The Debate

Sizing up Chinese Investments in Europe

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The Debate

Sizing up Chinese Investments in Europe

How can Europe strike the right balance between security and economic openness?

Sizing up Chinese Investments in Europe
Credit: Istagram/ European Commission

Chinese investments in the European Union have surged in recent years, giving rise to both great expectations and growing concerns. Foreign direct investment (FDI) in Europe traced back to mainland China hit a record 65 billion euros ($79 billion) in 2017, compared with less than 2 billion euros ($2.5 billion) in 2010, according to data gathered by Baker McKenzie.

As China continues to grow, develop, and integrate into the global economy, its overseas investments increasingly reflect the growing sophistication of the Chinese economy and the broader commercial and policy goals being set in Beijing.

To better understand this phenomenon, the European Think-tank Network on China (ETNC) has recently published a report that brings together original analyses from 19 European countries on the economic but also the geopolitical dimensions of increased Chinese investment in Europe.

One important contribution of this report is to dispel the emerging narrative that Europe needs China more than the other way around. European economies have a wide range of assets and features that Chinese investors seek, such as cutting-edge technology, the world’s largest single market, vast corporate networks that stretch the globe, brand names, integrated regional and global value chains and a stable legal, regulatory, and political environment. The importance of these assets for Chinese companies both today and in the long run should not be underestimated.

Still, the importance of Chinese investors for Europe should not be overlooked, either. Since the onset of the economic and financial crisis in 2008, and still today, many capitals and economic centers across Europe have looked to China as a source of opportunity and growth. Indeed, promoting investment relations has risen to the top of many bilateral agendas.

Yet, the growing scale of Chinese investments has shed light on a number of underlying concerns. These relate to the role of the Chinese state in the economy; a lack of reciprocity and fair competition; China’s growing political and diplomatic influence and the intra-European competition that this investment potential is generating. Among many of Europe’s smaller economies, which have received fewer Chinese investments, there is also a growing “promise fatigue” vis-à-vis China.

Such concerns are not new but they have become more publicly voiced in European capitals and in Brussels as Chinese companies have begun to buy critical infrastructure across the continent. A series of (proposed) high-tech take-overs in Germany, including the buying of leading robotics firm Kuka, can be seen as a watershed moment in Europe. For the first time, parts of the German political class are denouncing that Chinese investments could elicit substantial security concerns and become a strategic threat to the country’s industrial leadership.

In light of these growing concerns, the debate over how to respond has heated up, with many European policymakers expressing increasing hesitation over security risks, loss of technological leadership, and national economic competitiveness.

Things have moved rather quickly over the past year. A number of national governments, from Germany to Hungary to Latvia, have proposed or strengthened investment screening mechanisms – though for some China has not been the only, or even the primary concern (think Russia). Most prominently, the European Commission responded to a formal letter submitted in February 2017 by the ministers of economy from Germany, France and Italy by proposing an EU-wide investment screening mechanism that is now under legislative review.

But formulating a coherent response to this challenge on the European level will be difficult. Many smaller-sized European states have expressed concerns that an EU-level investment screening mechanism could be used by larger member states and/or the Commission as an instrument of influence to the benefit of some and the detriment of others.

Certain countries have also argued that the strengths of their national economies lie in their high degree of openness to investment and trade, and that measures to control the flow of goods and money will only reinforce a growing international trend towards more protectionism.

The Way Forward

In light of this complex picture, both European capitals and the EU need a more sophisticated response, seeking a proper balance between risk-management and openness. Chinese investment in Europe can be a source of jobs, growth, and even development and technological progress, but it can also be a destabilizing, strategic challenge, if not an outright threat. In this light, the following should be considered:

The openness of European economies has proven to be a source of growth, development, and prosperity, but in recent years, many countries in Europe have awakened to evolving geopolitical realities. A more fine-tuned balance between openness, security, and public order is needed. The proposal by the European Commission to establish a framework for screening FDI in the EU is a step in the right direction.

At the same time, there are clear risks of falling into a protectionist spiral. Europe should guard against using investment screening mechanisms as a means to protect broadly defined, and perhaps politically motivated “strategic sectors.” Moreover, there is a clear need to communicate and conduct outreach both within Europe and to the rest of the world on the drivers and goals of such a framework.

In dealing with China, the question of reciprocity on issues such as trade and investment has proven to be a core concern for many in Europe. A level playing field for European and Chinese firms in both markets should continue to be sought after. Indeed, the implications of a highly restricted Chinese market and a much more open European economy are significant.

There is now the risk that, if China does not open, Europe and the United States could move toward negative reciprocity, i.e., restricting access to their own markets. The debate in the United States is already moving in this direction. This would be a lose-lose situation. The ball is now in the Chinese court. Chinese President Xi Jinping solemnly declared in Davos in January 2017 that China will do its part to facilitate the next stage in globalization. The time to convert these words to reality is now.

Europe is certainly not in a position to ask China to change its state capitalist model, which has proven to be successful in many regards, including in maintaining power for the Chinese Communist Party (CCP). Yet, if Beijing is serious about deepening the “strategic partnership” with the EU at the economic and political levels, it will have to give concessions or make meaningful improvements. If it does not, the protectionist and political backlash in Europe will only increase.

In recent years we have seen the drawbacks of the lack of strategic thinking in the EU. Under the European rescue and adjustment programs, countries like Portugal or Greece were under pressure from other EU member states and institutions to privatize some of their public assets, which eventually ended up in the hands of Chinese investors. Perhaps these acquisitions were needed to open the eyes of politicians in powerful capitals such as Berlin and Paris and also in Brussels. Now is the time to deepen coordination within Europe, sharing experiences and pooling resources can help overcome many of the challenges.

Today there is a more cohesive European stance than five years ago in key areas such as granting China market economy status and the creation of a screening mechanism, though differences still remain in many other questions. In the end, Europe may have strong assets, but it can only turn these into a strong negotiating position if European capitals are willing and able to overcome their short-term calculations and define their interests more collectively.

The ability for Europe to speak with a stronger, more common voice in international affairs, and toward China in particular, can only come if there is confidence in the prospects of the European project. This means that the EU can only be strong outside if it strengthens itself from the inside.

John Seaman is Research Fellow at the French Institute of International Relations (Ifri), Miguel Otero-Iglesias is Senior Analyst at the Elcano Royal Institute, and Mikko Huotari is the Head of the program on China’s foreign relations at MERICS. All three are part of the European Think Tank Network on China (ETNC).