, Chinese ­investors still announced 210 overseas M&A deals in Europe in 2019 with the focus on high-tech firms in Europe, compared with 101 deals in North America in 2019.⁶ Although much better than the US environment, it is not clear whether the preferable EU investment environ­ment will be maintained.

Foreign investment reviews by both EU and ­member states

On 16 June 2020, the Deutscher Bundestag, i.e. the German parliament adopted an amendment of the German Foreign Trade and Payments Act (AWG). The amended AWG seeks to adapt the German legal framework to the requirements of the European Foreign Direct Investment (FDI) Screening Regulation (Regulation (EU) 2019/452 of 19 March 2019) and to further tighten the investigation and control regime of foreign investments in German target companies. Other EU member states acted in parallel.

German policymakers have increasingly restricted regulations controlling foreign investments in German com­panies ever since the acquisition of robotics company, Kuka, by Chinese investor, Midea, in 2016. Oversight has broadened; more security-relevant areas have been identified; and investigation deadlines have been exten­ded.⁷ In fact, at the end of 2018, the German ­government reduced, from 25 percent to 10 percent, the foreign ownership threshold that triggers review procedures and potential state intervention in foreign trans­action that involves certain areas of national security, like military assets, cryptosystems, critical infrastructure, or media companies with mass appeal.⁸ Moreover, the ­recently amended AWG i.a. has lowered – in line with the regime provided for in the European FDI Regulation – the threshold for the adoption of measures restricting investments from an actual to a likely threat.

A likely side effect to the AWG is a general hesitancy from foreign investors to invest or acquire German companies in strategically important industrial sectors. In addition, continual restricting of foreign investment in Germany projects an unwelcome message to foreign investors. On the other hand, such trend of a tightening of foreign investment control is an international trend not limited to Germany; and providing the tools for any intervention does neither mean that the preconditions for their use are fulfilled more frequently nor that the respective tools are actually used. The future development yet remains to be seen.

The White Paper on foreign subsidies

The European Commission released a White Paper on ways member states can level the playing field with ­foreign entities that depend on subsidies from foreign governments (the “White Paper”).⁹ It concludes that foreign subsidies can undermine competition and distort the EU’s internal market. For example, in case of a ­foreign company acquiring a EU entity, foreign government subsidies (such as preferential treatments in financing, loan guarantees, and special tax rebates) may enable an acquirer to offer premiums for acquisition, thereby preventing non-subsidized acquirers from accessing key technologies.¹⁰

The White Paper aims at an introduction of new EU ­legislation to address the current lack of rules to address unregulated foreign subsidies. The foreign subsidy measures proposed in the White Paper are open for public consultation until 23 September 2020. Assuming a positive public response, the European Commission could put forward concrete legislative proposals in 2021.If the considerations set forth in the White Paper were actually implemented, Chinese companies (especially state-owned enterprises that receive substantial government subsidies) would likely face additional scrutiny and investment tariffs on top of current government oversight like anti-trust and foreign investment review. This will greatly reduce the certainty of transactions and modify closing schedules for foreign transactions.

Potential investments and local operation of high tech companies in Europe

As described in more detail above, Chinese technology companies are increasingly turning their attention to Europe for investment and acquisitions. A recent report found that outbound deal volumes by Chinese technology investors into Europe increased 25 percent in the first quarter of 2020. ¹¹In addition, the report also found that for the first time since 2018 Chinese investment into the European technology sector caught up with amounts invested in the United States.

Among European deals by Chinese technology firms, Alibaba Group Holding and Tencent Holdings were the most active. Tencent enhanced its presence in the European market with five transactions, including two in fintech, one in digital media, one in marketplaces, and one in software.¹² And Alibaba affiliate, Ant Financial Services, announced in February 2020, the US$700 million acquisition of UK payments company WorldFirst, after Ant Financial Services called off its US$1.2 billion deal for MoneyGram when CFIUS indicated it would not approve the acquisition.¹³

In addition to acquisitions, Chinese high-tech companies, including Alibaba Cloud, Tencent Cloud, and Tiktok, have actively entered the European market by establishing local operation centres.¹⁴

With increased interest by Chinese investors, EU policy­makers and dealmakers have begun to express concerns. Neil Campling, head of technology, media and telecoms research at Mirabaud Securities, said that he thought Europe is vulnerable because the continent is lagging behind both China and the U.S. in economic growth as well as innovation.¹⁵ Margrethe Vestager, the EU’s competition commissioner, suggested in a recent interview that EU countries should consider taking stakes in companies to fend off the threat of a Chinese takeover. “We don’t have any issues of states acting as market participants if need be — if they provide shares in a company, if they want to prevent a takeover of this kind,” Vestager said.¹⁶

It is unclear whether EU policymakers will take a cue from their US counterparts and continue scrutinizing Chinese companies to a point where it could detrimentally impact Chinse inbound investments.

EU-China Comprehensive Agreement on Investment

In 2014, the European Union and China launched ­negotiations on the Comprehensive Agreement on Investment in 2014 (“CAI”).¹⁷ The European Union sought to create new investment opportunities in China for European companies by opening China’s market and eliminating certain discriminatory laws and practices. EU policymakers claimed that the Chinese regulatory environment prevented EU companies from competing in the Chinese market on an equal basis with Chinese companies.

In addition, in the past few years, the Chinese government has attempted to open certain parts of the Chinese market and create legal certainty for foreign investors. On January 1, 2020, the “Foreign Investment Law of the People’s Republic of China”¹⁸ and its supporting administrative regulations “Implementation Regulations of the Foreign Investment Law of the People’s Republic of China”¹⁹, came into effect. These regulations attempted to provide foreign investors with national treatment (i.e. foreign investors are treated the same as domestic investors), except for certain key areas. In July 2020, the government approved an amendment that further limited the areas of the economy off limits to foreign investors, like manufacturing, mining, agriculture, and finance.²⁰

Despite recent Chinese efforts to lure foreign investors, there is still daylight between Chinese and European negotiators. Negotiations on the content of relevant clauses for market access will determine whether the CAI can be completed on schedule at the end of 2020. The market access negotiation not only entails market opening, but also focuses around levelling the market access, the treatment of state owned enterprises, and countering subsidies. If signed, the CAI will be the first bilateral investment agreement signed by China to ­include market access.[21 http://www.iwep.org.cn/xscg/xscg_lwybg/202008/t20200807_5167390.shtml]

3. Prospects for EU-China investment in the post-pandemic period

Trade and investment links between the European Union and China are very important. The European Union and China are strategic markets for each other, trading on average over a billion euros a day.[22 https://trade.ec.europa.eu/doclib/press/index.cfm?id=2115#:~:text=With%20the%20
EU%2DChina%20Comprehensive,basis%20with%20Chinese%20companies%20and] And China’s growing domestic market and economic weight represent significant business opportunities for European companies. During the pandemic, European companies have continued to invest in the Chinese market. In May 2020, Germany’s Volkswagen Group, the largest European car company, announced an invest­ment of 2.1 billion euros in China to vigorously promote the development of its electric vehicle business.²¹ In July 2020, France’s Danone Group announced an invest­ment of 100 million euros to enhance its business in China, focusing to improve local research and development and innovation capabilities.²²

According to a recent report [25 https://www.rolandberger.com/zh/Publications/%E4%B8%AD%E5%9B%BD%E4%BC
%81%E4%B8%9A%E5%9C%A8%E6%AC%A7%E5%8F%91%E5%B1%95%E6%8A%A5%E5%91%8A(2019).html], Chinese companies have invested in European markets to fill gaps in certain European industrial chains. For example, CATL, a Chinese battery giant, established a battery cell manufacturing plant in Germany to enhance electric vehicle manufacturing in the European Union.²³ In addition, Chinese tech companies have established research centres throughout Europe to advance innovation throughout European enterprises. For example, Tencent, relying on its own cloud computing and artificial intelligence technologies, is providing BMW with an advanced and complete technical solution that runs through the entire R&D process of autonomous driving.²⁴

The COVID-19 pandemic has not only exposed further tensions between China and the European Union but it has shown the mutual dependence between the two nations. Whether the two sides reach a consensus that cooperation outweighs isolation remains to be seen.