Chinese FDI in the EU’s Top 4 Economies

Published on 2019-05-14

Chinese foreign direct investment (FDI) in the European Union (EU) has increased over 17 times from 2010 to 2016. This was followed by a drop in investments due to controls introduced on capital outflow by the Chinese government in the last two years.

With this large increase and a convergence of investment in sectors like energy and technology, several EU member states have come to suspect an underlying political motive.

Much of this suspicion has been felt within the EU’s four largest economies – the United Kingdom (UK), France, Germany, and Italy – who have received 70 percent of all Chinese FDI in the EU since 2000.

As a result, all four countries have tightened their investment screening policies. However, Italy’s newly-formed government is substantially more pro-China than the last, which will likely lead the country to increase its share of Chinese FDI in the future.

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What investment screening looks for

Foreign investment is a key source of capital for most countries, and especially so since the global financial recession of 2008.

Many countries, however, have in place an investment screening process for national security reasons.

These screening processes often examine incoming FDI in sensitive sectors and consider the investor’s connections to foreign states with whom the destination country has troubled relations.

In the EU, the UK, French, German, and Italian governments all have the power to block certain investments if they are considered a security risk.

Investment screening in the EU does not discriminate based on the country of origin, but looks at investments based on three main categories:

  1. Investments in sectors considered sensitive;
  2. Investments by state-controlled entities; and
  3. Investments in accordance with state-led outward projects.

The sectors that are deemed sensitive depends on the individual member country and the screening policy it employs.

Sectors considered to be essential to the running of a developed economy are often categorized as sensitive.

The recently introduced EU-wide screening coordination policy identifies the following sectors as sensitive areas:

Impact of screening policies on Chinese investment

Investments by state-controlled entities are viewed with caution in the EU because of the potential for foreign governments to use their control of certain assets as leverage in foreign affairs issues.

For Chinese firms, this not only includes state-owned enterprises (SOEs), but also some private companies who might have links to the Chinese government.

Investments in accordance with state-led outward projects – for example, China’s ‘Made in China 2025’ plan, which aims to make China a leader in a range of high-technology goods – are also viewed with suspicion for the same reason.

Investments with state-led direction into targeted sectors may be used by foreign governments to gain international strategic advantages. It also has implications for risks to intellectual property – an issue that is currently at the heart of the US-China trade war.

China’s FDI into the UK

Significant mainland Chinese investment into the UK started in around 2003 when Chinese FDI stood at an average of EUR 255 million (US$254 million) per year until 2011. From 2012, investment flows have become more substantial, averaging EUR 4.3 billion (US$4.9 billion) over the next five years.

Investment in areas considered sensitive in the UK have mainly been concentrated in information and communication technology (ICT) and energy. 22.5 percent of all Chinese investment from 2000-2016 was in the ICT sector and 9.7 percent was in energy.

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UK suspicion of Chinese investment in the energy sector actually led the government to delay plans to build the Hinkley Point C nuclear plant because of security concerns over a Chinese company’s 30 percent stake in the deal.

Chinese SOEs have played a big role in Chinese FDI to the UK. The large increase in 2017 FDI was due to China’s sovereign wealth fund, China Investment Corporation (CIC), making a massive EUR 12.5 billion (US$14.1 billion) purchase of the warehouse company Logicor.

Screening policy changes

Although the UK already had a reasonably strong screening system, changes were made in 2018. The two tests that allow the Competition and Markets Authority (CMA) to review FDI – the turnover test and the share of supply test – were both amended.

The CMA can now review transactions in sensitive sectors worth GBP 1 million (US$1.3 million). This is quite a significant change as the previous threshold for review was GBP 70 million (US$92 million).

The share of supply test evaluates transactions based on whether foreign companies will control too much of the market. A transaction can now be reviewed if the target company for investment alone supplies 25 percent or more of a good in a sensitive sector.

Key sensitive sectors in the UK include quantum computing, computer hardware, and software as these sectors perform a crucial role in the country’s economic development and contribute to national security.

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This article was first published by China Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in in ChinaHong KongVietnam, Singapore, India, and Russia. Readers may write info@dezshira.com for more support.