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New report by Rhodium Group and MERICS

Unequal market access distorts EU-China investment relations

As Chinese investment flows into the EU increase, the lack of equal market access is increasingly becoming a problem in investment relations with China. While Chinese investors enjoy the same rights in the EU market as any European business, China continues to limit access for foreign companies in many sectors. Apart from that, there is rampant informal discrimination of foreign firms.

A sector-by-sector comparison by Thilo Hanemann (Rhodium Group) and Mikko Huotari (MERICS) reveals that Chinese investments into the EU surpassed investments by EU companies in China in 10 out of 15 industries in 2017. Another finding of the report „EU-China FDI: Working towards reciprocity in investment relations with China“ is that the majority of large Chinese acquisitions in the EU would not have been possible for EU companies in China, as Chinese government regulations prevent foreign companies from doing business in the respective sectors. The imbalance is most visible in the transport and infrastructure sector, in which European investments are nearly non-existent.

    Lack of reciprocity harms European interests

    The authors of the study warn that the lack of investment reciprocity harms European interests. It violates fairness principles that the post-WWII economic order was built on. The perception of China as a state-permeated free-rider in the liberal global investment environment could also undermine popular support for economic cooperation with China and for a liberal economic order in Western democracies.

    The authors urge European policymakers to pursue a more assertive economic policy agenda vis-à-vis China. The aim should be to build leverage toward greater Chinese openness without shutting the door to productive Chinese capital and damaging Europe’s traditional openness to foreign capital.

    Policy solutions should be effective, but in line with European principles, values and political realities. The authors’ suggestions include:

    • Negotiating a robust bilateral investment treaty with China remains key to address reciprocity concerns. However, negotiations are slow and there are serious doubts about China’s ability to implement tough reforms.
    • Establishing an efficient, focused and transparent European framework to screen foreign acquisitions for security risks.
    • Employing additional strategies to build greater leverage vis-a-vis Beijing. EU member states should increase coordination with like-minded market economies to ratchet up pressure to resolve long-standing market access issues and to explore new avenues for competition policy that consider asymmetries in market access.

    Latest data on 2017 flows underscore importance of addressing reciprocity problems

    Europe clearly remains open to Chinese investment despite growing discussions about the need to better protect critical infrastructure. At 30 billion EUR, Chinese foreign direct investment in the 28 EU economies was at the second highest level ever recorded in 2017. The largest recipients of Chinese investment were transportation, utilities and infrastructure (15.3 billion EUR), information and communication technologies (4.8 billion EUR), real estate and hospitality (2.9 billion EUR) and automotive industries (1.3 billion EUR).

    The overall investment level dropped by 17% compared to the record year 2016 as a result of actions by Chinese regulators to re-assert control over outbound investment flows. The decline was however less dramatic than the overall decline in Chinese global FDI of 29%.

    After a period of large investments in Southern Europe, Chinese investments in Europe continued the trend of 2016 and largely focused on the biggest EU economies. The UK, Germany and France accounted for 75% of China’s total EU investment, which was the highest share in ten years. Investment in Germany dropped significantly from EUR 11 billion in 2016 to EUR 1.8 billion in 2017. This was, however, mostly due to the timing of large acquisitions, which were not completed in 2017 due to regulatory delays or other reasons.

    Outlook for Chinese investments in the EU in 2018 

    Strong Chinese investment in the EU is likely to continue in 2018. As of January 2018, more than 10 billion EUR of Chinese acquisitions were pending, building a solid floor for Chinese investment in 2018.

    The authors predict that despite concerns about unequal market access and efforts to establish stricter security screening procedures, the policy environment in the EU will remain more supportive of Chinese investment in 2018 than in other advanced economies. Tighter investment screening rules in the United States and a more confrontational US-China trade and investment relationship could lead to a diversion of Chinese capital from North America to Europe.

    Read the full report "EU-China FDI: Working towards reciprocity in investment relations with China" here.

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