The New Crown epidemic (a Chinese Communist virus) has dealt a blow to the global economy, and Western countries are once again realizing the importance of national strategic industrial autonomy. Beijing’s strategic ambitions could take a hit as the U.S. and Europe tighten foreign investment scrutiny and Chinese investments abroad will face stricter regulations.
For decades, Beijing has provided massive subsidies to domestic firms that have gone on a buying spree of Western manufacturing, disrupting global markets with low-priced products. Now that China has shifted its target to the upper end of the value chain, investing heavily in the acquisition of high-tech industries, the economic security of Western countries is being tested.
U.S. and European Scrutiny Ramps Up
Secretary of State John Blinken recently called on Western nations to pay close attention to the exact nature of Chinese investments in Western economies and to carefully assess their investments in strategic assets.
Blinken said that for Chinese investments in the West, one “has to be very careful about what the nature of that investment is. If it’s an investment in a strategic industry, a strategic asset, that’s something that countries need to consider carefully,” he said.
Under the Trump administration, the U.S. has expanded the review powers of the Committee on Foreign Investment and increased scrutiny of Chinese acquisitions of U.S. companies and exports of certain technologies. That trend is expected to continue under the Biden administration.
Bloomberg, citing people familiar with the matter, said the Biden administration is likely to maintain pressure on China to retain Trump-era investment restrictions on certain Chinese companies and resist Wall Street’s calls to ease them.
Buying or taking a stake in a company is one way for foreign companies to gain access to technology. The large number of Chinese companies acquiring companies involved in sensitive technologies or investing in critical infrastructure, especially since some have a Communist Party military background, has raised alarms with the U.S. government.
Julian Evans-Pritchard, senior China economic analyst at Capitol Macro, told Voice of America: “The main concerns are around national security and intellectual property and technology transfer …… Given the higher risks and costs involved, more justification is now needed before China is allowed to own U.S. assets.”
Almost simultaneously, the EU also proposed new trading rules to deal with the uncontrolled global expansion of Chinese companies. Previously, the EU did not have a similarly strict foreign investment review intervention mechanism as the United States.
The EU unveiled new proposals last week that would give the EU’s antitrust agency new powers to block foreign companies thought to be subsidized from the government from making acquisitions or securing public sector contracts in Europe. These companies would face heavy fines if they do not comply with the requirements.
If approved by EU member governments and the European Parliament, under the proposal, companies bidding for public sector contracts or certain types of M&A deals exceeding $300 million would be required to inform the authorities of the foreign subsidies they receive. Although this proposal does not mention China, large Chinese companies will be the main target.
According to Alicia Garcia Herrero, chief economist for Asia Pacific at the French foreign trade bank, Chinese companies are supported by state subsidies and enjoy an unfair market advantage in accessing advanced technology, which could weaken the European economy.
She said, “The dominance of state-owned and, more broadly, government-linked companies in the Chinese market gives them a clear advantage in expanding overseas because they can use the funds they receive in China to subsidize operations elsewhere and expand their market share.”
According to a survey by Dutch consultancy Datenna BV, Chinese state-owned or state-controlled companies have been highly or moderately involved in about 40 percent of the 650 Chinese investments in Europe since 2010, including some deals in advanced technologies.
In recent years, Chinese companies have acquired a number of leading European technology companies, such as the 2017 acquisition of German industrial robot maker Kuka AG; and China’s Northeast Industries Group’s 2015 acquisition of German automotive receiving systems company Fuba Reception System, which some reports say began producing products with military applications after the acquisition.
EU leaders are also concerned that Chinese companies will leverage government support to extend this unequal competitive advantage in the market as European governments borrow heavily to stimulate economic construction at a time when the global economy is being hampered by the new crown epidemic.
Some smaller European countries are also taking steps to discourage Chinese participation in their economies. Denmark passed legislation this month to allow for scrutiny of incoming foreign investment; Romania, Lithuania, Croatia, the Czech Republic, Slovenia and other countries are applying varying degrees of scrutiny to bids from Chinese companies.
China’s strategic ambitions thwarted
Francois Chimits, an analyst at Germany’s Mercator Center for China Studies (Merics), said the new EU bill is a milestone, with Western vigilance against Chinese investment now reaching an unprecedented level.
“The message is clear that the EU is building strength to enforce a level playing field more firmly at home,” he told Voice of America. “Fighting foreign distortions in the area of competition rules is a major conceptual and political breakthrough.”
The analysis suggests that a tougher Western stance on Chinese investment, both economically and diplomatically, would hit China’s ambitions hard. It not only strikes at Beijing’s access to advanced technology through foreign investment, but also constrains its ability to achieve more political goals through economic coercion.
Matej Šimalčík, executive director of the Center for Central European Studies, told VOA: “Coordinated action by the EU and the United States will certainly have an impact on China’s ambitions and its ability to project its influence through economic instruments. This would be a major setback for Chinese intervention in European politics, as the use and abuse of investment and trade ties is one of the most important tools in its political toolbox.”
In the long run, analyst Pritchard said, the blocked investment will make it more difficult for China to continue to increase its productivity by absorbing foreign technology and skills.
Pritchard said, “It also makes it more difficult for Chinese companies to go global as they mature, as companies in other East Asian economies such as Japan, South Korea and Taiwan have done, which is an important source of their continued economic outperformance.”
It is worth noting, however, that the degree of Western restraint on Chinese investment will also depend on the legislature’s ability to enforce it. Historically, Chinese investors have long tried to bypass national scrutiny and regulation.
Chinese companies with government backgrounds often have complex shareholding structures, and the lack of transparency of information in the Chinese market makes the ultimate ownership of control murky.
Some Chinese companies also target smaller acquisition deals with the same access to core technologies; others complete deals through their European affiliates to avoid scrutiny against foreign investment. Hidden subsidies are also difficult to measure, which may come from lower interest payments or tax burdens at home.
In the face of Western scrutiny of Chinese investment, China has accused the West of undermining the market economy, saying the aim is to contain China’s development. Chinese Communist Party Foreign Ministry spokeswoman Hua Chunying said last month, “Western powers are the main makers of WTO rules, and it is their consistent practice to maintain their own hegemony and restrict the development of developing countries.”
But in economist Alicia’s view, the West’s increased investment scrutiny is a desperate move because the source of the distortion is not in the West, but in China.
She said, “It is in everyone’s interest for China to create a level playing field between state-owned, private and foreign companies. The recent measures by the European Executive Committee are clearly the second best option.”