Can and should the EU restrict Chinese investments?

The European bloc wants to reduce dependence on Beijing’s money. But amid the turmoil of the Ukraine war and technological demands, many are questioning that stance. Germany’s ruling coalition is considering allowing Chinese state-owned shipping giant Cosco to take a stake in a Hamburg port terminal, government sources have revealed. to the Reuters news agency this Tuesday (October 25). Cosco originally planned to buy a 35% stake in logistics company HHLA’s terminal in Hamburg. The compromise, reportedly advocated by German Chancellor Olaf Scholz, would be for Berlin to approve the sale of 24.9% of one of its four container terminals to Cosco. However, Germany’s economy and foreign affairs ministries are advising against the deal, even with changes. China is a “rival with an alternative view” The proposal comes after EU leaders agreed that China should be seen primarily as a rival promoting an “alternative view of the world order”. Last week, the 27 leaders discussed ways to reduce dependence on China for technology equipment and minerals used to make microchips, batteries and solar panels. However, at the national level and among experts, opinions are divided about the best procedure. “China will not disappear. On the contrary, it will become more and more important,” says Martin Jacques, one of the world’s leading experts on China and member of the board of directors of the China Institute of Fudan University in Shanghai: “Europe needs an informed strategy about it, not an automatic response to ‘ security’ factors, which can be a generic phrase for saying ‘no,'” he told DW. Some analysts link precisely this strategic link to economic interdependence and security issues. “We can expect increasing levels of Chinese assertiveness – especially if its economy does not recover – and increasing attempts to exploit Europe’s existing trade dependence,” predicts Matej Simalcik, executive director of the Central European Institute for Asian Studies (CEAS), a think tank based in Europe, in Bratislava, Slovakia. Ruslan Stefanov from the Bulgarian think tank Center for the Study of Democracy (CSD) believes that the EU should learn from the experience with Russia, where, led by Germany, the bloc “fell into Putin’s trap like a sleepwalker.” “Europe increased its dependence on Russian gas even after the invasion of Crimea in 2014. But companies leaving Russia are now rushing to invest in China.” Investment decline Cosco’s acquisition of the port of Piraeus in Greece in 2016 was the peak of Chinese investment in the EU, with 44.2 billion euros (R$230 billion) flowing that year, including a stake in French carmaker PSA Chinese investment in the bloc fell between 2016 and 2020, partly due to Donald Trump’s pressure on foreign allies to avoid cooperation with China. But 2021 saw a brief recovery, according to consultancy EY, with Chinese direct investment in the EU and UK rising by 17% to €10.6 billion from €7.9 billion in 2020. For the acquisition of Philips for 3.7 billion euros by the private equity company Hillhouse Capital based in Hong Kong. Activity in the automotive sector was mainly driven by Chinese investments in batteries for electric vehicles. These two sectors accounted for 59% of total investments. The next three largest sectors were healthcare, pharmaceuticals and biotechnology, information and communication technology and energy. Slowdown Reasons for the slowdown include increased domestic investment by the Chinese government as part of its so-called “Made in China 2025” policy, which aims to position the country as a global technology powerhouse. The world’s second largest economy has also been hampered by strict capital controls, reduced financial incentives and restrictions dictated by Covid-19. On the European side, China’s direct economic investments have been slowed by vetting mechanisms put in place to weigh the national security risks of those investments. This is partly related to the fear of the spread of “corrosive capital”, i.e. external sources of financing that lack transparency, responsibility and market orientation. “The EU’s investment screening mechanisms still scrutinize transactions in the US with much greater intensity than those coming from China,” says Eric Hontz, director of the Center for Responsible Investment in Washington: “We need to better understand capital flows [da China], the real beneficial owners of the companies and the legal framework and their risks in the source of investment.” According to EY, Chinese companies are increasingly involved in venture capital financing, making data collection difficult. Datenna, a Dutch firm that tracks Chinese investment in Europe, found that 40% of 650 such applications in 2010 and 2020 had “high or moderate involvement of state-owned or state-controlled companies.” Small companies in focus The next phase of Chinese investment is unlikely EU infrastructure looks like previous ones, at a time when Beijing is increasingly looking to smaller companies in an attempt to stay under the radar of European scrutiny. According to technology consulting and investment firm GP Bullhound, based in London, Tencent was the most active Chinese investor in Europe at the end of 2021. Five of the six completed deals involving fintech European investments were made by the tech conglomerate, including investments in French payment platform Lydia, German company Billie and Polish gaming software company Gruby Entertainment. The most attractive sectors for Chinese venture capital investment in Europe are biotechnology, clean technology, financial technology, e-commerce, gaming and artificial intelligence. In 2021, Chinese venture capital funds and cryptocurrency funds more than doubled their funding in Europe to a record level of €1.2 billion, mostly concentrated in the United Kingdom and Germany. Another way to avoid EU screening is greenfield investment, that is, the construction of research and development centers and partnerships with European universities. EU divided or united? Whatever the EU’s decision, some guarantors are concerned about the lack of unity within the bloc on how to deal with Chinese investor pressure. Eric Hontz believes China is “picking winners and losers” to exert significant economic pressure, causing friction between EU member states. “If we replace gas produced in Russia with solar energy and wind energy produced in China, where will Europe end up?” So how should the EU do business with China? “In one word: carefully,” Hontz points out, adding that the EU must recognize that this is not the China of 15 years ago, eg “Xi’s apparent intention is not to maximize the prosperity of the people, but to increase the power and influence of the state.” Martin Jacques has a different perspective, asking: what has come out of China’s investment experience so far? “It seems to me that the investment from [montadora chinesa] Geely was instrumental in turning Volvo into an increasingly competitive force. Much better than its previous owner, Ford, who ran it to the bottom.” European skepticism about Chinese investment may be motivated by “the new cold war and a Sinophobic mentality,” Jacques speculates. good or bad? Personally, I’d say bad. Europe needs to act independent of the US and have their own way of thinking and relating to China.” Author: Jo Harper

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