FDI screening set to hit SOEs

EU security, public order framework limited to 'strategic sectors' could extend to other fields

The first European Union framework to screen foreign direct investment (FDI) on security and public order grounds will likely impact negatively on Chinese investment in Europe, especially those by State-owned enterprises, according to analysts.

The European Parliament last Thursday approved the proposal first put forward by the European Commission in 2017 to collectively address FDI that poses potential risks to the EU's critical sectors. It was passed with 500 votes in favor, 49 against and 56 abstentions.

"While the EU remains open for investment, FDI needs to be vetted to limit any possible danger to the EU's strategic interests," the European Parliament said in a statement.

The critical sectors identified range from energy, transportation, communications and data to space and finance, as well as water, health, defense, media, biotechnology and food security.

The framework will allow member states and the commission to cooperate and exchange information on investments from third countries that may affect security or public order in the EU.

It also allows the European Commission to issue opinions when an investment threatens the security or public order of more than one member state, or when an investment could undermine a project or program of interest to the whole of the EU.

Several EU countries, such as Germany and France, have sounded the alarm in recent years about FDI conducted by foreign SOEs in their high-tech sectors.

Zhang Haiyan, associate professor of strategy and entrepreneurship at NEOMA Business School in France, said that while the new framework in theory targets FDI from both developing and developed countries, it was related to original concerns about rising Chinese FDI in the sectors.

"Looking at the content, this regulation is clearly an urgent, 'tailor-made' tool to target FDI from China, especially M&A deals by Chinese SOEs," he said.

Although the screening process is to be limited to so-called "strategic sectors", Zhang said the impact could also occur in other fields under more expansive notions of strategic industries, the national interest and national security because of increasing FDI protectionism or other political reasons.

"This might be a challenge for the EU regulator to keep this framework as transparent and as fair as possible in order to not turn it into a tool of FDI and trade protectionism," he said.

Ye Bin, a researcher at the Institute of European Studies under the Chinese Academy of Social Sciences, said the new framework will add a tool to the EU's trade protection tool box, and set up a wall for Chinese investment. He warned that it might risk violating the EU's rules on the free flow of capital.

"China's future FDI in the EU should pay more attention to the attitude at the EU level, especially taking into consideration the impact of China-EU political relations on micro investment projects," he said.

The legislation will hurt political trust between the two sides, making their ideological differences more felt in the economic and trade arena, he said.

The European Council is expected to approve the framework in early March. Member states and the commission will subsequently have 18 months to make the necessary arrangements for the new mechanism to operate.

So far, 14 EU countries have FDI screening mechanisms that differ widely in their scope and design.

Bernard Dewit, chairman of the Belgian-Chinese Chamber of Commerce, said that although the new regulation is not only targeting China, this will push Chinese companies to conduct deeper market research before heading to Europe with investment projects.

"There will be increased sensibility toward Chinese investments in the EU, mainly those concerning strategic sectors," he said.

For many non-strategic sectors, there would be no change in EU policy and the region remains open to Chinese investments, Dewit said. The new rules are not only targeting Chinese FDI, but also FDI from other countries such as Russia and Brazil, he said.

Dewit said that to avoid China-EU relations being significantly affected, Europe and China should cultivate a deeper understanding of each other through cultural, tourism and trade exchanges.

The structure and source of FDI to the EU have changed drastically in the last two decades, with more investment from emerging economies, according to its Parliament. Investment from China grew sixfold and investment from Brazil increased tenfold. Russian investment more than doubled during the period.

As part of efforts to facilitate ties, China and the EU have so far conducted 19 rounds of talks for a bilateral investment agreement.

chenweihua@chinadaily.com.cn

(China Daily 02/18/2019 page3)