As the owner of the second-largest economy in the world, China has made foreign investment inroads everywhere, from natural resources and infrastructure in the developing world to prime real estate such as the Waldorf Astoria in New York. However, recent Chinese investments in strategic industries in the West have raised concerns over the long-term consequences of Chinese ownership and highlighted the need for greater regulatory scrutiny.
Indeed, the much-vaunted fourth industrial revolution of robotics and the “Internet of Things” seems to have taken center stage in the crosshairs of Chinese investors. Acquisitions of Italian robot-maker “Gimatic,” German technological stalwarts “Kuka” and “KraussMaffei Group,” and an ongoing deal for Swiss agribusiness “Syngenta” are some of the biggest European tech companies targeted by Chinese money this year. Though they add to long-standing concerns of intellectual property theft associated with the country, these investments more broadly evidence Chinese rivals’ ability to purchase cutting-edge technology outright.
This has prompted outcry from various government and business representatives who claim that the future of industry and innovation is being sold wholesale to Chinese hands. Furthermore, the European Union Chamber of Commerce in China (EUCCC) last week decried the asymmetries of market access between the EU and China, as the latter, in clear disregard for the European open market model, plainly restricts foreign investment in a host of key industries. Jörg Wuttke, head of the EUCCC, issued the chamber’s most strongly-worded criticism on the need for lack of Chinese market reform when he called the lack of reciprocity “politically unsustainable.”
Elsewhere, the growing sense of unease around Chinese investment has resulted in more than words, with two deals halted in their tracks. At the end of June, the UK suddenly announced that construction of the £18 billion Hinkley Point nuclear plant (pictured above) was to be delayed and put under review, to the surprise and discontent of two Chinese state-owned companies that had agreed to finance a third of the total cost. The Australian government also blocked two large infrastructure sales to Chinese companies in recent months, one concerning a large swathe of agricultural land and the other Australia’s biggest electricity distribution network. Both the UK and Australia invoked national security grounds as justification, mirroring the hawkish approach to foreign investment the United States has taken through its Committee on Foreign Investment in the United States (CFIUS).
Though investment from China provides an important source of growth and jobs in Europe, a clear-eyed understanding of its risks must be promoted. Many of the acquiring companies are state-owned enterprises (SOEs) and often benefit from valuable state support such as preferential loans and subsidies, conferring a significant competitive advantage relative to their market-based counterparts. Furthermore, many Chinese SOEs are known to be mired in debt and over capacity, which may therefore compromise the operations of their subsidiaries.
In addressing these concerns, Sebastian Heilmann, president of the Berlin-based Mercator Institute for China Studies (MERICS), proffers some salient recommendations:
- Innovative models of state ownership in nationally strategic sectors, which both prevents a controlling stake being sold and avoids intrusive state intervention in management
- Strict disclosure requirements to be applied against Chinese companies, which enable transparency and clarity in dealings with usually opaque SOEs
- The extension of the EU’s competition policy to Chinese state-owned investors, as well as prohibitions on state aid to set a market-based and level playing field
- Increased lobbying efforts for the ongoing bilateral investment treaty negotiations between the EU and China, which would enable reciprocal access to Chinese markets
These recommendations provide practical and resonant means to deal with the exigencies of an investor which some in the West have not fully understood or foreseen. These market-based, non-discriminatory assessments may serve to narrow the discrepancies between Chinese and Western investors while promoting gradual and positive reform of Chinese industry.
However, China’s leaders are not known to be forthcoming in matters of strategic international competition (take, for instance, their brinkmanship over unfolding events in the South China Sea). The challenge will therefore lie in coordinating a collective, firm, and uniform response between European nations. China has never hesitated to single out a country for either praise or punishment, be it the cold shoulder turned to Norway after Chinese dissident Liu Xiaobo received the Nobel Peace Prize or the financial “aid” pledged to Cambodia after it supported China’s territorial claims in the South China Sea. In response to Chinese intransigence, European nations must take equally tough stances on Chinese investment, as a hard line may be the only way to lobby effectively for meaningful reform.
Recent success in fostering open dialogue and collaboration between the EU and China regarding the latter’s steel overcapacity gives reason for hope in this case and should be emulated to the extent possible. Much like its overproduction of steel, overly expansive Chinese foreign investment has clearly identifiable issues and origins, and addressing them head on will lead to a fair, conducive and well-adjusted marketplace for all. With this in mind, the EU and its counterparts must together recognize the combined value of power and finesse as they collectively press for a level foreign investment playing field with China, both now and in the future.