CHINESE INVESTMENTS IN EUROPE BARGAIN HUNT OR SALVATION FOR THE EUROPEAN ECONOMY? Wetenschappelijke verhandeling Aantal woorden: 26968

HANNES DEKEYSER Stamnummer: 00804339 Promotor: Prof. dr. Jan Orbie Copromotor: Prof. dr. Thomas Jacobs Masterproef voorgelegd voor het behalen van de graad master in de richting Politieke Wetenschappen afstudeerrichting Internationale Politiek Academiejaar: 2016 - 2017

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Inzagerecht in de masterproef (*) Ondergetekende, ……………………………………………………. geeft hierbij toelating / geen toelating (**) aan derden, niet- behorend tot de examencommissie, om zijn/haar (**) proefschrift in te zien. Datum en handtekening ………………………….. …………………………. Deze toelating geeft aan derden tevens het recht om delen uit de scriptie/ masterproef te reproduceren of te citeren, uiteraard mits correcte bronvermelding. ----------------------------------------------------------------------------------- (*) Deze ondertekende toelating wordt in zoveel exemplaren opgemaakt als het aantal exemplaren van de scriptie/masterproef die moet worden ingediend. Het blad moet ingebonden worden samen met de scriptie onmiddellijk na de kaft. (**) schrappen wat niet past

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Abstract

Deze verhandeling vangt aan bij de vaststelling dat de exponentiële stijging aan investeringsgolven uit China steeds meer aandacht krijgt op het Europese politieke toneel. Enerzijds leidt dit tot optimisme, wegens het potentieel voor economische groei en jobs, anderzijds leidt dit tot een bepaalde politieke weerstand. De toegenomen weerstand in Europa vis-à-vis investeringen uit China is een recent fenomeen waar amper onderzoek naar verricht werd. Dit wordt onderzocht op basis van een eerdere studie van Tingley et al., die vaststelt dat de kans op politieke oppositie in de Verenigde Staten tegenover fusies en overnames door Chinese bedrijven aanzienlijk toeneemt als er 1) Nationale veiligheidsbelangen, 2) Chinese staatsbedrijven, 3) Sectoren onder economische druk, 4) Asymmetrie in marktopenheid en 5) Bekende merken, in het spel zijn. Bovendien stellen zij de hypothese dat beleidsmakers geneigd zijn om nationale veiligheidsbelangen te benutten als vehikel voor het doordrukken van andere grieven (conform die laatste vier). Na een beperkte literatuurstudie omtrent de politieke consequenties voor Europa als gevolg van Chinese investeringen, volgt een complete analyse van China’s statistieken en motivaties qua investeringen. Tot slot wordt in het eerste onderdeel van de eigenlijke onderzoeksfase elk criterium van Tingley et al. geanalyseerd op een potentiële link met een toegenomen politieke oppositie in Europa. Daar komt de conclusie dat er inderdaad een toegenomen politieke bezorgdheid is in die investeringen waar er nationale veiligheidsbelangen op het stel staan, de investeerder een Chinese staatsbedrijf is, binnen sectoren onder economische druk, met slechts anekdotisch bewijs van een toegenomen politieke weerstand tegenover de overname van bekende bedrijven. In het tweede onderdeel van de onderzoeksfase wordt bekeken of Europese leiders gebruik maakten van nationale veiligheidsoverwegingen om andere grieven te kanaliseren. Daar wordt geen bewijs voor gevonden, al is er een sterk vermoeden dat bepaalde beleidsmakers die wens koesteren uit een gevoel van oneerlijkheid.

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Table of Contents

1 Problem Statement ......................................................................................................................... 6

2 Methodological Note ....................................................................................................................... 9

2.1 Research Design ...................................................................................................................... 9

2.2 Scope of this Dissertation ........................................................................................................ 9

2.3 Availability of Data ................................................................................................................ 10

3 Theoretical Framework ................................................................................................................. 11

3.1 Definitions ............................................................................................................................. 11

3.2 Political opposition to investments from China: a recent phenomenon .............................. 12

3.2.1 State of research ........................................................................................................... 12

3.2.2 Framework by Tingley et al. .......................................................................................... 13

4 Investment from China into the EU: State of Play ........................................................................ 15

4.1 Introduction to EU-China Investment Relations ................................................................... 15

4.2 Chinese Investment Figures: a deeper look .......................................................................... 17

4.2.1 Global investment figures ............................................................................................. 17

4.2.2 FDI flows and stock into the EU ..................................................................................... 18

4.2.3 Investments per member state ..................................................................................... 19

4.2.4 Investments per sector .................................................................................................. 20

4.2.5 Investments per investor ............................................................................................... 21

4.2.6 Type of investment ........................................................................................................ 22

4.2.7 Conclusions .................................................................................................................... 22

4.3 Supply side: Incentives for Chinese FDI in Europe ................................................................ 23

4.3.1 Resources & reserves .................................................................................................... 23

4.3.2 China’s going out policy ................................................................................................. 23

4.3.3 China’s Belt and Road Initiative ..................................................................................... 24

4.3.4 China’s economic restructuring ..................................................................................... 24

4.3.5 Commercial motivations ............................................................................................... 25

4.3.6 Future prospects............................................................................................................ 27

4.4 Demand side: The European Response ................................................................................. 27

4.4.1 The EU’s Chinese investment paradox .......................................................................... 27

4.4.2 A European patchwork of foreign investment regulations ........................................... 29

5 Chinese FDI into Europe: European Political Opposition? ............................................................ 32

5.1 Motives for European opposition ......................................................................................... 32

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5.1.1 Security sensitive industries .......................................................................................... 32

5.1.2 Sectors in which EU companies face restrictions in China’s M&A markets .................. 39

5.1.3 State-owned Enterprises ............................................................................................... 42

5.1.4 Economically distressed industries................................................................................ 45

5.1.5 High brand recognition .................................................................................................. 47

5.2 Did EU governments use national security considerations? ................................................. 48

6 Conclusions .................................................................................................................................... 52

6.1 Findings.................................................................................................................................. 52

6.2 Reservations .......................................................................................................................... 53

6.3 Suggestions for further research ........................................................................................... 53

7 Bibliography ................................................................................................................................... 55

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List of Abbreviations

AIIB Asian Infrastructure Investment Bank BIA Bilateral Investment Agreement BIT Bilateral Investment Treaty CAI Comprehensive Agreement on Investment CCP Chinese Communist Party CEE Central and Eastern European (countries) CFIUS Committee on Foreign Investment in the United States CFSP Common Foreign and Security Policy CGN China General Nuclear Power CJEU Court of Justice of the European Union COSCO China Ocean Shipping Company Ecofin Economic and Financial Affairs Council EIB European Investment Bank EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product IFDI Inward Foreign Direct Investment IMF International Monetary Fund IPE International Political Economy IR International Relations M&A Mergers and Acquisitions MOFA Ministry of Foreign Affairs (China) MOFCOM Ministry of Commerce (China) NDRC National Development and Reform Commission (China) OBOR One Belt, One Road OECD Organisation for Economic Co-operation and Development OFDI Outward Foreign Direct Investment PBOC People’s Bank of China PLA People’s Liberation Army (China) POE Privately-Owned Enterprise SAR Special Administrative Region SASAC State-owned Assets Supervision and Administration Commission of the State Council (China) SOE State-Owned Enterprise SPE Special Purpose Entity SRF Silk Road Fund SWF Sovereign Wealth Fund TFEU Treaty on the Functioning of the European Union UNCTAD United Nations Conference on Trade and Development

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List of Figures and Tables

Figure 1: Value of mutual Chinese and EU FDI transactions ................................................................. 15 Figure 2: EU International trade in goods with China ........................................................................... 16 Figure 3: China’s Global Outward FDI Grew above Trend in 2016 ........................................................ 18 Figure 4: China Smashes Records with Overseas Deal Spree ................................................................ 18 Figure 5: Core European economies are in the focus of Chinese investors .......................................... 19 Figure 6: Chinese FDI in the EU-28 2000-2016 ...................................................................................... 20 Figure 7: Chinese investment becoming private ................................................................................... 21 Figure 8: Chinese FDI transactions in the EU28 by entry mode, 2000-2015 (in million USD) ............... 22 Figure 9: FDI regulatory restrictiveness per country, 2015 ................................................................... 49

Table 1: Five categories of Chinese multinationals’ foreign investment motivations. Based on Deng (2004) with additions. ........................................................................................................................... 26 Table 2:FDI security-related screening procedures at Member-State level ......................................... 30

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1 Problem Statement

In times of global political and socio-economic uncertainty, symbolised by a sovereign debt crisis and eurocrisis in the West, followed by a surge in populism, a Brexit referendum, political turmoil close to Europe’s eastern and southern borders, and the election of Donald Trump in the United States, the European Union realises more than ever that the heyday of an American-led world order, dominated by the West, may soon be counted as history. “We Europeans truly have to take our fate into our own hands — naturally in friendship with the United States of America, in friendship with Great Britain, as good neighbors with whoever, also with Russia and other countries”, German chancellor Merkel said in a momentous speech at an election rally in Munich (Paravicini, 2017).

One of those increasingly important “other countries”, with whom the EU has established a strategic partnership since 2003, is the People’s Republic of China. The EU-China relationship is based on three pillars1, which are underpinning the yearly EU-China Summit (EEAS, 2013). Furthermore, a myriad of political and technical dialogues, working groups and platforms, covering topics from climate change, innovation and tourism, to space technology, youth and education, were gradually created over time, to become the highly institutionalised and comprehensive relationship that it is today.2

Nevertheless, the cooperation between the EU and China is in essence still based on trade, investments and technology. Since China’s opening-up in 1978, Brussels gained more interest to expand the relations with Beijing. This eventually lead to the conclusion of a Trade and Cooperation Agreement in 1985, which is still their formal basis of cooperation (Muenchow-Pohl, 2012). The European Union has become China’s largest trading partner, whereas China has become the EU’s second largest trading partner after the United States. Bilateral trade between the EU and China already exceeds EUR 1.5 billion every single day (Hansakul & Levinger, 2014, p. 2; Juncker, 2017), and besides high profile issues such as human rights and climate change, the most contentious topics of debate between China and the EU are related to economic affairs. Some noteworthy issues are for instance China’s Market Economy Status and anti-dumping or anti-subsidy practices (Barone, 2015; Yalcin, Felbermayr, & Sandkamp, 2016), China’s overcapacity in sectors such as cement and steel (European Union Chamber of Commerce in China, 2016), and the EU’s massive trade deficit with China, currently estimated a rough EUR 180 billion (European Commission, 2017b; Eurostat, 2016; Hansakul & Levinger, 2014, p. 2).3

On top of that, mutual investment flows between China and the EU have increasingly come to the forefront of their relationship. In terms of FDI stock, Europe is arguably the biggest investor in China (Hansakul & Levinger, 2014, p. 11; Hellström, 2016, p. 32), and many European firms have a well-established presence in China since years, incentivized by cheap labour, cost-efficient production and the proximity of a rapidly growing consumer market. The delocalisation of production or assembly facilities by European enterprises has become a familiar phenomenon, induced by globalized and increasingly complex supply chains.

A more recent development, however, is China’s rapid emergence as a net exporter of capital, turning the country from a marginal player to one of the largest exporters of capital worldwide, accounting for about 10% of global FDI flows (Hanemann & Huotari, 2016, p. 2; Hellström, 2016, p. 11). This is no surprise, as it is consistent with China’s emergence as an economic - but also political and military - powerhouse. The growing share of investment flows from non-developed countries echoes a “global rebalancing of economic power” (Veron & Hendrik-Roller, 2008), which could be seen as part of an ongoing shift towards

1 The annual high-level strategic dialogue, the annual high-level economic and trade dialogue, and the bi-annual people-to-people dialogue 2 See Annex 1 for the architecture of the EU-China partnership 3 It should however be noted that there are large differences and fault lines between EU member states with regards to their trade balance with China, and their positions on EU anti-dumping regulations towards China. This is not further elaborated upon as it would be beyond the scope of this dissertation.

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a multipolar world order. According to Summers (2014) is China increasingly assertive on the global scene in defending its geostrategic interests, but also through economic infrastructure projects such as its Belt and Road Initiative (BRI), and the establishment of an Asian Infrastructure Investment Bank (AIIB). Chinese president Xi Jinping’s latest speech in Davos was for many observers a sign that Beijing is serious about its ambition to play a greater global role. As former Swedish Prime Minister Carl Bildt stated on Twitter: "There is a vacuum when it comes to global economic leadership, and Xi Jinping is clearly aiming to fill it. With some success" (Barkin & Piper, 2017).

Europe has become a highly desired destination for Chinese investment, especially over the past three years, when the EU became the largest market for Chinese acquisitions in terms of value (Hellström, 2016, p. 13). Indeed, Chinese investment in Europe has grown exponentially. As Hanemann & Huotari (2016) conclude in their paper A new record year for Chinese outbound investment in Europe, “In the past five years, annual Chinese FDI in the EU averaged more than EUR 10 billion, compared to around EUR 1 billion annually in the previous five years” (Hanemann & Huotari, 2016, p. 3). The latest data even suggested a staggering 77% increase of Chinese FDI in the EU in 2016, compared to the year before (Hanemann & Huotari, 2017). Economically seen, the influx of Chinese capital into Europe could offer great opportunities to EU-countries after the eurocrisis, such as an increase in employment, productivity, tax revenues, investment in R&D and so forth (Forchielli, 2015, p. 2; Meunier, 2014a; Okano-Heijmans & van der Putten, 2011, p. 12; Röller & Véron, 2008). European leaders are aware of those opportunities, which has even lead to a competition between EU member states to attract investments from China (Forchielli, 2015, p. 2; Okano-Heijmans & van der Putten, 2011, p. 10).

However, notwithstanding the ostensible benefits Europe could gain from the inflow of Chinese capital, recent mergers and acquisitions by Chinese enterprises have sparked a wave of controversy in Europe. A growing number of voices have pointed to several caveats of what they call a “scramble for Europe” (Godement, Parello-Plesner, & Richard, 2011), fearing harmful effects to their national or economic security, and to the EU’s collective bargaining power vis-à-vis China (Hanemann & Huotari, 2016, pp. 2–3; Meunier, 2014a). Intuitively, it seems somehow paradoxical that those same European governments who are courting Beijing to attract capital are increasingly criticizing Chinese investment, in particular with respect to a number of notable cases that have drawn a growing media coverage.4

European governments’ growing scrutiny of foreign investments for national security concerns is no isolated development. According to UNCTAD (2016), there is a global trend in which national security considerations are an increasingly important factor in investment policies (UNCTAD, 2016, pp. 94–100). The same report furthermore notices a large variety and flexibility in how governments define national security, allowing them to take into account economic interests in the investment screening process. Indeed, some countries prefer a broad definition of national security, creating ambiguity and leaving political actors with the ability to block foreign investment in the name of national security, even if there is only an obscure link between the target firm and any tangible threat (Tingley, Xu, Chilton, & Milner, 2015, p. 33). This lack of predictability, typical for investment limitations based on national security concerns, leaves room for investment protectionism (UNCTAD, 2016, p. 94). This issue was raised by Hanemann & Huotari (2017), who recently warned that the substantial increase of media coverage on Chinese acquisitions incentivizes politicians to politicize transactions, strengthening “the probability of populist kneejerk reactions to Chinese deals” (Hanemann & Huotari, 2017). The potential for a populist backlash against Chinese investments could even be exacerbated by the negative popular image China has

4 To name a number of investment cases that attracted massive attention by the media and the public: the blocked acquisition of German technology firm Aixtron by Fujian Grand Chip Investment Fund (Chazan, 2016b), the blocked purchase of minority shares by State Grid Europe Limited in Eandis, an energy distributor in Flanders (Arnoudt, 2016; Kelepouris, 2016; Segers, 2016), the successful acquisition of German robotics maker Kuka by China’s Midea (Rattay, 2016), and the controversy surrounding the Hinkley Point nuclear plant in the UK, which is financed for 33% by the state-owned China General Nuclear Corporation (Jack, 2016; Ruddick, 2016)

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in Europe, with favourability rates at their ever-lowest point in several EU-countries (Pew Research Center, 2016) and a declining acceptance of Chinese acquisitions in Europe (Hellström, 2016, p. 23).

The national security concerns by several EU member states towards foreign investments must certainly be addressed by governments in Europe. However, as the literature indicates, those same national security considerations may as well be used as a pretext for different political objectives. This is an opportune risk to take into account, exemplified by for instance the OECD’s warning for a global wave of trade tensions and protectionism, with potentially detrimental effects for economic growth (Allen, 2016). As one of the only scholars so far, Tingley et al. (2015) investigated US opposition to mergers and acquisitions from China, providing evidence that political opposition to mergers and acquisitions from China is more likely when there are national security considerations, reciprocity concerns, a situation of economic distress in the particular industry, investments by state-owned enterprises, or acquisitions of famous brands (Tingley et al., 2015). Furthermore, they formulate the hypothesis that national security concerns may function as a “vehicle through which to express other grievances” (Tingley et al., 2015). Until now, no specific research has been undertaken to make a similar examination with regards to the political opposition versus Chinese investments into the European Union, although it may be a timely idea to do so, given the exponentially growing investment flows from China into the EU over the last few years. Tingley et al. (2015) suggested some related ideas for further research, asking if “US political opposition to Chinese inward M&A [is] unique and dependent on the particular political economy of the US, or [if it is] generally representative of developed countries' reactions to Chinese investments?” (Tingley et al., 2015).

Continuing on these suggestions, this dissertation envisages to provide an exploratory analysis of the political opposition in the EU and its member states to the recent surge in investments from China, based on the following research questions:

- Are the five concepts, likely to increase political opposition to Chinese M&A attempts in the US, as defined by Tingley et al. (2015) present in the political opposition to Chinese investment in the EU?

- Have EU governments invoked national security considerations through which to express these grievances?

This should furthermore provide further insight into the popular question whether investment from China is perceived as a mere bargain hunt, in which China is exploiting Europe and its weaknesses for commercial and political purposes, or if it could provide a salvatio to the European economy.

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2 Methodological Note

2.1 RESEARCH DESIGN

The large increase of Chinese FDI into the EU has led to a heated debate amongst policy makers, scholars and in the public sphere. Whereas the majority of papers and reports focuses on the figures, motives and nature of Chinese investment flows5, only little attention has been paid to the political reactions they create, and which root causes may be at the basis of political opposition against those investments, or as stated by Meunier (2014): “A relatively new and much less studied or understood face of China’s global economic rise is the explosion of Chinese foreign direct investment and the evolving political responses this explosion has provoked.” This is a particularly interesting phenomenon to look into, especially since a better understanding of eventual political grievances is a prerequisite to help alleviate any concerns. Furthermore, it is particularly important since Tingley et al. (2015) have developed a hypothesis that policymakers may make use of national security screenings for investments as a vehicle through which to express those other grievances, which could open the way to a downwards spiral of protectionism.

The eventual objective of this dissertation is to undertake an analysis of the five aspects which, according to Tingley et al. are likely to increase political opposition to M&As from China, in order to find out to which extent they are also present in the European political opposition to Chinese investment. This is done through an inductive exploratory research process, by consulting a set of academic journal articles, think tank reports, primary sources and more than 60 collected media articles. During this research process, particular attention was paid to any European political opposition related to each of the five aspects defined by Tingley et al. (2015). This research methodology seemed the best possible option to acquire sufficient qualitative and quantitative information about European opposition against Chinese investments, since it was practically unfeasible to imitate the approach of Tingley et al. (2015), who created a dataset of 569 M&A transactions.

Chapter 3 will provide the necessary theoretical framework, including the definitions that will be used, the state of play concerning the academic research on political responses in Europe to investments from China, and an elaboration on the five concepts that were defined by Tingley et al. If one wants to comprehend the opposition against investments from China, it is indispensable to have a thorough understanding of the specific dynamics at play. Therefore, chapter 4 provides a breakdown of the available data, including an analysis on Chinese enterprises’ incentives to invest in Europe (supply-side) and the European response those investments invoked (demand-side). Chapter 5 is the most essential part of this dissertation, as it includes the eventual analysis of political opposition to Chinese investments in Europe.

2.2 SCOPE OF THIS DISSERTATION

The level of analysis will focus on both EU-China relations and on the political relations between EU member states and China (without considering public perceptions). Although this is a wide scope, making it hardly possible to be comprehensive, this is inevitable due to the fact that the very topic of research involves an area of multi-level governance. Since the 2009 Lisbon treaty, FDI has become an exclusive competence of the EU’s common commercial policy (Meunier, 2014a). Therefore, any future bilateral investment agreement will be negotiated between Brussels and Beijing. However, most EU member states

5 By for instance quantitative analyses of the available data of Chinese FDI into EU member states; questioning the commercial, economic and political reasons for Chinese enterprises to invest; discussing the political state of play in the EU with regards to FDI from China; discussing the issue of Chinese state-owned enterprises investing into the EU…

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still have bilateral investment agreements in force with China, awaiting further progress in the EU-China BIA negotiations. Moreover, national security, which is a crucial matter of concern in this dissertation, is notwithstanding the EU Common Foreign and Security Policy (CFSP) an exclusive member state competence.

It does not attempt to be comprehensive, and will provide no extensive analysis of all EU member states and their investment relations with China, nor any conclusive analysis or evidence based on self-collected data sets as in Tingley et al. (2015), which would be beyond the scope of this paper considering time and budget constraints. Moreover, this paper is written from a perspective of (international) political science, occasionally using IPE-concepts. Although the research topic is closely related to economic science, it does not include any econometric analysis, nor any research in microeconomic implications of Chinese investments into the EU.

2.3 AVAILABILITY OF DATA

This dissertation makes use of a variety of qualitative and quantitative data. Qualitative data include the consulted articles from academic journals, and a collection of more than 60 high-quality newspaper articles and media, combined with publicly available primary sources from EU-institutions and multilateral organisations such as the OECD or UNCTAD. Eurostat-data on FDI were hard to use, since they are recorded based on a different benchmark since 2013, resulting in potentially distorted figures. Furthermore, Eurostat does not take the eventual destination of an investment into account, which can give distorted data due to the presence of tax havens, such as Luxembourg, who are not necessarily the final recipient of investment flows. MOFCOM-data, on the other hand, have a limited credibility and reliability and are widely criticised (Hanemann & Huotari, 2015, pp. 12–13). Data-providers such as Bloomberg or Dealogic collect their own - generally very credible – sets of transactions, but they do not offer free access to their datasets. The American Enterprise Institute & Heritage Foundation has a free China Investment Tracker, with the flaw that it only collects transactions over USD 100 million, which is not necessarily representative of total FDI figures. Therefore, we opt for the figures from MERICS and Rhodium-group, which are widely used and valued in the academic field on Chinese FDI to Europe.

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3 Theoretical Framework

3.1 DEFINITIONS

The definition and use of clear and unambiguous concepts is quintessential to avoid any confusion when interpreting the narrative and conclusions of this dissertation.

When referring to China, Beijing or the PRC, we refer to the People’s Republic of China, and not to the Republic of China or Taipei China, also known as Taiwan. A special case with regard to FDI analyses in China is the position of special administrative regions such as Hong Kong SAR and Macau SAR. Although both regions fall under the sovereignty of the People’s Republic of China, they are often included as separate entities in datasets, charts and studies. Due to the fact that Hong Kong and Macau are financial hubs that serve as special purpose entities (SPEs), which could result in a distorted representation of real FDI figures, we will exclusively discuss mainland China for data analysis, unless otherwise stated. For the discussion of geopolitical relations, we refer to greater China, including its SARs.

When referring to Europe, Brussels or the EU, we allude to the European Union, unless otherwise stated. Although it is obvious that Europe as a continent differs from the European Union as a political institution, they shall be used as synonyms for oratory purposes.

When discussing investment from China, it should be clarified that the term “investment” is an umbrella concept, encompassing different types of investments. One of the most familiar concepts, often discussed with regard to cross-border investment flows, is foreign direct investment (FDI). This dissertation paper will use the OECD benchmark definition of FDI because of its wide recognition and use by organisations such as UNCTAD, IMF and other international institutions:

“Direct investment is a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long-term relationship with the direct investment enterprise to ensure a significant degree of influence by the direct investor in the management of the direct investment enterprise. The “lasting interest” is evidenced when the direct investor owns at least 10% of the voting power of the direct investment enterprise. Direct investment may also allow the direct investor to gain access to the economy of the direct investment enterprise which it might otherwise be unable to do. The objectives of direct investment are different from those of portfolio investment whereby investors do not generally expect to influence the management of the enterprise” (OECD, 2008)

Moreover, within FDI, a distinction can be made according to the purpose of direct investment, between:

i. purchase/sale of existing equity in the form of mergers and acquisitions (M&A); ii. greenfield investments;

iii. extension of capital (additional new investments); iv. financial restructuring

“While M&A transactions imply the purchase or sale of existing equity, greenfield investments refer to altogether new investments (ex nihilo investments). Extension of capital relates to additional new investments as an expansion of an established business; conceptually and in terms of economic impact, it is similar to greenfield investments. Financial restructuring refers to investment for debt repayment or loss reduction. Direct investment will have, all other aspects being equal, a different impact, in particular, on the “host” economy depending on the type of FDI.

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It is generally considered that cross-border investments in the form of M&As will not involve significant changes in the performance of economic variables such as production, employment, turnover, etc., unless the acquired enterprise is subject to significant restructuring. On the other hand, new investments [such as] greenfield investments and extension of capital, are likely to add new dimensions to the economic performance of the host economy and to the earnings of the direct investor” (OECD, 2008, pp. 86–87)

When analysing FDI data, one should furthermore keep in mind that there is a distinction between FDI flows, which record the value of direct investment transactions during a given period of time (such as a quarter or year), and FDI stock, which is the aggregate level of all inward or outward direct investment since a starting point in the past.6

Other investment concepts that may be relevant for the purposes of this paper are portfolio investment and government bonds. Portfolio investment, such as equity and debt securities, is an often liquid form of investment which can be bought and sold, and in which the direct investment enterprise acquires less than 10% of the voting power, not requiring that investor to get involved in management.7 Government bonds are often referred to as loans from investors to a government, which are issued around the world to raise money. Until the bond matures and governments pay back the money loaned, a fixed rate is paid to the buyer at fixed time intervals (Treanor & Allen, 2016). Contrary to direct investment however, portfolio investment and government bonds often happen through intermediaries, making them difficult to be mapped (Okano-Heijmans & van der Putten, 2011, p. 9).

3.2 POLITICAL OPPOSITION TO INVESTMENTS FROM CHINA: A RECENT PHENOMENON

3.2.1 State of research

China’s so-called shopping spree is a rather recent phenomenon. Investments from China came to the fore in 2008, when the political machine in Brussels was in the midst of a debate on the role of Sovereign Wealth Funds (SWFs) from emerging countries, such as China Investment Corporation (Veron & Hendrik-Roller, 2008). From then on, the issue of Chinese investments flared up several times in the public debate, but it is only since 2014, when Chinese FDI into Europe overtook investment flows in the opposite direction, that Chinese investment gained a prominent place in the political spectrum. It has recently led to a growing controversy and corresponding political opposition in Europe, which is a new dynamic that gained little academic attention before. It therefore goes without saying that this is a relatively new and unexplored field, with only few related publications today.

Meunier, Burgoon & Jacoby (2014) conclude in a first, introductory paper on the politics of hosting Chinese FDI in Europe, that the rapidly increasing investment in Europe has resulted in perceptions that Chinese companies are buying up the world. Amidst these perceptions, the potential of hosting investment from China is viewed in Europe with ambiguity, as it represents opportunities as well as threats. On the one hand, European politicians may be expected to welcome Chinese FDI as a source for much-needed jobs and economic recovery, whereas on the other hand those same politicians may be expected to fear Chinese FDI for the potential loss of sovereignty due to the possibility of conditional strings attached, especially given China’s authoritarian capitalism. They furthermore conclude that the increasing Chinese presence on European markets is creating some fears among government elites and publics, and therefore expect a

6 Source: https://data.oecd.org/fdi/fdi-flows.htm#indicator-chart and https://data.oecd.org/fdi/fdi-stocks.htm#indicator-chart 7 Source: https://stats.oecd.org/glossary/detail.asp?ID=2092

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number of high-visibility investment attempts to attract negative attention, provoking a public backlash, in particular if Chinese investors acquire national icons or treasured assets. Although Europe has witnessed incoming investment flows with related political fears in the past (such as the coca-colonization by American multinationals from the 1960s onwards, or the explosion of OFDI from Japan in the 1980s), the influx of Chinese FDI may be different for several reasons. First, Europe has rarely witnessed any substantial FDI from a developing to a developed region, and is “more accustomed to investing in emerging, problematic economies than being treated like one of them”, which may result in existential political problems. Second, the communist nature of China’s political regime and the strong state interference in an enterprise’s investment decisions is a new element compared to previous investment flows into Europe, which may bring along some economic tensions. Third, geopolitics matter, and China’s position as a non-ally could pose some national security considerations because of risks of espionage or technologies being transferred to the People’s Liberation Army (PLA). However, despite the mentioned concerns, European politicians have, contrary to their American colleagues, refrained from China-scapegoating to score points in domestic politics. The variation in how European political actors respond to the substantial growth in Chinese OFDO into Europe even “suggests that the European politics of Chinese investment deserve substantial analysis” (Meunier, Burgoon, & Jacoby, 2014).

A second publication by Meunier (2014) analyses whether the boom in Chinese FDI to Europe is a good bargain (where both investor and investee benefit) or instead a Faustian bargain (where capital is accompanied by implicit conditionality affecting European norms and policies). The paper concludes that first, Chinese FDI in Europe has the potential to be used as a tool for China to achieve foreign policy goals through implicit or explicit conditionalities, which is probable because of the Chinese government’s considerable influence over its companies’ decision to invest abroad. Second, Chinese FDI could have an impact on domestic policies in the EU, for instance through a regulatory race to the bottom on environmental or labour standards. Third, Chinese FDI in Europe may affect the policies between European countries, and in particular the process of European integration with respect to investment policy through a divide and rule-strategy. The paper ends with a suggestion that “future research on the implications of Chinese investment should look for domestic political debates in Europe about China as a national security threat (Meunier, 2014a)”.

Other authors write about the regulatory challenges for the EU competition policy and the merger regulation posed by growing Chinese OFDI (Zhang & Van Den Bulcke, 2014), the eventual need of a common European approach to address security aspects of foreign acquisitions (Veron & Hendrik-Roller, 2008), the different impact of Chinese FDI among EU member states’ positions in the global value chain (Defraigne, 2017), the impact of Chinese FDI on European labour (Burgoon & Raess, 2014), the consequences of China’s growing FDI for the EU’s investment rules (Meunier, 2014b) or the potential for generating greater mutual EU-China FDI flows (Clegg & Voss, 2016). A second source of papers are the regular and highly qualitative reports which track the ongoing developments, patterns, figures and policy implications of Chinese FDI in Europe (European Chamber, 2013; Hanemann & Huotari, 2015, 2016, 2017; Hanemann & Rosen, 2012). All these publications were fully consulted and shall be cited in the next chapters of this thesis. However, their main themes have less affinity with the core topic of political opposition in Europe to Chinese investments, and a further elaboration on their research outcomes would significantly reduce the remaining available space for the rest of this essay.

3.2.2 Framework by Tingley et al.

China’s outbound investment boom is a very recent phenomenon, and it is still ongoing. This has the advantage that this essay shall be able to respond to unfolding political developments, which is a challenging and encouraging endeavour to undertake. However, it also entails the disadvantage that the

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limited number of publications and prior research barely provide any theoretical context to initiate further research. However, the previous and pioneering research by Tingley et al. (2015) may bring solace. As one of the only scholars so far, they have conducted extensive research to the political opposition to Chinese mergers and acquisitions based on a dataset of 569 transactions, arguing that until then, little research had been undertaken to the factors that determine domestic opposition to inward FDI.

Even though the legal basis to block foreign M&As in the US only allows this out of national security considerations, the study finds that US political actors are more likely to oppose Chinese M&As:

- In security sensitive industries - In sectors where US companies faced similar investment restrictions in China - By state-owned enterprises - In economically distressed industries - Of target firms with a high brand recognition

Furthermore, the study ends with the question whether “US political opposition to Chinese inward M&A [is] unique and dependent on the particular political economy of the US, or [if it is] generally representative of developed countries' reactions to Chinese investments?” (Tingley et al., 2015)

This dissertation will make use of the abovementioned five criteria as a basis for further research into the political opposition in Europe towards investments from China, in order to make a qualitative assessment per criterion, and the eventual political opposition it generates versus Chinese investments in the EU.

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4 Investment from China into the EU: State of Play

4.1 INTRODUCTION TO EU-CHINA INVESTMENT RELATIONS

Over the past decades, investment flows between Europe and China mainly flowed from west to east. In terms of aggregates, the EU holds EUR 167.9 bn or 2.4% or of its OFDI stock in China8, which totals 18% of China’s inwards FDI stock, making the European Union the biggest investor in China (Eurostat, 2015; Hansakul & Levinger, 2014, p. 11; Hellström, 2016, p. 30). The top five EU source countries for China in terms of FDI stock are Germany (EUR 38.5 bn), France (EUR 16.5 bn), Italy (EUR 10.6 bn), the UK (EUR 8.7 bn) and the Netherlands (EUR 6.7 bn) (Hansakul & Levinger, 2014, p. 11). European firms’ eagerness to invest in China was driven by the prospects of cost-efficient production opportunities, low labour costs and access to the world’s fastest growing consumer market. The EU’s investment position in China even increased after the financial crisis as a consequence of a large-scale stimulus package by the Chinese government at times of sluggish or even declining growth rates in Europe (Hansakul & Levinger, 2014, p. 11). There were some concerns that rising labour costs in China could shift European FDI to other destinations such as southeast Asia, but so far, relocation took place within China towards inland provinces (UNCTAD, 2016, p. 45). More recently, European companies have, according to Hanemann & Huotari (2017) become hesitant to invest in China due to China’s slower economic growth, overcapacities in certain industries, lower margins in the Chinese market and formal and informal market access barriers for foreign companies in China (Hanemann & Huotari, 2017, p. 5).

China’s FDI stock in the EU28 is valued at EUR 34.9 bn, accounting for a mere 0.6% of total inward FDI stocks in the EU (Eurostat, 2015). This is a rather low figure compared to for instance the US, which accounts for EUR 2380.9 billion or a share of 41.4% of total inward FDI stocks in the EU (Eurostat, 2015). Although this may seem somewhat surprising considering the large media attention in Europe for Chinese investments over the past three years, one finds a different picture when looking at yearly FDI flows instead of total FDI stocks. Chinese FDI flows into the EU have boomed since 2013, overtaking the decreasing EU FDI flows in China, as illustrated by figure 1.

Figure 1: Value of mutual Chinese and EU FDI transactions9

8 Source: Eurostat, 2015. (http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Top_10_countries_as_extra_EU-28_partners_for_FDI_stocks,_EU-28,_end_2012%E2%80%932015_(billion_EUR)_YB17.png) 9 We here opt for the data and graphics compiled by MERICS and Rhodium Group, as Eurostat aggregate FDI data are only available until 2012, whereas data since 2013 are based on new methodological standards, thereby “making statistics from 2013 onwards not directly comparable with those from previous years” (Eurostat, 2017).

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As part of this trend, the European Union has emerged as a favourite destination for Chinese investors, with a 77% increase of completed OFDI transactions in 2016 compared to the year before, valuing EUR 35 billion (Hanemann & Huotari, 2017). This coincides with the aforementioned declining FDI figures by European companies in China, creating a growing imbalance in mutual FDI-flows (Hanemann & Huotari, 2016, 2017). It is exactly this imbalance which has led to concerns about related economic risks in Europe. According to many observers, the declining OFDI figures from Europe to China are caused by asymmetric market access conditions, whereby European investors in China are disadvantaged or restricted to certain sectors that are open for Chinese investors in the EU (Hanemann & Huotari, 2017). As a matter of fact, this particular asymmetry or “lack of reciprocity” has been a frustration by EU industrial associations and EU politicians for several years and is regularly raised by the European Union Chamber of Commerce in China, which continuously encourages Beijing to open its markets to European investors (European Chamber, 2016).

Figure 2: EU International trade in goods with China10

One should furthermore take into account that the recent imbalance in mutual FDI flows adds to the EU’s long-standing deficit of trade in goods with China (see figure 2), which has been an irritant for Brussels since several years (Hansakul & Levinger, 2014, p. 2).11 Although this is no major issue from a macroeconomic point of view (Krugman, 1994)12, it is suspected in Europe that China is manipulating trade through for instance industrial policies, non-tariff measures, subsidies and a strong government intervention in the economy (giving state-owned firms a dominant position), resulting in overcapacities and dumping practices on the European market. The resulting lack of a level playing field for European companies, which is continuously monitored and indicted by industry interest groups in Brussels13, has become a highly politicized matter and regularly appears at the top of the agenda of high level meetings between Chinese and European officials.14 This salient issue even gained a prominent place in the Commission’s “Elements for a New Strategy on China” (European Commission, 2016).

10 Source: Eurostat, 2016. (http://ec.europa.eu/eurostat/documents/2995521/7553974/6-12072016-BP-EN.pdf/67bbb626-d55f-4032-8c24-48e4c9f78c3a) 11 One should however not overlook the EU’s surplus of trade in services with China. Source: Eurostat, European Commission, 2017 - (European Commission, 2017b) 12 The European Commission also mentions on its website that the EU’s trade deficit with China is compensated by exports to other destinations, resulting in an overall positive EU trade balance (European Commission, 2017a) 13 Take for instance the European Chamber of Commerce in China or AEGIS Europe, an industry alliance which brings together nearly 30 European associations from industries such as steel, bicycles, aluminium, fertilisers and so forth (AEGIS Europe, 2015) 14 A high profile case causing commotion in 2016 was the 11 December expiry of a provision in article 15 of China’s WTO accession protocol, which, according to China, would imply that the EU would have to stop using the analogue country methodology when calculating the anti-dumping margin in dumping cases with China. This resulted in a nervous and sometimes even emotional debate in the European

-400

-200

0

200

400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EU international trade in goods with China(in € billion)

Exports Imports Trade balance

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In 2013, the EU and China announced their desire to start the negotiations of a bilateral investment treaty (BIT)15, which could build trust, open markets, ensure investment protection and provide a predictable legal framework in the long term (Forchielli, 2015, pp. 1–3; Hansakul & Levinger, 2014, p. 11).16 The investment treaty is, as a matter of fact, the EU’s first opportunity to exert its new exclusive competence over FDI in a standalone investment agreement (Meunier, 2014a). The negotiations started in 2014 and are still ongoing at the time of writing this dissertation. The EU attaches great importance to the conclusion of a BIT with China, illustrated by the fact that it is mentioned as a top priority in the European Commission’s proposed new EU trade and investment strategy, launched in 2015 (European Union, 2015; Hellström, 2016, p. 31).

Despite the fact that China’s FDI stock in the EU is a mere 0.6% of the EU’s total inward FDI stock, the exponentially growing investment flows and a resulting asymmetry with investment flows from Europe to China have caused political consternation. This should be seen in the context of wider economic and political relations between the EU and China, in which their trade relations and related concerns have gained a prominent place on the political agenda.

The aggregate data of Chinese investment flows into the EU however only provide a general picture. In order to gain a better understanding of this dynamic, the next chapter will look deeper into a breakdown of Chinese investment figures.

4.2 CHINESE INVESTMENT FIGURES: A DEEPER LOOK

4.2.1 Global investment figures

In less than a decade, China has emerged as one of the world’s largest exporters of FDI flows, following an exponential growth which reached about USD 220 bn in 2016, accounting for close to 11% of global FDI flows, as illustrated by figure 3 (Hanemann & Huotari, 2016, 2017). It is furthermore remarkable that in 2016, Europe and North America appeared as major host regions for mergers and acquisitions by Chinese enterprises (see figure 4). China’s so-called “shopping spree” was as a result widely covered by press and media in the west, including widely renowned press agencies such as the Financial Times and Bloomberg (Campbell, Browning, & Kirchfeld, 2016).

Institutions and between different stakeholders, on the EU’s trade defence instruments and the question whether or not China should be granted market economy status (Barone, 2015). 15 In more recent communications, the treaty is called a Comprehensive Agreement for Investment (CAI) 16 As mentioned before, all EU member states (except for Ireland) already have a BIT in place with China. Although these BITs focus on investment protection, they have no provisions on the requirements for and restrictions on market access (Hellström, 2016, p. 31)

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Figure 3: China’s Global Outward FDI Grew above Trend in 2016

Figure 4: China Smashes Records with Overseas Deal Spree17

4.2.2 FDI flows and stock into the EU

As stated before, Europe has emerged as a major destination for Chinese OFDI in the last three years (see figure 1). In 2016, Chinese enterprises invested not less than EUR 35 billion in the EU, which is an increase of 77% compared to the year before (Hanemann & Huotari, 2017, p. 4). However, the massive investment flows from China should be put into context, since the FDI stock from China into the EU is a mere 0.6% of the EU’s total IFDI stock. China’s FDI into the EU is increasing rapidly, but it has started from a very low base compared to the investment figures of for instance the US into Europe (Hellström, 2016, p. 12). Despite the emergence of the EU as a desired destination for mergers and acquisitions, the share of the EU in total Chinese OFDI is still marginal, with a lot of potential for more investment waves in the future (Forchielli, 2015, p. 1; Hellström, 2016, p. 4; Okano-Heijmans & van der Putten, 2011, p. 9). According to China’s Ministry of Commerce (MOFCOM) for instance, only 5.5% of Chinese OFDI flowed to Europe (including Russia) in 2013, which brought China’s OFDI stocks in Europe at the time to a total of a mere 8% of China’s accumulated overseas investments (Hellström, 2016, p. 14).

17 Retrieved from https://www.bloomberg.com/news/articles/2016-10-23/china-s-art-of-the-deal-how-m-a-pariahs-became-global-players (Campbell, Browning, & Kirchfeld, 2016)

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4.2.3 Investments per member state

The official aggregate data on Chinese FDI into the EU provided by Eurostat offer a macro-level perspective, but it does not provide a breakdown per member state. This is nevertheless an interesting variable to look into, since the issue of national security considerations of foreign investments is a national competence, whereas FDI an sich is an exclusive EU-level competence on which the member states have an impact through the Ecofin council formation (Council of the European Union, 2017).

The lack of detailed official data on EU member states’ IFDI from China is compensated by the research and datasets of institutions such as Rhodium Group, which collaborates with the German think tank MERICS for regular publications on FDI from China. Based on the Rhodium Group-data, it is clear that there is a strong disparity between EU member states when it comes to FDI from China. Generally speaking, Chinese investors have mainly focused on what is called the “Big Three” European economies, which are Germany, the UK and France (Hanemann & Huotari, 2017, p. 6; Hansakul & Levinger, 2014, p. 12).

Figure 5: Core European economies are in the focus of Chinese investors

In 2015, five EU member states accounted for three quarters of the Chinese FDI flow into Europe, namely Italy, France, the UK, the Netherlands and Germany (Hellström, 2016, p. 16). A particularly interesting development that year was the strong increase of FDI to southern European countries, which can largely be attributed to the EUR 7.1 billion takeover of Pirelli by ChemChina (Arosio & Masoni, 2015; Hanemann & Huotari, 2016). In 2016, Chinese investors again focused on the Big Three, with Germany valuing EUR 11 bn and the United Kingdom EUR 7.8 bn, together counting for 53% of the total investment value that year (Hanemann & Huotari, 2017, p. 6). However, southern Europe remained an interesting destination for Chinese FDI, with for instance the notorious investment in the Greek Piraeus port by COSCO. Furthermore, 2016 was characterised by an increased interest in northern Europe, mainly due to Tencent’s EUR 6.7 bn takeover of Finland’s Supercell gaming company (Hanemann & Huotari, 2017, p. 6). Investment in eastern Europe remains quite limited, despite OBOR-related investment promises by Beijing and the institutionalised meetings between CEE-countries and China under the 16+1 platform (Hanemann & Huotari, 2017, p. 6).

On the one hand, one should be careful to avoid interpreting yearly investment patterns as wider long-term trends. Figure 5 demonstrates a high volatility in FDI inflows from China among regions in Europe. As stated before, the yearly investment data for a country can be distorted by a single massive acquisition which is not necessarily going to repeat itself for the years to come. On the other hand, data on the

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cumulative Chinese FDI stocks in EU member states does give a clear indication of the disparities among EU countries, illustrated by figure 6. As stated before, mainly the Big Three have collected large investment stocks from China between 2000-2016, with Germany attracting the largest number of deals, whereas the UK is leading when it comes to the total investment amount (Hansakul & Levinger, 2014, p. 13). Also northern-European and Benelux countries have attracted considerable shares of FDI, especially when one takes their relatively low population into account compared to the Big Three. Over the past years, southern European countries, in particular Italy, increasingly emerged as a destination for Chinese FDI, whereas CEE-countries are lagging behind their EU-peers, despite their eagerness for investments from China. Generally speaking, eastern and southern Europe are considered as attractive investment destinations for the production for the European market and for infrastructure investments, whereas northern and western Europe are mainly targeted for access to technologies, financial and logistical services and its consumer markets (Okano-Heijmans & van der Putten, 2011, pp. 9–10).

Figure 6: Chinese FDI in the EU-28 2000-2016

4.2.4 Investments per sector

Chinese investments in the EU cover a wide range of sectors, varying substantially between years. In 2015 for instance, most Chinese investment was in the automotive sector, real estate and hospitality industry, with less capital for the energy sector compared to the years before (Hanemann & Huotari, 2016). In 2016 however, there was a greater interest in energy (with renewable energy investments), but also ICT, utilities, transportation, infrastructure and entertainment, combined with a sharp decline in FDI in real estate (Hanemann & Huotari, 2017, pp. 5–6). It is also here important not to interpret the yearly distribution of FDI flows per sector as an indication of a future trend, since Chinese investors’ motivations to target certain industries is varied and hard to predict. However, when analysing Chinese FDI into Europe over a longer term, one can discern several general patterns with implications for the future.

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Between 2010 and 2014 for instance, 95% of Chinese investment in the EU was concentrated in seven business sectors, with one-third in the energy sector, 23% in real estate, followed by manufacturing, agriculture, finance and ICT (Casaburi, 2015, p. 47). More recent figures show an increasing appetite for advanced manufacturing assets, which counted for more than one third of total Chinese investment in the EU in 2015 and 2016, which is due to the Chinese investors’ drive to upgrade their technological know-how (Hanemann & Huotari, 2017, pp. 5–6). Furthermore, one can witness a growing diversification in terms of sectors, with for instance a rise of FDI in the entertainment and hospitality industry which was unheard of before.18

4.2.5 Investments per investor

Until 2015, Chinese investment in Europe was dominated by China’s state-owned enterprises (SOEs) in terms of volume, despite a growing share of private investors (Hanemann & Huotari, 2016, p. 6; Hellström, 2016, p. 16). Between 2008 and 2013, SOEs were worth 78% of the total investment value, although privately owned enterprises (POEs) have been in the lead in terms of the number of deals. Their share in total investment value has furthermore risen from just 4% in 2008-10 to more than 30% in 2011-13 (Hansakul & Levinger, 2014, p. 13). More recent data has shown that in 2016, POEs even accounted for 74% of total Chinese investment in Europe compared to just 30% in 2015, thereby for the first time overtaking SOEs total investment values in Europe (Hanemann & Huotari, 2017). As shown by figure 7, Chinese privately owned enterprises have indeed been in the lead when it comes to the total number of investment deals in Europe, recently even overtaking SOEs in terms of value. This is a remarkable finding, seeing the fact that many of the EU governments’ concerns on Chinese FDI are particularly related to the nature of China’s SOEs and their potentially non-commercial or political motives to invest. This will be further discussed in chapter 5.1.3.

Figure 7: Chinese investment becoming private19

18 Examples include Fosun’s acquisition of Club Med, or Jin Jiang’s attempted takeover of AccorHotels (http://www.reuters.com/article/clubmed-fosun-idUSL8N18U3LE) 19 We use the chart by Hansakul & Levinger (2014) due to the fact that Deutsche Bank Research has its own dataset, combined with data from Bloomberg, which are unfortunately not freely available for public use. Note that Chinese companies’ subsidiaries in HK are included in the figures here.

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4.2.6 Type of investment

The majority of Chinese FDI in Europe comes under the form of mergers and acquisitions, with the EU even being China’s largest market for acquisitions since 2014 (Hellström, 2016, p. 13, 2016, p. 21). However, despite its small share of Chinese FDI, much of the debate concerning China’s capital exports to Europe is related to greenfield investment such as China General Nuclear Corporation’s 33% stake in the new Hinkley Point nuclear plant in the UK. According to Hansakul & Levinger (2014), the EU was even a primary location for greenfield investment by Chinese enterprises between 2003 and 2011, when Europe attracted more greenfield investment by Chinese companies than any other region, whereas fewer Chinese M&A deals were closed in Europe compared to other regions such as Asia and North America in that same period (Hansakul & Levinger, 2014, p. 12). More than a third of China’s greenfield investment in the EU during this period was in manufacturing, with a quarter of investment in services. Examples include investments by companies such as Huawei Technologies and ZTE (Hansakul & Levinger, 2014, p. 12). However, even during this time span, M&A were still the dominant type of Chinese investment into the EU, as shown by figure 8.

A recent, important trend is the fact that EU member states, such as Germany, are increasingly becoming attractive for Chinese financial investors looking for stable and long-term returns, with portfolio investments that may be significant, but with less than 10% of the voting powers acquired. Examples include Fosun’s stake in KTA Agrar in 2015, one of the biggest agricultural companies farming food crops in Europe (Casaburi, 2015, p. 25; Hanemann & Huotari, 2016, p. 8).

Figure 8: Chinese FDI transactions in the EU28 by entry mode, 2000-2015 (in million USD)20

4.2.7 Conclusions

This chapter has given more insight into the figures and realities of Chinese investment into the EU. Although Chinese global FDI flows have soared over the past years, with the EU emerging as a major global destination for M&As by Chinese investors, China’s FDI stock in the EU is with 0.6% of the EU’s total IFDI stock a marginal figure, while the EU’s FDI stock in China totals 18% of China’s total IFDI stock.

20 Figure taken from (Hellström, 2016, p. 22), due to the fact that Rhodium Group data were not separately available

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Chinese OFDI per EU member state is variable per year, although there is a wider trend in which the Big Three (Germany, the UK and France) are main destinations for Chinese FDI, whereas southern and northern Europe are increasingly attracting investment from China, in particular Italy. CEE-countries are laggards compared to their European peers.

The breakdown of Chinese FDI in Europe per sector also greatly varies per year, but over the long term there was a main interest in energy, real estate, manufacturing, agriculture, finance and ICT. Recent developments show a growing appetite for advanced manufacturing (and high-tech) assets, and an increasing diversification of sectors, including the hospitality and entertainment industry.

Somehow surprisingly, Chinese private-owned enterprises are responsible for the largest number of investment deals, although state-owned enterprises were in the lead in terms of total investment volume. POEs are however gaining an increasing share in the investment volume of yearly FDI flows, and were able to overtake SOEs in 2016 with a share of 74% of total investment volume that year.

The majority of Chinese FDI into the EU consisted of M&As, but Europe has been a favourite destination for greenfield investment compared to other regions in the world. Furthermore, Europe is becoming increasingly attractive for long-term, stable portfolio investment by Chinese financial investors.

These findings are crucial to understand the “how” of Chinese investments in Europe, and are a prerequisite for this dissertation in order to further elaborate on the political dynamics in the EU related to certain concerns or enthusiasm for investments from China. However, it is equally crucial to understand the “why” of Chinese investment flows to Europe, and which are the reasons that lie at the basis of Chinese investors’ decisions to invest in the EU. This shall be discussed in the following chapter.

4.3 SUPPLY SIDE: INCENTIVES FOR CHINESE FDI IN EUROPE

4.3.1 Resources & reserves

The majority of Chinese OFDI was initially destined for developing countries, rich in natural resources, in order to ensure Beijing’s energy security and strategic reserves (Forchielli, 2015, p. 1; Meunier, 2014a). The energy sector composes a considerable share of Chinese OFDI until today, with oil and gas operations by Chinese SOEs, as well as an increasing focus on nuclear power, such as the Hinkley Point nuclear plant in the UK (Tiezzi, 2014).

4.3.2 China’s going out policy

Beijing’s ‘Going Out’ policy was established in 1999 and encouraged Chinese enterprises to acquire assets and expand business overseas, supported by the country’s massive foreign exchange reserves (Hansakul & Levinger, 2014, p. 13; Wang, 2015). The initiative has facilitated Chinese corporations’ presence around the globe, especially acquiring natural resource assets (see above), although there were many stories of acquisitions plagued by corruption and inefficiencies. Whereas this strategy was initially aimed at promoting China’s state-owned “national champions’” presence abroad, the policy has gradually shifted towards promoting overseas private investment (Hansakul & Levinger, 2014, p. 13).

China’s president Xi Jinping and premier Li Keqiang are shifting the strategy towards a ‘Going Out 2.0’ approach with more focus on the export of higher value goods and services. Beijing has defined industrial upgrade as one of the top priorities to be pursued, which should be seen as part of China’s wider economic reforms from an export-driven economy, boosted by public investment projects, towards a consumption-driven economy with goods and services that end up higher on the value chain, thereby attempting to

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avoid the middle income trap (Clegg & Voss, 2016; Defraigne, 2017; European Commission, 2016; Tiezzi, 2014). Furthermore, the export of high value added products, such as high speed trains, strengthens China’s image abroad, and massive infrastructure investment projects abroad may help the Chinese steel and cement industries to offset some of the overcapacities in their sectors.

During his speech at the third session of China’s 12th National People’s Congress in 2015, premier Li identified specific sectors of this ‘Going Out’ model, thereby suggesting to “increase the international market share of Chinese railway, electric power, communications, engineering machinery, automobile, aircraft, electronics and other equipment, and encourage the metallurgical building materials and other industries to invest overseas” (PRC National People’s Congress, 2015). This is remarkably consistent with China’s 2016 investment figures in the EU, showing a greater interest in energy, but also ICT, utilities, transportation and infrastructure, and the 2015 investment surge in the European automobile sector, as discussed in chapter 4.2.4.

Since the creation of China’s ‘Going Out’ policy, authorities in Beijing have eased restrictions on overseas investment, through cutting red tape and lengthy approval procedures for China’s private sector’s investments abroad. In 2014, the National Development and Reform Commission (NDRC) announced a simplification of approval procedures, and lifted the investment value requiring a full review from USD 100 million to USD 1 billion (Hansakul & Levinger, 2014, p. 13; Hellström, 2016, p. 8). In the same year, China’s State Council announced plans to increase financing support to encourage overseas investment, while easing currency exchange regulations for Chinese firms (Lee, 2014; Tiezzi, 2014).

4.3.3 China’s Belt and Road Initiative

On top of the revamped version of its ‘Going Out’ policy, China’s notorious Belt and Road Initiative (BRI), consisting of a 21st century continental Silk Road Economic Belt and a Maritime Silk Road, could act as a catalyst for Chinese investments overseas. The BRI was announced by Chinese president Xi Jinping during a visit in Kazakhstan in 2013 (Tian, 2015). The initiative aims to enhance regional connectivity on the Eurasian continent: from China through Russia up to Europe, and along sea lanes across the Indian ocean via the African continent all the way up to the Mediterranean (Le Corre & Sepulchre, 2016, p. ix).

The BRI endeavours to improve connectivity through improved transport infrastructure such as ports, railways or roads, and energy infrastructure such as gas or oil pipelines and electric grid (Tiezzi, 2014; Wang, 2015). Since 2013, an array of projects were announced, such as the construction of a high speed railway connection between Belgrade and Budapest, and in January 2017 the world witnessed the launch of the first direct freight train connection between Yiwu in eastern China, and London (Josephs, 2017). To finance the Belt and Road infrastructure projects, Beijing has set up several vehicles, such as the Silk Road Fund (SRF) and the Asian Infrastructure Investment Bank (AIIB) (Hanemann & Huotari, 2016, p. 5; Hellström, 2016, p. 11). The latter was an impressive diplomatic success for China, with 70 countries - of which 18 EU member states - joining as members, despite Washington’s discouragements to its European allies (Stanzel, 2017). The AIIB and SRF are closely working with other investment banks, such as the European Investment Bank (EIB) or the Asian Development Bank (ADB). The strong and constructive involvement of Europe’s capitals, and the infrastructure investment nature of China’s Belt and Road Initiative may thus facilitate further investment flows from China to the European continent (Hanemann & Huotari, 2016, p. 5; Hellström, 2016, p. 11).

4.3.4 China’s economic restructuring

China’s GDP growth figures no longer reach the mythical double digits from the past decades. Its economy has encountered downward pressure resulting in lower growth rates, narrated by its leadership as the

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“new normal” (Qing & Yao, 2015). Although the country is dealing with domestic challenges that are slackening growth such as corruption, a cooling property market, high debt levels and excess capacity in several industries; the high growth levels were in any case unsustainable on the long term. A moderation was to be expected as part of its transition from an emerging economy, fostered by public investments and exports of low value products in industries characterized by cheap labour, to a low-to-middle income economy boosted by consumption and high value products. In order to support this transition, Chinese authorities are aiming to move its factories up the global value chain (UNCTAD, 2016, p. 45). At China’s annual National People’s Congress meeting in 2015, premier Li announced to “… implement the 'Made in China 2025' strategy, seek innovation-driven development, apply smart technology, strengthen foundations, pursue green development and redouble our efforts to upgrade China from a manufacturer of quantity to one of quality" (Qing & Yao, 2015).

As a consequence of this new normal, the surge in Chinese investments is, according to Hanemann & Huotari (2016) “not just a temporary episode of opportunistic buying after the crisis, but must be seen as a structural story fuelled by changes in the Chinese economy and Europe’s position as a safe haven economy with an attractive asset base” (Hanemann & Huotari, 2016, p. 3). As a result of the economic slowdown, growing volatility and increasing competition at home, Chinese companies are increasingly under pressure and willing to take risks as to diversify their portfolio and assets to reduce over-exposure to a slowing Chinese economy, thereby aiming to acquire advanced technologies, famous brands, real estate, services and a gigantic consumer market abroad, in particular in Europe (Forchielli, 2015, p. 2; Hanemann & Huotari, 2016, p. 4, 2017, p. 5; Hansakul & Levinger, 2014; Hellström, 2016, pp. 8, 11; Meunier, 2014a; Murphy, 2008, p. 12).

Chinese enterprises’ hedging behaviour against a slowing Chinese economy through foreign investments is furthermore amplified by government-led initiatives such as the aforementioned going out policy or the BRI. As mentioned by premier Li Keqiang, China’s industrial masterplan “Made in China 2025” aims to transform the country into a manufacturing superpower. It endeavours to achieve this objective through an industrial modernisation process in sectors such as automotive, aviation, machinery, robotics, high-tech maritime and railway equipment, energy-saving vehicles, medical devices and information technology, by making use of smart manufacturing technology. By upgrading the industrial processes of its manufacturing sector, Chinese authorities hope to increase the competitiveness of its enterprises and to strengthen their global expansion (Wübbeke, Meissner, Zenglein, Ives, & Conrad, 2016, pp. 6–7).

The policy is complementary to the objectives of China’s going out policy and will contribute to its economic restructuring. Chinese companies’ resulting objective to improve industrial processes has contributed to their recent investment spree for European high-tech and advanced manufacturing enterprises as discussed in chapter 4.2.4. The strategy can provide attractive short-term business opportunities for European companies since the transformation requires technologies that Chinese suppliers cannot provide at their current technological capabilities. However, according to a MERICS-report, “Made in China 2025” will also pose tremendous challenges to Europe and its enterprises, since the industrial policy is aiming to gradually replace foreign with domestic Chinese technologies using massive state backing. Those Chinese enterprises will enter international markets and eventually compete with European companies in high value market segments (Wübbeke et al., 2016, pp. 6–7).

4.3.5 Commercial motivations

Despite the strong internationalisation impetus given by Beijing to its domestic enterprises, one should not derogate the individual, commercial objectives of Chinese enterprises, which are still considered the predominant drivers for investment decisions from China (EPSC, 2016, p. 5; Hanemann & Rosen, 2012, pp. 60–69). As observed in chapter 4.2.5, the majority of Chinese enterprises investing in Europe are privately

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owned and are of increasing importance compared to Chinese SOEs. With the downward pressure on China’s economic growth and limited domestic possibilities to invest, Chinese enterprises, but also new institutional investors such as SWFs, social security funds and insurance firms (see chapter 4.2.6), are actively looking for business or investment opportunities abroad (Hanemann & Huotari, 2015, p. 25, 2017, p. 4). Even between China’s SOEs, a competitive fight for contracts and overseas investments is taking place (Godement, Cheng, Le Van, & Vendryes, 2012).

Deng (2004) distinguishes five categories of motivations that lie at the basis of Chinese multinationals’ decision to invest abroad (Deng, 2004):

Resource-seeking investments Establishment of foreign subsidiaries to exploit natural resources, and to secure a continued supply of raw materials for own industrial operations.

Technology-seeking investments

Investments in developed economies to acquire sophisticated technology, in order to compensate for competitive disadvantages, usually through the acquisition of an existing firm rather than a new operation in greenfield investments.

Market-seeking investments

In several industries, Chinese markets have reached the limits of effective demand, resulting in a production overcapacity. Many companies therefore target foreign markets to sell their products, but face trade barriers such as import quota or anti-dumping procedures. Foreign subsidiaries can ensure continued access to these markets. Enterprises thereby often follow supply-chain linkages (Hansakul & Levinger, 2014, p. 13).

Diversification-seeking investments

A number of Chinese companies have invested abroad for the benefit of risk diversification. This is often encouraged by the government, who wants to develop its ‘national champions’, to the example of Korean and Japanese conglomerate multinationals. A recent example is the case of HNA group, which transformed from a Hainan-based airline operator into a holding company in sectors from tourism and finance, to real estate and logistics (Weinland, Fontanella-Khan, & Massoudi, 2017)

Strategic-asset-seeking investments

In today’s global market, firms find it strategically important to engage in FDI in one or more countries. One key strategic asset that Chinese firms are pursuing is to create a globally recognised brand. These companies are engaged in overseas investment to promote their long-term strategic goals, not only relying on the exploitation of existing resources, but also accumulating new knowledge and skills that can be turned into strengths.

Table 1: Five categories of Chinese multinationals’ foreign investment motivations. Based on Deng (2004) with additions.

A sixth motivation to add, overlooked by Deng (2004), is the possibility of long-term, profit-seeking portfolio investments in which a Chinese enterprise, sovereign wealth fund or financial institution (such as pension funds) aims to safely invest its financial reserves (Hanemann & Huotari, 2015, p. 25; Okano-Heijmans & van der Putten, 2011, p. 10).

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4.3.6 Future prospects

In 2015, Chinese officials expressed their expectation to deploy an additional USD 1 trillion in OFDI in the coming five years, in Europe and over the world (Hanemann & Huotari, 2016, p. 2). Although this surge in investments is a “structural story” and there is a general expectation that China’s so-called buying spree will continue, several downside risks for Chinese outbound investments have emerged in recent years.

First, there is a recent re-tightening of capital controls by Chinese authorities. The lower growth figures of China’s economy, worries about a weakening currency, and the lack of domestic investment opportunities due to its immature and volatile financial markets, and government restrictions on real estate investments to avoid a new bubble to emerge, have provoked massive capital outflows over recent years (Bradsher, 2017; de Jonquières, 2016; Hanemann & Huotari, 2016, p. 9). This has increased downward pressure on the RMB exchange rate, despite Chinese authorities’ intentions to maintain a stable currency exchange rate. As a result, the People’s Bank of China (PBOC), drained its foreign currency reserves to prop up the value of the RMB, while central authorities increased the tightening of capital controls through more stringent reviews for certain outbound FDI transactions (Bloomberg, 2017; Bradsher, 2017; Weinland, 2017). The intensified stringency will arguably impact Chinese companies’ opportunities to invest in the EU (Hanemann & Huotari, 2017, p. 4). Nevertheless, Chinese NDRC-officials responded to media reports that the country will stick to its going out policy and continue to encourage a healthy development of qualitative outbound investment (Engen & Elias, 2016)

A second element which may counterbalance Chinese FDI flows to Europe is the EU’s complex investment climate, with 28 member states and different national regulations Okano-Heijmans & van der Putten, 2011, p. 9). Chinese enterprises have raised several difficulties to invest in Europe, such as bureaucratic hurdles and red tape, including travel visas, work permits and bureaucratic fragmentation, but also the geographic distance, a different cultural and political environment or even practices of discrimination (European Chamber, 2013, p. 4; Meunier, 2014a).

Third, several authors point to the possibility that a political reaction in Europe, due to the increased media coverage, resistance to and awareness of geopolitical and economic risks posed by Chinese investment, may aim to create new legislation to tighten investment reviews to address those concerns, which could have a detrimental effect on Chinese FDI flows to Europe (de Jonquières, 2016; Hanemann & Huotari, 2017, p. 9). This European response, or the “demand-side” to Chinese investment, will be further scrutinized in the next chapter.

4.4 DEMAND SIDE: THE EUROPEAN RESPONSE

4.4.1 The EU’s Chinese investment paradox

The European Union has generally been welcoming Chinese investment, in particular after the financial crisis struck the continent in 2008 (Hanemann & Huotari, 2015, p. 24; Meunier, 2014a; Okano-Heijmans & van der Putten, 2011, p. 8). During the sovereign debt crisis in Europe, China for instance continued to buy EU government bonds and expressed its confidence in the European Union (Martina & Rinke, 2012; Meunier, 2014a). China was lauded as a potential source of dearly needed capital and an engine for global growth when the West was in troubled economic waters (Okano-Heijmans & van der Putten, 2011, p. 12). It has been widely reported that many EU member states, and since 2015 practically every single one of them, have sought high-level meetings with China to strengthen bilateral investment flows, and in particular to attract investment to their nation (Hanemann & Huotari, 2016, p. 6). The investment promotion strategies greatly differed among EU member states. Many CEE-countries, eager for capital

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from China but with little success so far (see chapter 4.2.3), have been using the 16+1 setting as a platform to promote themselves as investment destination, whereas David Cameron’s UK maintained close relations with Beijing and commended the relations with China as a ‘Golden Era’ (Halliday, 2016). As stated in chapter 4.3.3, no less than 18 EU member states have joined China’s AIIB, whereas Beijing pledged EUR 315 billion to the Investment Plan for Europe (European Commission, 2015). At the latest EU-China Summit in 2017, both parties even announced the establishment of a co-investment fund21.

The open and welcoming European attitude towards Chinese investment does not come as a surprise, considering the many opportunities it could entail for the EU’s economies (Clegg & Voss, 2016). First, the acquisition of European companies, which were in some cases on the verge of bankruptcy, saved jobs at times of rising unemployment rates in Europe (Forchielli, 2015, p. 2; Hellström, 2016, p. 20; Meunier, 2014a). In 2010 for instance, 45,000 jobs were affiliated with Chinese FDI (Hanemann & Rosen, 2012). Second, capital from China could help increase the efficiency and size of a growing enterprise’s operations, increase investment in R&D and innovation22, invigorate manufacturing bases and facilitate backward access to the Chinese market (Forchielli, 2015, p. 2; Hanemann & Huotari, 2015, p. 6; Meunier, 2014a). Third, investments from China could result in increased tax revenues, and could offer opportunities to EU governments with regard to infrastructure development, in for instance eastern Europe (Hanemann & Huotari, 2016, p. 5; Hellström, 2016, p. 20). This could come at a timely moment, as the EU is in urgent need of investment with fallen investment levels since the financial and fiscal crisis, thereby risking to dampen future growth prospects, especially in many smaller EU economies - also known as ‘Europe’s Investment Trap’ (Hanemann & Huotari, 2015, p. 26). Fourth, Veron & Hendrik-Roller (2008), applying a liberal theory paradigm, argue that cross-border investment can create a powerful alignment of interests between investing countries and the EU, which may play a role in defusing potential tensions (Veron & Hendrik-Roller, 2008, p. 3).

In recent years however, perspectives in the EU on investments from China seem to have shifted, especially as IFDI flows from China have surpassed FDI flows in the other direction since 2014 (see chapter 4.1). This imbalance, adding to the already existing concerns about the EU’s trade deficit with China and related trade disputes, has fed a sense of unease in several EU member states related to an array of different concerns. Although European delegations are as often departing to China to promote their country or region as an optimal investment destination, and the official narrative by the Commission as well as Europe’s national governments persistently states to welcome investment from China23, it is clear that the “acceptance of Chinese acquisitions is declining in Europe” (Hellström, 2016, p. 23). The growing opposition in the EU against investments from China is related to several issues, including a perceived national security threat, and may even be symptomatic of a renewed realism in the relations with China (Hanemann & Huotari, 2017, pp. 8–9), which shall be further discussed in chapter 5. Those objections were however addressed on different levels as a consequence of the EU’s multi-level governance patchwork of competences with regards to foreign investment.

21 Retrieved from http://europa.eu/rapid/press-release_IP-17-1524_en.htm 22 Huawei, for instance, has set up more than 30 R&D sites and innovation centres across Europe in Belgium, Finland, France, Germany, Ireland, Italy, Sweden and the UK, whereas its headquarters are located in Munich (Hanemann & Huotari, 2015, p. 27) 23 This is explicitly stated in for instance the Commission’s “Joint Communication: New Elements for a Strategy on China” (European Commission, 2016), Juncker’s speech at the latest EU-China Summit (Juncker, 2017), statements by Germany’s Minister of Foreign Affairs Sigmar Gabriel and Minister of Economy Brigitte Zypries (Chazan, 2017b; Delcker, 2016)

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4.4.2 A European patchwork of foreign investment regulations

In the 1957 Treaty of Rome, which created the European Economic Community (EEC), the EU’s founding members agreed to incrementally bring their trade policies on a supranational level (EUR-Lex, 2017; The Treaty of Rome, 1957). This was however not the case for their foreign investment policies, which was spread over the national and supranational levels in a complex mix of competences. The EEC was in charge of liberalisation, and to defend market access for European investments with regards to preferential trade agreements negotiated with third countries (Meunier, 2014a). Things changed with the 2009 Lisbon Treaty, as according to article 207, it is the Commission’s exclusive competence to deal with FDI (and not portfolio investment), to negotiate bilateral investment treaties, to protect the EU’s OFDI abroad and to regulate inbound foreign direct investment for the member states. However, since the Lisbon Treaty came into effect, the letter of law has been rather different from practice (Meunier, 2014a). The EU member states are currently in a transitional phase, since the 27 member states’ (widely differing) BIAs24 with China are still in place until they are replaced by an EU-wide investment agreement with China (European Commission, 2013).

The EU is competent for the review of FDI deals under the competition policy, and can reject them based on anti-trust grounds25 (Forchielli, 2015, p. 3; Grieger, 2017, p. 5; Meunier, 2014a). However, member states remain in power over investment promotion and for the screening of foreign investments for national security purposes. This is legally enshrined in the TFEU26, and it is therefore impossible for member states to unilaterally decide the scope of public security without any checks by the EU-institutions (Grieger, 2017, p. 5). The public security exception, interpreted rather narrowly by the Court of Justice of the European Union (CJEU), is only allowed in the presence of a “genuine and sufficiently serious threat”, and it cannot be applied for purely economic purposes. Investors must be able to challenge the decision for a court, and restrictive measures must be proportional and no less restrictive than any other measure that is equally effective (Grieger, 2017, pp. 5–6). However, the treaty does not clearly define national security and leaves room to broad interpretations (Hanemann & Rosen, 2012, p. 70). As a result, EU member states have different and widely varying regulations in place with regards to the restriction of foreign investment for security concerns (see table 2) (Grieger, 2017, p. 2; Hellström, 2016, p. 33).

Grieger (2017) divides member states’ approaches in two categories, namely:

1. Availability of a specific legal basis for FDI screening; FDI screening can either target only the defence sector or include other sectors; scrutiny can either be mandatory (automatic) or carried out on a case-by-case basis;

2. Partial or total prohibition of, or restrictions on, FDI in specified sectors; the screening can target defence or other sectors (agricultural land, air transport, energy etcetera) (Quoted from Grieger, 2017, p. 6)

Although hybrid approaches do exist, in which FDI in a certain sector is fully excluded combined with a cross-sectoral vetting process for certain investments, such as Germany. None of the screening

24 All EU member states except for Ireland have a bilateral investment agreement with China 25 Based on Article 101 (TFEU), prohibiting cartels and anti-competitive agreements; and Article 102 (TFEU), prohibiting the abuse of a dominant position. 26 Based on Article 346(1)(b) (TFEU), excluding the national defense sector; Article 65(1)(b), which derogates from the principle of free movement of capital by invoking grounds of public policy and public security, or for overriding reasons related to the general interest as recognised by the CJEU (Grieger, 2017). Note that, contrary to the free movement of persons, goods and services (which are the freedoms of the internal market), that the free movement of capital also extends to third countries (but with an allowed exceptional treatment for third party FDI for a range of reasons which are related to broader public policy (Hanemann & Rosen, 2012, p. 66)

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procedures, be it on EU or member state-level looks into the nature or funding of transactions (e.g. whether an acquisition is funded by public or private capital) (Grieger, 2017, p. 5).

Table 2: FDI security-related screening procedures at Member-State level27

Over the past decade, the idea to better coordinate foreign investment procedures emerged on several occasions. In 2008, the debate on sovereign wealth funds from non-traditional investors such as Russia or China lead the Commission to issue a communication in which it dismissed a common approach, arguing that the establishment of an EU committee on foreign investments – to the example of the CFIUS in the United States – “has the risk of sending the misleading signal that the EU is stepping back from its commitment to an open investment regime” (European Commission, 2008). In 2011, a debate to establish a CFIUS-style mechanism in the EU took place after the generous bid by the Chinese enterprise Xinmao for Dutch cable maker Draka, thereby shocking officials in the Commission and raising fears that technology or crucial infrastructure may fall in the hands of foreign companies from China or Russia (Wishart & Rankin, 2011). Also in 2012 and 2013, the European Parliament issued resolutions calling for a body entrusted with the ex-ante evaluation of foreign investment, mirroring the CFIUS-system (Grieger,

27 Table was compiled and created by (Grieger, 2017, p. 7), and is here used due to exclusive data source based on EPRS enquiries to EU member state agencies

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2017). This was so far opposed by both the Commission and several EU member states, due to fears that this could send protectionist signals (see above) or result in more restrictions on foreign investments in China (Hellström, 2016, p. 33; Meunier, 2014a).

Academic views on the matter are rather diverse. Many academia advocate for improved coordination on the EU-level, in order to comprehensively address the security risk since in many EU-member states, there is no consistent framework to review FDI outside of the defense industry, a gap that could be exploited by populist politicians which could result in a protectionist backlash or public anxiety (EPSC, 2016; Hanemann & Huotari, 2015, 2017, p. 6; Okano-Heijmans & van der Putten, 2009; Veron & Hendrik-Roller, 2008, p. 7). Veron & Hendrik-Roller (2008) envisage three options to coordinate the policy framework for the review of foreign investment in Europe:

1. A first option consists of specific legislation and implementation in every member state, as is now the case.

2. A second option involves common legislation at the EU-level, with implementation carried out at the national level – as preferred by Veron & Hendrik-Roller (2008), which is according to them the politically most feasible option.

3. At third option would consist of EU-level legislation and implementation, done by the Commission or a created ad hoc EU agency - for instance to the example of the CFIUS in the United States, as advocated by several authors (Forchielli, 2015, p. 1; Hanemann & Rosen, 2012, p. 72; Okano-Heijmans & van der Putten, 2009; Quattrocchi, 2014)

Despite their different perspectives on the level on which legislation and implementation should happen, there seems general consensus that this framework should be limited to transfers which create a credible risk to the national security, and that it should refrain from including economic criteria, such as the ownership of an investor or reciprocity demands (Hanemann & Rosen, 2012, p. 67; Veron & Hendrik-Roller, 2008, p. 8). Meunier (2014), however, suggests to strengthen the monitoring of foreign investment based on the competition policy (which should not be equalised with the inclusion of economic considerations in foreign investment review screenings).

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5 Chinese FDI into Europe: European Political Opposition?

In chapter 3, it was observed that, so far, only limited research focusing on the opposition to Chinese investment has been undertaken. Tingley et al. (2015) did elaborate on this topic with a study focusing on the opposition to Chinese M&S in the United States. The study noted that, although most legal barriers to M&As are based on national security considerations, opposition to Chinese M&As is more likely in:

- Security sensitive industries - Sectors in which US companies faced restrictions in China’s M&A markets - Acquisitions by Chinese state-owned enterprises - Economically distressed industries - If the target American company has a high brand recognition

Based on this initial research, and as stated in chapter 3, this dissertation endeavours to conduct exploratory research in the light of the recent investment boom from China into the EU, with regard to the following research questions:

- Are the five concepts, likely to increase political opposition to Chinese M&A attempts in the US, as defined by Tingley et al. (2015), present in the political opposition to Chinese investment in the EU? Which will be discussed in chapter 8.1.

- Did EU governments invoke national security consideration through which to express these grievances? Which will be discussed in chapter 8.2.

5.1 MOTIVES FOR EUROPEAN OPPOSITION

5.1.1 Security sensitive industries

5.1.1.1 The case of national security considerations & investment from China

According to consulted sources, the recent investment boom from China did lead the European public, media and policy makers to fear for its consequences on their national security, especially because of the European disinvestment in strategic assets or infrastructures that could be acquired by Chinese investors (Hellström, 2016, p. 8, 2016, p. 28; Okano-Heijmans & van der Putten, 2011, p. 10). Although there is no strict definition on EU or national level of what is considered national security or a strategic asset (see chapter 4.4.2), Hellström (2016) mentions technologically advanced companies or those assets that are of importance to national security, whereas German Economy Minister, Sigmar Gabriel, reportedly wants to restrict takeovers if they involve key technologies, without any further indication of what constitutes a key technology (Chazan, 2016b; Hellström, 2016, p. 28). Hanemann & Huotari (2017) refer to ‘critical infrastructure’ such as electricity grids, power plants, ports and other transportation and communication structure.28, whereas Grieger (2017) links security concerns to:

1. Control over strategic assets such as nuclear power plants 2. Control over the production of critical defence inputs (such as military chips) 3. Transfer of sensitive technology or know-how to a foreign country whose hostile intent cannot be

excluded and

28 See the cases of EANDIS, Hinkley Point, Global Switch

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4. Espionage, sabotage or other actions of a disruptive nature (Grieger, 2017, p. 5)

One should thereby bear in mind that China’s growing military prowess, its state ownership in the economy and its geopolitical position as a non-ally vis-à-vis the American-led coalition of NATO-members, may amplify the already existing anxieties (Hanemann & Huotari, 2017, p. 6). Security ties between the US and EU within NATO even render European companies to be cautious with acquisitions from China, making them nervous because of the Chinese government’s influence over its companies, and fearing to be excluded from the American market (Campbell et al., 2016; Okano-Heijmans & van der Putten, 2011, p. 11). A particular cause for concern are the so-called dual-use technologies, which are “goods, software and technology that can be used for both civilian and military applications”.29 A case in point here is the attempted takeover of the German enterprise Aixtron, which creates devices that produce crystalline layers that are used as semiconductors in weapons systems, by China’s Fujian Grand Chip Investment Fund in 2016, which was eventually rejected by the German government after a tip by US intelligence services (Hanemann & Huotari, 2017, p. 6). Other notorious recent cases are examples of strategic asset acquisitions, such as the announced 33% stake by China General Nuclear Corporation’s in the new Hinkley Point nuclear plant in the UK; the failed attempt by China’s State Grid to purchase 14% shares of Eandis, the biggest distributor of gas and electricity in Flanders; or COSCO’s 51% stake in the Piraeus port in Greece, which all gained massive media attention and lead to a heated public debate in their respective countries.

As stated before, at the time of writing there is no EU-wide definition of what constitutes a strategic asset or a key technology. The blockage of an acquisition based on national security considerations is still an exclusive member state competence (see chapter 4.4.2). This is somewhat absurd, since foreign enterprises have full access to the internal market once they have invested in one member state. An enterprise could even be rejected by one member state on grounds of national security, succeed to invest in another member state, eventually through a European subsidiary, and still gain access to the market of that first one, with the same security implications (Meunier, 2014a; Veron & Hendrik-Roller, 2008, p. 7). As discussed in chapter 4.4.2, European governments and EU-institutions have been wary of the eventual consequences of foreign investments by non-traditional investors such as China for their national security since several years. However, in 2016, when China’s so-called shopping spree grew exponentially, reaching its highest-ever peak in FDI flows to Europe (see chapter 4.2), the political scene in Brussels and other EU-capitals witnessed a series of intensifying and contentious developments.

5.1.1.2 Recent developments in the EU

On 18 May 2016, Chinese appliance-maker Midea proposed to acquire Kuka, one of Germany’s most innovative engineering companies producing industrial and highly intelligent robots, for EUR 4.5 billion. Midea had been working with Kuka for many years and had installed approximately 100 Kuka robots in its factories. The company said that it considered the takeover as an opportunity to expand Kuka’s presence in the Chinese market, where most factories are not (yet) automated (Campbell et al., 2016; Chazan, 2016a). The move is in line with the motives discussed in chapter 4.3, as it is a technology-seeking investment guided by China’s ‘going out’ and ‘Made in China 2025’ policies. However, the announcement rang alarm bells with the German political elite, as Kuka plays a crucial role in Germany’s ‘Industrie 4.0’, which aims to link its industries with the online world. Furthermore, experts feared for the consequences if sensitive industrial and corporate data would fall into the hands of a Chinese company. According to

29 Definition by the European Commission. Retrieved from http://ec.europa.eu/trade/import-and-export-rules/export-from-eu/dual-use-controls/index_en.htm

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reports by Bloomberg and the Financial Times, “the idea of a Chinese entity owning one of the nation’s great innovators is a cause of widespread angst in Germany” (Campbell et al., 2016; Chazan, 2016a).

Following Midea’s offer, Günther Oettinger, the EU’s digital commissioner (and a political ally of Angela Merkel), reportedly touted Kuka a “successful company in a strategic sector that is important for the digital future of European industry”, after which he called on other European enterprises to make an offer (Quoted in Chazan, 2016a). Sigmar Gabriel, Germany’s deputy chancellor, considered it “appropriate if there was at least one alternative offer from Germany or Europe”, and German chancellor Angela Merkel, who was at that time in China with a delegation of German businessmen, expressed her concern and told officials she “expected reciprocity on the Chinese side” (Both quoted in Chazan, 2016a). The German government was not able to block the deal, which was according to German law only allowed to prevent a takeover by a non-EU investor when it is related to narrowly defined strategic infrastructures such as energy networks, IT security or defence companies (Chazan, 2016a). Eventually, Midea committed to a hands-off approach, to preserve existing jobs and factory sites and to protect data belonging to Kuka’s customers. The takeover was eventually completed in the first half of January 2017, after also the US authorities gave their green light (Taylor, 2016).

In June 2016, the Commission ruled that China’s state-owned China General Nuclear Power (CGN) is not independent from China’s central administrator of SOEs: the State-owned Assets Supervision and Administration Commission (SASAC)30. The decision was made during a review of a proposed joint venture between France’s EDF and China’s CGN, and it implied that the Commission did not only consider CGN’s revenues, but the combined ones of all Chinese energy SOEs (Prince, 2016). This has major implications, since the Commission, which has the exclusive competence over antitrust issues in the EU, generally only reviews a merger if each party to it has more than EUR 250 million in sales in the EU as well as combined worldwide sales of more than EUR 5 billion. CGN alone would not have reached this threshold, but the combination of all energy SOEs under SASAC’s does meet the requirements (Hellström, 2016, p. 34; Prince, 2016). The decision may force Chinese SOEs to file for EU merger clearance, irrespective of their size in Europe. This could create an extra hurdle and could probably delay proposed M&As by Chinese SOEs in Europe31 (Prince, 2016). The Commission’s decision gained little attention in the public sphere, but it may symbolise a meaningful change, since it was the first time the Commission publicly stated that the Chinese government control is so pervasive that all SOEs in a sector should be treated as one single entity. In a statement, the Commission reportedly said to “…not lay down rules in its cases, but make findings based on the facts of the case at that specific point in time.”32 The same report quotes a source saying that this will be a likely basis for future similar cases, with intensifying levels of scrutiny by the Commission (Prince, 2016).

In October 2016, the German government withdrew its clearance for Fujian Grand Chip Investment’s (GCI) takeover of German chip equipment maker Aixtron, after a tip by US intelligence services that semiconductors produced by Aixtron could be used by China for its nuclear programme (Chazan, 2016b; Sheahan, 2016). Later on, also the American regulator for the screening of foreign investments, CFIUS, which had competence over the matter due to the Aixtron’s subsidiaries in the US, blocked the acquisition (Chazan, 2016b, 2017a; Sheahan, 2016). China was not amused, and its MOFA summoned a high-ranking German embassy official to present a formal protest, calling the decision “political obstruction” (Blanchard

30 Retrieved on 20 July 2017 from http://ec.europa.eu/competition/mergers/cases/decisions/m7850_429_3.pdf 31 Note that the EU Chamber of Commerce in China-survey of 2013 includes complaints by Chinese businesses about the bureaucratic and time-absorbing nature of antitrust investigations by the Antitrust Commission (European Chamber, 2013, p. 18) 32 The specific statement could not be found on the website of the Commission or the EEAS, neither their press desks, so it is therefore assumed that this was a spoken and not written statement, quoted in this article

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& Ten Wolde, 2016; Delcker, 2016). In the same month, the German Ministry of Economy announced the idea to protect high-tech companies from unwelcome takeovers, in particular by state-owned and partly state-owned companies from non-European countries (Euractiv, 2016). The Ministry sent an internal paper to the government with six points for reviewing investment at EU-level, with “wide-reaching rights for the EU and national governments to prohibit company acquisitions by investors from non-EU countries” (Euractiv, 2016).

In February 2017, France, Germany and Italy addressed EU Trade Commissioner Cecilia Malmström with a request to rethink rules on foreign investment into the EU, raising concerns that technological knowhow may be leaking abroad, while at the same time EU investors often face barriers when they want to invest in other countries, in for instance public procurement33 (Le Guernigou & Thomas, 2017; Zypries, Sapin, & Calenda, 2017). The letter stated that the Commission should consider the possibility of EU member states being able to outright block a foreign investment (or allow so subject to conditions), adding that “EU law gives the right to member states to prohibit foreign investments which threaten public security and public order”, but “what is needed is additional protection based on economic criteria taking into account, and with reference to, the Commission’s expertise”. The letter furthermore said that “the right of non-EU investors in the bloc should be subject to reciprocity in cases where EU investors are given only limited market access in non-EU countries”, and reportedly desired to be able to “intervene in direct investments which are state-controlled”, which they deem to be unfair (Chazan, 2017a; Le Guernigou & Thomas, 2017). Germany’s deputy economy minister, Matthias Machnig, reportedly commented that Germany does support open markets and FDI, but that foreign enterprises “must show that their investments in Germany are not driven by the state, and that financing for their deals is in keeping with the market” (Quoted in Chazan, 2017). A Financial Times-article described the move as “a sign of the growing protectionist backlash against Chinese investment in Europe’s most sensitive industries” (Chazan, 2017a).

In its response, the European Commission welcomed the proposal, agreeing that the imbalance in investment openness between China and Europe needs to be addressed (as discussed in chapter 4.1). The Commission’s spokesperson responded that “The Commission believes the EU needs to assess if it has all the tools to respond to the challenges of globalisation” (Quoted in Valero, 2017). In May, the same year, the Commission’s stance seemed to remain in favour of open and free trade. Jyrki Katainen, EU commissioner responsible for jobs, growth, investment and competitiveness, said that while Brussels wants to ensure members states not to be “by accident influenced by aggressive acquisitions”, the EU desired to be open to foreign investment, adding that it would be better for the EU to seek full investment reciprocity, while some member states already have competences to pull the brakes in case acquisitions pose a threat to national security (Quoted in Toplensky, 2017).

Late April 2017, ten members of the European People’s Party (EPP) submitted a proposal for a union act, stating that, whereas the EU is one of the most open economies in the world and freedom of investment is a core principle for the EU and its member states, “there is a lack of reciprocity in the openness of third countries, where EU investors often have only limited access and meet various hurdles which reduce the possibilities of investment”, “whereas the playing field is even less level if such investment is subsidised by state bodies”, and “whereas, in some cases, non-EU investment can lead to the acquisition of entire European companies as part of strategic industrial policies, potentially causing significant damage to the EU economy, particularly in sensitive areas as regards security or industrial policy”, the group considers that rules governing this at EU level is needed “when the envisaged direct investment by the third country

33 One should however note that the EU and China are already at the twelfth round of talks to reach an investment agreement, without any conclusion so far, to the frustration of several EU member states (Valero, 2017a)

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does not comply with market rules or is facilitated by state subsidies, resulting in a likely market disturbance […] or when European companies are not permitted to make equivalent investments in the home country of the potential investor”. Furthermore, the proposal states that the Commission’s proposal should “extend the scope of existing protections to strategic sectors such as energy, transport, telecommunications, health and water; establish a principle of reciprocity in the EU’s investment policy; and provide for the establishment of a European Committee on Foreign Investment, tasked with reviewing, investigating and controlling sensitive foreign investments” (European Parliament, 2017).

At the 19th EU-China Summit on 2 June, there were strong expectations by opinion makers that Beijing and Brussels would create a front against the United States’ decision to withdraw from the Paris Agreement on Climate Change. Although the EU and China asserted the importance of the issue in their press releases after the summit, they did not come up with a joint statement to show their unity. Instead, EU leaders used the occasion to notify China of their discomfort with the growing imbalance in mutual investment flows. In his speech at the parallel EU-China Business Summit, Jean-Claude Juncker, although acknowledging China’s reform efforts and the positive potential of enhanced investment in both directions, stated that “while Chinese investment into the European Union increased by 77% in 2016, the flow in the other direction declined by almost a quarter. […] That reflects how difficult it can still be to do business in China. Roughly half of EU companies say that it actually got harder last year. One in two say they feel less welcome than when they entered the Chinese market. And more than half say that foreign companies are treated unfairly compared to their Chinese competitors. […] A big economic powerhouse needs to be higher than mid-table (Juncker, 2017).” Furthermore, he also addressed trade imbalances due to Chinese overcapacities in steel, adding that “When we have to, we will be sure to uphold fairness when it comes to trade. And we are backing that up by strengthening our trade defence instruments to make them fit-for-purpose. This is not about being protectionist or pointing fingers at others. Our actions are fully in line with our international obligations under the WTO and we will apply them in a fair, transparent and country-neutral way. Trade cannot simply be free. It must be fair.”

Later the same month, the EU council summit was the scene of a clash between different camps among EU-member states. The summit explored measures “to screen foreign investments where necessary in order to mitigate risks to national security”. Newly elected French president Macron, desiring a ‘protective Europe’, backed the proposal by Paris, Berlin and Rome to establish a European mechanism against unwanted foreign acquisitions in strategically important sectors, and wanted EU leaders to jointly call on the Commission to investigate ways to “screen investments from third countries in strategic sectors” (Blenkinsop, 2017; Von der Burchard, 2017). However, traditional pro-free trade member states such as the Netherlands, the Nordic countries and the Baltic states, but also CEE-countries such as Poland, rejected the idea of a European mechanism against foreign takeovers, fearing that such measures would foster protectionism in the block. European leaders were eventually unable to reach a consensus to screen foreign investments, although they called for more reciprocity and welcomed an initiative by the Commission “to analyse investments from third countries in strategic sectors”, however, without mentioning China (Blenkinsop, 2017; Von der Burchard, 2017). Nevertheless, inside sources reportedly stated that the political debate is definitely making a shift towards a more robust policy, in which free trade should be balanced with fair trade (Beesley, 2017).

The European Commission would reportedly be in the process of drafting a regulation to screen investment at the time of writing, which may introduce mandatory screening of certain M&As of more than 25% into certain strategic companies, while member states would be required to establish departments to screen investments if they do not already have them (Guarascio, 2017; Hanke, Cerulus, Eder, & Herszenhorn, 2017). This should however be read with caution, since the Commission has yet to formally propose the regulation and it remains to be seen if EU member states will be able to reach consensus, considering the existing fault lines in the Council. Furthermore, one should keep in mind that

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national security concerns are not in the scope of the EU, but remain a member state competence, whereas competition policy is an exclusive EU competence (see chapter 4.4.2) (Beesley, 2017; Hanke et al., 2017).

Meanwhile, several EU member states decided not to wait any further, and have taken unilateral steps to strengthen their screening of foreign investments. In July 2017, the British government proceeded with its plans to do so, using a sector-to-sector approach including telecoms, defence and energy (sectors in which controversial investment by Chinese enterprises took place, such as the Hinkley Point nuclear plant or the 49% purchase of Global Switch, a cloud data centre provider). Until recently, mergers and acquisitions in the UK were reviewed by the Competition and Markets Authority, which is focused on competition and not on security. The British government stated that “It is important that we protect national security, while remaining an open and liberal international trading partner and a global champion of free trade and investment” (Pickard & Clover, 2017). It is hereby interesting to observe that the UK, being one of the Big Three recipients of investment from China, did not contribute to the letter written by France, Germany and Italy to advocate a stronger investment screening regime within the EU, but nevertheless strengthened its foreign investment screening procedures. This may indicate a salient shift in the UK’s perspective on Chinese investments, while under Cameron’s administration, London attached great importance to the ‘Golden Era’ of Chinese-British relations, proudly announcing deals such as IT-company Huawei’s plans to invest £1.3 billion in the UK (Gordon, 2016)

In the same month, Germany has increased its powers to block foreign investment, widening the existing law’s scope from “defence industry enterprises or companies involved in IT security and the processing of state-classified documents” to companies generally operating in “critical infrastructure” (Chazan, 2017b). Furthermore, the directive gives more time to the government to investigate acquisitions and expands the scope of the law to “indirect acquisitions” in which foreign investors create vehicles in other EU-countries to take over German targets. The move was however criticised by employers’ organisations who stated that it makes Germany less attractive for foreign investment, while the government should instead put pressure on foreign governments to open their markets (Chazan, 2017b). On top of that, also the Netherlands announced plans to strengthen the government’s powers to block foreign acquisitions of domestic companies, despite its reluctance towards an investment screening procedure at EU-level (Marriage, 2017).

China on its side opposes EU actions against M&As. A MOFA spokesperson, Geng Shuang, reportedly stated to “[be] concerned about the relevant moves of Germany and Europe” (Hanke et al., 2017). Ding Zhijie, a professor at the University of International Business and Economics in Beijing was quoted by the financial times, stating that “back when developed countries dominated international trade they greatly promoted free trade and free capital flows and claimed this would bring benefits to both sides. Now, other countries have grown and increased their overseas investment, and these same countries use ‘national security threat’ as an excuse to set up obstacles against incoming investment”(Pickard & Clover, 2017).

5.1.1.3 Conclusions

The recent developments in Europe lead to several observations. First, and going back to the research question for this chapter, it is clear that there is a wider concern in Europe with regards to acquisitions in security sensitive industries by Chinese enterprises. In particular the Aixtron-case lead to a strong response by German authorities, which, combined with the booming FDI flows all over Europe in 2016, created a momentum within the member states and EU-institutions to discuss the risks of Chinese FDI to national security, and the possibility to tighten screenings of foreign investment by non-EU entities. While this is still considered by the Commission – and it is too soon to draw any definite conclusions –, several member states have taken unilateral steps to strengthen their screening procedures. Although it is not the first time that a stronger coordination concerning foreign investment screenings is put on the EU’s political agenda (see chapter 4.4.2), the investment figures from China since 2015 are considerably higher

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than the years before and could, combined with the current risk of anti-globalist and populist sentiments, put extra pressure to coordinate the matter on a European level (Hanemann & Huotari, 2017).

Second, although there is a discernible concern related to security sensitive sectors, it appears that several other grievances have infiltrated the debate with regards to foreign investment screenings. A) There is the growing frustration in Europe that China is not reciprocally opening its markets for European investments. Angela Merkel shared her related concerns during the Midea-Kuka controversy, and the joint letter by Germany, France and Italy stated that “the right of non-EU investors in the bloc should be subject to reciprocity in cases where EU investors are given only limited market access in non-EU countries”. Investment reciprocity even became a buzzword in Brussels, as it appeared in the EPP’s proposal for a union act, it was raised by EC-president Juncker during the EU-China Business Summit, and also the European Council called for more reciprocity.

B) It seems that there is a considerable unease in Europe with regard to China’s state-owned enterprises. After the German rejection of GCI’s takeover of Aixtron, its Ministry of Economy launched the idea to protect German high-tech companies from acquisitions “in particular by state-owned and partly state-owned companies from non-European countries”. Also the German-French-Italian letter to the Commission expressed the desire to “intervene in direct investments which are state-controlled”, whereas Germany’s deputy economy minister said that foreign enterprises “must show that their investments in Germany are not driven by the state, and that financing for their deals is in keeping with the market”. This was furthermore addressed by the EPP’s proposal for a union act, referring to the lack of a playing field if investment is subsidised by state bodies. The Commission’s move to consider all SOEs from the energy sector under SASAC as one entity is, although unrelated to the national security concern, characteristic of the growing European discontent – or distrust – towards investments by Chinese SOEs, and may signal a start of stricter monitoring on grounds of the competition policy, as suggested by Meunier (2014). Nonetheless, the British, German and Dutch investment screening reforms did not include reciprocity concerns or the state-owned nature of an investor in their procedures, which would go against EU-legislation (see chapter 4.4.2). This could however explain the political efforts by Germany to include the considerations in an EU-level legislative framework, which would furthermore level the playing field between EU member states and avoid a competitive disadvantage, in which those who restrict Chinese investment based on the above conditions may end up in a tit-for-tat scenario with Beijing, with possibly detrimental consequences for their exports to China (Defraigne, 2017). It is reportedly even mentioned by Commission officials that “some capitals are trying to hide behind the EU institutions in order to act against major trade partners like China as they fear retaliatory measures against their own countries” (Valero, 2017c).

Third, contrary to western European states (and in particular Germany), the EU’s CEE-countries barely seem present in the debate for increased screenings of investments by non-EU enterprises. To the contrary, besides the traditional pro free trade Baltic states, also Polish prime minister Beata Szydlo reportedly said that “Poland will firmly oppose protectionist measures in the European Union” (Quoted in Von der Burchard, 2017). This division is reminiscent of a quote by a Eastern-European diplomat in Beijing, stating that “We don't need the Chinese when we have EU funds, but when we don't have the money we need the Chinese. Our companies can't compete on the Chinese market of public procurement, so it doesn't matter to us if China opens up this market" (Quoted in Euractiv, 2011). This may signify a fault line within the EU, which one can even visually observe in figure 6. Although they received growing FDI flows from China (with for instance a massive Huawei-office in Budapest), CEE-countries have so far not received as much FDI from China as the Big Three and Italy. This is a consequence of their different business landscape, with less high-tech enterprises or world renowned brands, which are major incentives for Chinese investment abroad (see chapter 4.3) (Defraigne, 2017). As a result, these countries are less vulnerable to lose strategic enterprises to China’s so-called shopping spree. Furthermore, the diplomat’s

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quote may suggest that there are less opportunities for their enterprises to approach China’s public procurement market, making investment reciprocity less of an urgency. Instead, these countries would have relatively more to gain from the great potential that Chinese FDI flows could entail (Defraigne, 2017; Meunier, 2014b).

5.1.2 Sectors in which EU companies face restrictions in China’s M&A markets

5.1.2.1 The case of reciprocity & investment from China

The conclusions of the previous chapter observe that recent developments in Europe show that the issue of reciprocal market access, or China’s perceived lack thereof, has infiltrated the political debate with regards to Chinese investment in Europe. This is supported by the literature, with several authors who have noticed the growing Chinese interest in sectors that remain restricted to foreign investment in China, such as the entertainment industry, utilities, infrastructure, logistics, insurance, media and telecommunications and financial services (European Chamber, 2016, p. 25; Hanemann & Huotari, 2016, p. 4, 2017, p. 6, Hellström, 2016, p. 30, 2016, p. 4). For Europe, this is particularly frustrating as several of the restricted sectors are those in which EU enterprises are highly competitive, while the EU has an intrinsic openness to foreign capital in its legal framework (see chapter 4.4.2.).

China is regarded as one of the least open countries among the G20-economies, with market barriers that come in different ways, such as an outright prohibition for foreign investors in certain sectors, discrimination against foreign companies (for instance to obtain local contracts or funding), an unpredictable legal environment, legislative issues, limited IPR protection or a case-by-case approval system for foreign ownership in China, creating a sense of arbitrariness with European investors (European Chamber, 2016, pp. 17–18, 2016, p. 22; Hanemann & Huotari, 2015, p. 35; Hansakul & Levinger, 2014, p. 2; Hellström, 2016, p. 30). Beijing is aware of the issue, which it openly acknowledged. In 2015, its State Council announced a law that would abolish the current system of three lists of encouraged, restricted and prohibited sectors, replacing it with an FDI regime based on pre-establishment rights restricted by a single ‘negative list’, combined with national security reviews34 and competition policy (Hanemann & Huotari, 2015, p. 38). Chinese leaders have made several announcements to further ease market access for foreign investment, and is encouraged to do so by European leaders and interest groups (European Chamber, 2016, p. 30; Juncker, 2017). However, according to the EU Chamber of Commerce in China, even the recently announced reforms give mixed outcomes with more liberalisation in some sectors but increased restrictions in other sectors (such as press and media) (European Chamber, 2016).

5.1.2.2 Earlier developments in the EU

Although the idea to include reciprocal market access as a condition to allow foreign investment from China is a recent phenomenon (see above), European concerns related to China’s foreign investment restrictions are nothing new under the sun.

The Commission’s 1998 communication ‘Building a Comprehensive Partnership with China’ expressed the importance of FDI for China’s economic growth, and advocated “the construction of a sound and transparent regulatory framework for investment and a better enforcement of Chinese regulation on IPR”. Furthermore, it stated that the “EU trade policy must be backed up by a comprehensive strategy to promote investment, […] focusing on those industrial sectors (such as telecommunications, energy,

34 Which is indicative of a global trend, as stated in the problem statement. This new development has led to concerns about the scope of China’s national security reviews, and its potential for economic protectionism (European Chamber, 2016, p. 106)

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environmental technology and services, transport and financial services), where Europe has a clear competitive advantage (European Commission, 1998). A following report in 2000 noted that “the large Chinese trade surplus […] is also assisted by persisting market access barriers in China, which impede trade and investment flows. […] Removing these obstacles has therefore remained a priority for the EU” (European Commission, 2000). Furthermore, the report asserts the importance of China’s WTO accession and outlines several programmes and the EU’s willingness to support economic and social reforms in China. The communication from the Commission one year later, which defined five action points for a more effective EU policy towards China, noticed that “China is also becoming or has become a player and a market of global importance in sectors such as the telecommunications, transport, energy and the environment” (European Commission, 2001), and mentioned the EU’s relatively low FDI share in China, although it foresaw that China’s WTO accession and related reforms would smoothen this up. However, two years later, when China and the EU launched their strategic partnership, the tone changed in a new policy paper by the Commission: “Having itself benefited significantly from globalisation, China should reciprocate by progressively opening up its own economy, in line with is WTO accession commitments and beyond” (European Commission, 2003). The paper besides acknowledged Chinese reforms in line with its WTO accession commitments, but expressed substantial concerns related to a lack of transparency in economic governance and several investment barriers in for instance financial services, tele-communication and construction.

In 2006, the Commission issued a new communication in which it states that “in Europe there is a growing perception that China’s as yet incomplete implementation of WTO obligations and new barriers to market access are preventing a genuinely reciprocal trading relationship. Imports from China have added to pressure to adjust to globalisation in Europe. This trend is likely to continue as China moves up the value chain. For the relationship to be politically and economically sustainable in the long term, Europe should continue to offer open and fair access to China's exports and to adjust to the competitive challenge. The EU needs to develop and consolidate areas of comparative advantage in high-value and high-tech design and production and to help workers retrain. China for its part should reciprocate by strengthening its commitment to open markets and fair competition”, later in the document adding that “The EU will accept that it cannot demand openness from China from behind barriers of its own” (European Commission, 2006). In 2013, when Beijing and Brussels celebrated the 10th anniversary of their strategic partnership, they announced the launch of their negotiations for an investment agreement, which should “provide for progressive liberalisation of investment and the elimination of restrictions for investors to each other’s market”, thereby replacing the existing bilateral investment treaties between EU member states and China (EEAS, 2013). The investment agreement is a main priority for the EU, as it underlines in its new trade strategy “Trade for all” (European Union, 2015).

Until that point, the EU mainly focused on the protection and facilitation of European investments into China, by encouraging Beijing to reciprocally open its markets and to remove formal and informal barriers in order to create a level playing field for European enterprises. Besides, the EU repeatedly stressed its willingness and activities to support China with its economic reforms, in particular in the context of China’s WTO accession in 2001. In consulted publications above, there were no stipulations related to Chinese investment in Europe35. This is logical, as Chinese FDI flows to the EU only started to reach a considerable height since 2010 (see chapter 4.2), with annual increases, paralleled by raising anecdotal political attention related to ad hoc developments such as Xinmao’s attempt to take over Draka (see

35 Except for the 2008 communication by the Commission related to SWF-investments in the EU (see chapter 4.4.2.)

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chapter 4.4.2). In 2016, however, the European Commission’s “Elements for a new EU strategy on China”, indicated a significant shift.

The document notes that China’s “going global” policy is accelerating, and that its companies are encouraged to “trade, invest abroad and find resources as never before” (European Commission, 2016). Besides, it states that “there has been a lack of progress in giving the market a more decisive role in the economy in the key areas of concern to the EU. Recent legislative initiatives have introduced new restrictions on foreign operators in China, which go against market opening and the principles of equal treatment and a level playing field." Yet, “the fundamental principle of the EU’s relationship with China is that it should be based on reciprocal benefit in both practical and economic terms [and] the EU expects China to assume responsibilities in line with the benefits it draws from the rules-based international order” (European Commission, 2016). On top of that, the document reaffirms the high priority of a conclusion on the EU-China Comprehensive Agreement on Investment (CAI)36. So far, the communication is in line with previous statements by the Commission, although there is, at first sight, a somewhat hardening tone in which the EU is no longer offering Beijing to provide support with its economic reforms, but calling on China to assume its responsibilities to provide reciprocal market access. However, what follows in the document is a language far more direct than in any communication before:

“Yet ‘opening up’ is focussed more on helping Chinese companies go abroad than improving access to China's market. There are also challenges, for example intensified direct competition in some sectors or in third country markets where China hopes to establish its State-owned Enterprises (SOEs) as global champions. The EU wants a China which is economically more open and stable, with significantly improved market access for foreign companies as well as a level playing field and fair competition for business and investment, benchmarked at the level of openness provided for all companies operating in the EU market. […] The EU welcomes productive Chinese investment in Europe provided it is in line with EU law and regulations. We expect EU investment in China to be equally welcome. […] China should limit the scope of security-related reviews of EU investments in China solely to issues that constitute legitimate national security concerns. Similarly, the EU expects Chinese Overseas Direct Investment in Europe to be based on free market principles, and will use all the means at its disposal to address the potential market distortions and other risks of investment by enterprises which benefit from subsidies or regulatory advantages provided by the state. The possibility of establishing a common minimum definition of what constitutes critical national infrastructure in the context of inward investment in the EU should be examined in conjunction with Member States. (European Commission, 2016)”.

The latest communication resembles a shift in the EU’s policy with regards to mutual investment reciprocity for several reasons. First, it is the first document which takes notice of Chinese companies’ increasing investments abroad, signalling the growing policy relevance of this phenomenon for the EU (which is obviously linked to the booming parallel investment figures as discussed in chapter 4). Second, it is also the first document which refers to the global presence of China’s SOEs and to the possibility of market distortions because of subsidies or regulatory advantages provided by the state. Third, the communication mentions challenges, such as intensified direct competition in some sectors where China wants to establish its SOEs as global champions, which is not a matter of national security nor reciprocity, but of increased competition between European and Chinese companies in the same market segments (as discussed in chapter 4.3.4). Fourth, the document alludes to the establishment of an EU common minimum definition of what constitutes a critical national infrastructure, which is in line with the developments discussed in chapter 5.1.1. Fifth, there appears to be a willingness by the EU to take action,

36 Or the EU-China Bilateral Investment Agreement

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by using all the means at its disposal “to address potential market distortions and other risks of investment by enterprises which benefit from subsidies or regulatory advantages provided by the state.” Recent developments, such as the Commission’s June 2016 decision to consider all Chinese SOEs under SASAC in the energy sector as one entity, may be a case in point (see chapter 5.1.1.).

5.1.2.3 Conclusions

Both the literature and official statements by European Institutions suggest that reciprocal market access with China is a matter of incredible importance to Europe’s decision makers. Market access in general has been a case of concern for almost 20 years, and where it was initially just briefly mentioned in one sentence with the EU-Chinese trade imbalance (as discussed in chapter 4.1.), it has gained an increasingly prominent place on Brussels’ political agenda for China. Especially since the exponential growth of FDI flows from China, European decision makers have come to realise the opportunities as well as challenges this may constitute for the Union. Although Brussels formally asserts its openness to investments from China, there is a clearly discernible trend in which Europe is more assertive in its demand for investment reciprocity, while expressing its willingness to act if China fails to do so. This development may signify a shift towards a new realism in EU-Chinese relations, as is the case for Berlin’s attitude towards Beijing (Hanemann & Huotari, 2017, pp. 8–9). An interesting observation to add is a notion of unfairness amongst the European public, business community and government leaders when it comes to China’s asymmetric market openness (Grieger, 2017, p. 4). This is not unimportant, as a considerable number of authors point to the risk of decreased public support for FDI from China if it is not perceived as a win-win situation, which could result in a backlash and limit European leaders’ options to remain their openness to investment from China, especially in times when the benefits of globalisation are increasingly being questioned (EPSC, 2016, p. 5; Grieger, 2017, p. 4; Hanemann & Huotari, 2015, p. 30, 2017, p. 10). In the meantime, Brussels keeps up its hopes for a conclusion of the CAI with China, which could build mutual trust, ensure market openness in both directions for investment and provide a long-term legal framework (EPSC, 2016, p. 5; Forchielli, 2015, p. 3, 2015, p. 1; Hanemann & Huotari, 2016, p. 3; Juncker, 2017). Although most EU member states already have a BIT with China, they lack provisions regarding the requirements and conditions for market access, while focusing on investment protection after market entrance (Hellström, 2016, p. 31). However, so far, the CAI-negotiations hardly reached any convergence, due to disagreements exactly with regard to… market access (García-Herrero & Xu, 2017, p. 6).

5.1.3 State-owned Enterprises

5.1.3.1 The case of China’s SOEs and investment from China

The sources that were consulted in the above two chapters have shown clear indications that there is a growing sense of awareness and concern regarding investments by Chinese SOEs in the European Union. As stated before, the German ministry of economy for instance launched the idea to protect its high-tech companies from acquisitions “in particular by state-owned and partly state-owned companies from non-European countries”. Furthermore, the letter by Berlin, Paris and Rome to the Commission advocated the possibility to “intervene in direct investments which are state-controlled”, whereas Germany’s vice-minister of economy stated that foreign enterprises “must show that their investments in Germany are not driven by the state, and that financing for their deals is in keeping with the market”. Besides, also the EPPs proposal for a union act referred to the lack of a playing field if investment is subsidised by state bodies. Eventually, the Commission’s “Elements for a new EU strategy on China” for the first time takes notion of the growing global presence of China’s SOEs, and to the possibility of market distortions because of subsidies or regulatory advantages provided by the Chinese state. The Commission’s decision in 2016 to consider all energy-related SOEs under SASAC as one entity could be representative of this growing awareness.

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The literature indicates two sources of concern in Europe with regard to Chinese SOEs. First, there is the notion that China’s SOEs are intrinsically linked to the Chinese government and its political objectives, and could therefore be serving political rather than commercial interests (Hellström, 2016, p. 26; Meunier, 2014a; Okano-Heijmans & van der Putten, 2011, p. 10). Hellström (2016) for instance mentions a European perception and suspicion that China’s state-owned enterprises have links to the Chinese Communist Party (CCP) its People’s Liberation Army (PLA) (Hellström, 2016, p. 31). A case in point is the purchase of Global Switch, a British cloud data centre provider, by a Chinese consortium of which one of its members is a subsidiary of AVIC, a Chinese military aerospace group. After the deal, the Australian government eventually terminated its contract with Global Switch because of this change in ownership (Pickard & Clover, 2017). China is according to European policy makers a particular reason for concern, as it is not a direct enemy but definitely no geopolitical ally of the EU, in particular vis-à-vis the alliance of NATO-states, or compared to the traditionally amicable relations with countries from whom Europe received waves of investment in the past, such as the United States, Japan or South-Korea (Grieger, 2017, p. 4). China’s unique, non-democratic political system, its opaque political decision-making processes, its state influence over the economy, its rapidly growing military prowess and its history with waves of enmity to the West – think about the century of humiliation and the cold war – have sparked anxiety in Europe and elicited a certain apprehension towards investments by Chinese SOEs, especially for reasons of national security (see chapter 5.1.1) (Meunier, 2014a; Okano-Heijmans & van der Putten, 2009). The fact that China’s enterprises are supported to go abroad by governmental initiatives such as the ‘going out policy’, ‘Made in China 2025’ or China’s Belt and Road Initiative has amplified concerns (Hanemann & Huotari, 2017, p. 6). German officials for instance insisted to welcome Chinese investments, but criticized the involvement of Chinese government programmes to do so, which is considered to be part of a ‘political strategy’. Even back in 2011, when Xinmao made a bid for the Dutch cable maker Draka, similar concerns arose when Antonio Tajani, then Commissioner for industry, called the acquisition of hi-tech companies “a political strategy that Europe needs to respond to politically” (Wishart & Rankin, 2011).

A second source or concern with regard to Chinese SOE investments in the EU is related to the prevailing idea that China’s SOEs (but also internationally operating private companies) benefit from a preferential treatment by central or local authorities, a legacy of China’s history of a centrally planned economy, which undermines market economy principles (García-Herrero & Xu, 2017, p. 2). Examples include cheaper and easier access to financing, explicit or implicit guarantees by the government, subsidies, access to state information, industrial policy support schemes such as ‘Made in China 2025’ and so forth (García-Herrero & Xu, 2017, p. 10; Hanemann & Huotari, 2015, p. 39). Whereas European enterprises were in the past mainly affected by these subsidies when they were competing with such companies in China, they are now confronted with major Chinese competition in their home markets (García-Herrero & Xu, 2017, p. 6; Hanemann & Huotari, 2015, p. 39). Since EU legislation forbids state aid to European companies – a rule that does not apply to non-EU enterprises -, there is a sense of unfairness, in which EU businesses feel discriminated versus their Chinese competitors (García-Herrero & Xu, 2017, p. 6; Hanemann & Huotari, 2016, p. 2). This can also be noticed in the current discourse by European officials, such as Sigmar Gabriel’s statement that “It’s about regulating fair competition on the European level — particularly when it comes to states who have no free market economy like we do, or who do investments in our key technologies via companies ruled by the state” (Delcker, 2016), or the passage in the Commission’s ‘Elements for a new EU Strategy on China’, saying that “It is important for the EU to work with China to promote open and fair competition in each other's markets and to discourage China from underwriting its companies' competitiveness through subsidisation or the protection of domestic markets. (European Commission, 2016)”.

However, the strong attention paid by Europe to investments by Chinese SOEs might almost lead an outside observer to overlook the actual figures. As observed in chapter 4.2.5, despite the generally larger

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share of SOEs in the total value of mergers and acquisitions, privately-owned enterprises have always been in the lead in terms of number of M&As in Europe and are taking an increasingly growing share in the total value of deals, even overtaking SOEs in 2016. Furthermore, and as discussed in chapter 4.3.5., the decision by a Chinese enterprise to invest abroad is not only driven by governmental initiatives, but also by commercial incentives, even leading to a competition between SOEs for contracts in the EU (Godement et al., 2012; Hanemann & Rosen, 2012, pp. 60–69). One should thereby take into account that many of China’s SOEs are actually provincially owned, and that within the country, there is a strong competition between provinces to either attract investment or to invest abroad, with diverging ‘going out’ policies, and with different features per province regarding the share of SOEs or POEs in their market, the sectors in which their SOEs are active or the OFDI destinations for their SOEs37 (Davies, 2013, pp. 43–55). There is a particular desire for Chinese companies to diversify their investment portfolio since the Chinese economy is suffering downwards pressure, for which the European market, with its stable legal framework and attractive investment opportunities since the great recession, was considered an excellent destination. Nevertheless, even if privately-owned enterprises take an increasingly stronger role in Chinese OFDI, several sources point to the fact that privately-owned enterprises as well have strong political connections. As a result of China’s SOE-reforms in the 1990s – which transformed smaller SOEs into private firms or consolidated them with larger state-owned enterprises – many private firms today were state-owned until the late 1990s with remaining political connections until today (García-Herrero & Xu, 2017, p. 2). Besides, 5% of Chinese POEs is estimated to be owned by members of the CCP, so although they are technically a private enterprise, they are considered to be at least partly under the influence of the government (García-Herrero & Xu, 2017; Veron & Hendrik-Roller, 2008, p. 2).

5.1.3.2 Conclusions

Investments by SOEs from China are a contentious issue in Europe, and are therefore likely to increase related political opposition. This is mainly a result of two causes of concern. One, European policymakers suspect that politically motivated interests may drive an SOE’s decision to invest in Europe, with potential consequences for national security. Two, there appears a deeply rooted sense of unfairness and discrimination as a result of the fact that SOEs benefit from a preferential treatment by Chinese authorities and therefore fail to follow market principles (on top of the fact that those SOEs have less market barriers to face in the Chinese market compared to their European competitors). Even if the trend of an increasing share of POEs in China’s OFDI continues, it is unlikely that the European concerns will be soothed as a result of the perceived blurred lines between state and market forces (Grieger, 2017, p. 4; Okano-Heijmans & van der Putten, 2011, p. 10). Because of this high degree of entanglement between state- and privately-owned entities, García-Herrero & Xu (2017) suggest that the EU should not over-focus on SOEs in its BIA-negotiations with Beijing, as also some large privately-owned companies can benefit from preferential treatment or market access in China. Instead, they suggest Brussels to focus on reciprocal market access, in order to put European companies on equal footing with their Chinese competitors (García-Herrero & Xu, 2017, p. 13). The importance of a bilateral investment treaty cannot be overstated, since there are no multilateral regimes that regulate investment subsidies, contrary to trade subsidies, which fall under the WTO-framework (Hanemann & Huotari, 2015, p. 39). It remains to be seen whether the EU, for whom Chinese SOE-investment is a clear reason for concern, will pursue the recent proposals to be able to “intervene in direct investments which are state-controlled”, to the example of Canada (which

37 This nuance is not once mentioned in any of the other consulted studies, nor in any official publication or strategy of the EU institutions, who generally address China’s central government to discuss related issues, despite the relatively strong fiscal autonomy that China’s provinces enjoy.

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implemented restrictive regulations towards SOE-investments), or whether it will remain open to foreign investment irrespective of an enterprise’s ownership features (Hanemann & Huotari, 2015, p. 11).

5.1.4 Economically distressed industries

5.1.4.1 The case of economically distressed industries and investment from China

Tingley et al. (2015) argue that a “motivation for political leaders’ likely opposition to foreign M&As is their desire to protect local economic interests that M&A activity might hurt” (Tingley et al., 2015, p. 34). In the study, economic distress is tapped by measuring abnormal rates of unemployment within a firm’s sector, under the assumption that M&As in industrial countries are perceived to result in significant employment reductions in the acquired firm, which could eventually lead to political opposition to such acquisitions. It was eventually concluded that US political actors are indeed more likely to oppose Chinese inward M&A investments in economically-distressed industries. As stated in the methodological note, it would be beyond the scope of this dissertation to apply similar research methods as Tingley et al. (2015), who constructed a dataset of no less than 569 transactions as a basis to measure the correlation between those variables. Furthermore, the European Union would pose a particularly complex challenge, due to the fact that the available data would need a breakdown per sector and per member state, after which an analysis should be done per European capital and on EU-level, comparing the available data with political opposition to Chinese M&As in those sectors. Although this would be a fascinating and rewarding challenge to undertake, the constraints in time and space do not allow such further elaboration in this dissertation. Eurostat aggregate data for the EU2838 were consulted and show no considerable decrease in employment rates for the sectors that were most popular for Chinese FDI in Europe (energy, real estate, manufacturing, agriculture, finance, IT and more recently automotive and the hospitality industry, see chapter 4.2.4.), despite a strong decline in growth rates for the agricultural and manufacturing sector. Although the manufacturing industry is one of the sectors that gained remarkable public attention through Midea’s acquisition of Kuka, or GCI’s refused attempt to take over Aixtron – which both met considerable political opposition –, it would be tendentious to interpret this as an indication that European political opposition towards Chinese investment is correlated with declining employment rates in the manufacturing industry. Instead, and as outlined in the methodological note, this chapter will continue to utilise official statements, media sources and literature as before, to explore any European political resistance to investments from China, based on concerns for economic distress.

The consulted sources, which include all publicly available EU-statements, press releases or speeches on China, as well as a considerable amount of media sources, do not provide sufficient indications that European opposition towards investments from China are related to a fear of job losses in economically distressed sectors, except for a statement by French MEP Françoise Grossetête, saying that she would “like to see a concrete action plan on the issue of controlling foreign investment in strategic areas that are going to guarantee the employment because jobs are the only social response that we can give to our citizens” (Valero, 2017b). To the contrary, since the financial crisis, there is a hunger and even competition between member states for FDI from China, resulting in less political resistance if foreign investment means that jobs could be saved or created (Forchielli, 2015, p. 2; Hellström, 2016, p. 20; Meunier, 2014a). In 2010, 45,000 jobs were associated with Chinese FDI in Europe (Hanemann & Rosen, 2012). In Piraeus port, of which COSCO acquired a 51% share, there was initially some commotion related to work accidents and deteriorating working conditions, but after three years of operation 1,000 jobs were created and the situation improved. A study by Hanemann & Huotari (2015), which reviewed more than 1,000 deals, does

38 Eurostat (2016). Dataset consulted at http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=lfsa_egan2&lang=en

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not support any fears that Chinese investment may negatively impact local employment (Hanemann & Huotari, 2015, p. 6). After the controversial Kuka deal, Midea pledged to maintain existing production facilities and jobs until at least 2023 and sent its vice-president to make those assurances in a meeting with the German economy minister (Campbell et al., 2016). Although jobs are a high priority of Europe’s policymakers after the eurocrisis, there are no clear indications to be found in their discourse or the literature that there would be any political opposition to Chinese investments related to fears that jobs might disappear. This is an evidence when it comes to greenfield investment (see chapters 3.1. and 4.2.6.), which provides additional jobs per definition, but also mergers and acquisitions by Chinese investors appear to be seen as an opportunity for job creation, rather than a threat. Burgoon & Raess (2014) even notice “a cautiously optimistic view of Chinese investors as no more or less threatening to organised labour”, and a relative embracement of this investment (Burgoon & Raess, 2014). A case in point is the following quote on the EEAS homepage for EU relations with China, stating that “the rise of China has happened with unprecedented scale and speed and has not only changed the country internally but has also given it more weight on the international stage. This presents major opportunities for EU-China cooperation, in particular in creating jobs and growth in the EU and in supporting China's own economic reform programme.”39

However, the argument by Tingley et al. (2015) that political leaders will likely oppose M&As if those investments pose a threat to their local economic interests does not necessarily have to limit the scope of research to ‘possible job losses’ in economically distressed industries. The concept of ‘protecting local economic interests’ can also be expanded, in which not only employment figures but also the business interest of one’s national industries is taken into account. Seen from this perspective, there is a growing apprehension in Europe that Chinese enterprises are increasingly competing in the same market segments as their European counterparts (facilitated by acquisitions in Europe) (García-Herrero & Xu, 2017, p. 11). As stated before, The European Commission’s new strategy on China considers this to be challenge, especially in the light of the unfair competition by China’s SOEs (European Commission, 2016). A Reuters report even cites a proposal from the European Commission’s industry department, suggesting increased powers for the EU to scrutinize “investments in the EU of strategic importance both from an economic and security perspective”, including defense, transport infrastructure and cutting-edge technologies, which may be extended to deals that put at risk “economic prosperity” (Guarascio, 2017). Although this should be read with strong caution since it is hard to verify the reliability of this report, and the Commission may come up with a very different proposal, it is nevertheless interesting to notice what seems a growing momentum in Brussels to defend its businesses and economies to any threats resulting from Chinese investments, especially when they are given unfair benefits.

Okano-Heijmans & van der Putten (2011) noticed European worries, stating that several sectors and countries in Europe are anxious to “lose their competitive advantage and technological know-how”, and are increasingly concerned about risks for Europe’s industrial base due to the growth of Chinese acquisitions in hi-tech assets (Hanemann & Huotari, 2017, p. 6; Okano-Heijmans & van der Putten, 2011, p. 10). This seems consistent with Sigmar Gabriel’s wish to restrict foreign takeovers if they involve “key technologies” (Chazan, 2016b). Hanemann & Huotari (2015) however write that the so-called “headquarters effect”, in which acquisitions can result in the transfer of technology from the host to the source country, has little empirical evidence. Furthermore, they state that there is no evidence to support the claim that Chinese firms might be buying European technological assets to move those activities and jobs back to China. To the contrary, the growing figures of technological-seeking investments from China

39 European External Action Service (2017). Retrieved from https://eeas.europa.eu/headquarters/headquarters-homepage_en/8666/EU-China%20relations,%20fact%20sheet

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are even an opportunity in terms of intellectual property rights, as Chinese enterprises are willing to pay for those technologies at market prices instead of the former practices in which investors were forced to share their technologies with a Chinese partner in order to enter China’s market (Hanemann & Huotari, 2015, p. 39). Despite the fact that European politicians have rarely expressed any concerns related to job losses as a consequence of Chinese investment, this seems as anecdotal evidence of a growing anxiety that the transfer of European technologies to investors from China could thwart Europe’s local economic interests. Indeed, according to Grieger (2017), “[there is] a growing perception among certain Member States that the existing mechanisms are not suitable for tackling concerns about alleged 'unfair competition' from China, which may harm the EU's industrial base, long-term global competitiveness in strategic sectors, and hence its future economic prosperity” (Grieger, 2017, p. 2).

5.1.4.2 Conclusions

If ‘economically distressed industries’ are interpreted as those sectors that are under pressure of relatively higher unemployment figures, which could lead to a political reluctance to eventual job losses, there was little evidence found that Chinese investment in those industries would result in higher political opposition in Europe. On the one hand, this is probably a consequence of the methodological constraints of this dissertation, as it would require a breakdown of the unemployment rates per sector and per member state, which should then be compared to a dataset of Chinese acquisitions in those sectors per member state and the potential political opposition it was confronted with. On the other hand, it might be so that there are indeed less fears in Europe for job losses following Chinese acquisitions. The discourse in Europe appears to be rather optimistic, even speaking in terms of saving or gaining jobs because of Chinese FDI. However, when applying a wider scope of what constitutes ‘local economic interests’, one can observe a certain anxiety in Europe related to the potential harm of Chinese investments, and resulting technology transfers, to the EU’s industrial base, the global competitiveness of its enterprises and its economic prosperity. These economic concerns are accompanied with a sense of unfairness, a result of the prevailing perception in Europe that the lack of reciprocal market access for investments, and China’s preferential treatment for its SOEs - who are now competing on the European market – are discriminating European enterprises. In the previous chapters, it was observed that the current debate in Brussels about Chinese acquisitions not only pays attention national security concerns, but also – and maybe even more – to these economic concerns, with even a number of proposals to include those in a foreign investment screening framework. This would contradict the academic consensus that an investment screening procedure should strictly stick to security interest (see chapter 4.4.2.), although it is now too soon to make any assessment, as the political process is still in progress. It does however raise the question whether the tendency to protect of one’s economic interests from the negative outcomes of Chinese investment could spiral into outright protectionism, a certain risk which is noticed by several authors (Grieger, 2017; Hanemann & Huotari, 2016, 2017; Hanemann & Rosen, 2012; Veron & Hendrik-Roller, 2008).

5.1.5 High brand recognition

According to Tingley et al. (2015), US politicians tend to express more opposition to a foreign acquisition when the target firm has high brand recognition, since transactions that involve well-known firms are more likely to draw widespread public attention. In the consulted statements from European decision makers, not a single reference was found to the fact that well-known firms may result in stronger political opposition to Chinese investments. The consulted press however made reference to two cases. A first case is the attempt by Chinese SOE Jin Jiang in June 2016, to increase its stake in the French hotel group AccorHotels, Europe’s largest in its kind. As Jin Jiang already owned AccorHotels’ biggest French rival, Louvre Hotels Group, French president Hollande promised to keep a close look on the matter in order to ensure the company to remain in diverse hands. According to Le Figaro, however, the French government

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mainly wanted to avoid yet another of its prize assets falling into foreign hands (after Nokia’s purchase of Alcatel, GE’s purchase of Alstom’s power business or Fosun’s purchase of Club Med the year before (Vidalon & Denis, 2016). A second case is a Financial Times-article concerning the infamous acquisition of Kuka by Midea, which reports a source from Rothschild, stating that it is “legitimate to think about what happens when you transfer control of high-tech companies like Kuka to the Chinese. The more iconic a company, the more this will be debated” (Chazan, 2016a). These two quotes are obviously insufficient to claim that well-known firms result in stronger political opposition in Europe

5.2 DID EU GOVERNMENTS USE NATIONAL SECURITY CONSIDERATIONS?

The previous chapter observed that European political opposition to Chinese investments is, similar to the situation in the United States, fuelled by investments in security sensitive industries; in sectors in which EU companies faced restrictions on China’s markets, and in acquisitions by Chinese state-owned enterprises. Besides, it found no explicit opposition by European decision makers towards Chinese investment inspired by fears for job losses, although there is anecdotal support that politicians stand ready to protect local economic interests when Chinese investments are perceived to thwart those interests. On top of that, it found little evidence in press coverage or public statements which could act as proof that high brand recognition would increase the chance of European political opposition to Chinese acquisitions. This chapter will take a next step and further elaborate on the second research question of this dissertation, namely:

- Have governments in the EU invoked national security considerations through which to express these grievances?

If this question should be answered based on the effective number of rejected transactions out of national security considerations, then a very simple answer can be given, namely ‘probably not’, simply because only few such reviews to barely any outright rejections have taken place, despite the recently growing national security concerns in the EU. According to Van Den Bulcke and Zhang (2014), by 2014 no member state had even used its national FDI screening to reject Chinese investors (Cited in Meunier, 2014b). Germany, for instance, undertook 338 reviews on foreign acquisitions of domestic enterprises between 2008 and November 2016, but all except one of those reviews were voluntarily filed by the foreign investor in order to alleviate any potential concerns40 (Stanzel, 2017). The Germany Ministry of Economy’s only self-initiated review was one regarding the acquisition of Aixtron by GCI, after being informed by the US government that it had some national security concerns after its own investment screening process of the deal (Stanzel, 2017). This could, on the one hand, be a consequence of the fact that a plain rejection of a foreign acquisition is, in general, extremely rare, as many security review mechanisms in fact contain negotiation mechanisms to mitigate the security risks (Grieger, 2017, p. 10). However, if such national security consideration is invoked through which to express other grievances, negotiations that mitigate the asserted national security concern would eventually alleviate those security-related concerns and allow the foreign investor to enter the market after all.

On the other hand, another factor that could explain the limited number of rejections, is the EU’s general openness to foreign investment, as confirmed by the OECD’s FDI regulatory restrictiveness figures (see figure 9) (Clegg & Voss, 2012, p. 10, 2016, p. 85; Thomsen & Mistura, 2017). This could be a result of the EU-legislation, which stipulates a free movement of capital – also extending to third countries –, with exceptions in case of strictly interpreted threats to national security or public policy (see chapter 4.4.2.).

40 No similar figures could be found for the UK, Italy and France.

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An extra reason could be that, according to Defraigne (2017), the EU member states are less wary of Chinese strategic-asset seeking outward investments than for instance the USA or Japan, who have opted for a more cautious approach towards Chinese FDI. The EU is not a hard power with a consistent foreign and security policy that considers China as a direct threat. Furthermore, the competences with regard to FDI are divided between the EU-institutions and member states, which, combined with the different member state preferences in terms of security screenings, gives the Chinese authorities ample room for manoeuver. This geopolitical and institutional context poses a more favourable environment for Chinese firms to acquire technology and know-how (Defraigne, 2017). This is confirmed by the latest EU Chamber of Commerce in China report on Chinese FDI in Europe, which includes the results of a survey with Chinese enterprises, showing that only 7% of the businesses report to have countered national security concerns (European Chamber, 2013, p. 18). The EU is perceived as a stable investment environment, with a relatively open market, few market access barriers and “little history of opposition to Chinese investments on national security grounds”41, especially compared to the US and Australia (European Chamber, 2013, p. 4, 2013, p. 17).

Figure 9: FDI regulatory restrictiveness per country, 201542

Indeed, the American foreign investment screening process, as executed by the CFIUS, is seen by Chinese investors to lack transparency, predictability and even to be discriminating against Chinese investors – probably a consequence of the fact that deals involving SOEs are mandatorily required to be reviewed (Hellström, 2016, p. 33; Meunier, 2014a). Furthermore, the CFIUS screening mechanism includes critical infrastructure and critical technologies, which is not the case in every EU member state, where different regulations prevail. However, the CFIUS ‘Three Threat’ framework43 is generally considered to apply a

41 It should however be noted that this survey was undertaken in 2013, when Chinese FDI flows were not at the same levels as today 42 Source: image taken from (Thomsen & Mistura, 2017, p. 4); data based on OECD FDI Regulatory Restrictiveness Index database 43 The CFIUS separates threats in three distinct types, namely: “1) a possible leakage of sensitive technology or government that might deploy or sell such technology so as to be harmful to US national interests, 2) the ability of the foreign acquisitor, acting independently or under instructions from the home government, to delay, deny, or place conditions upon provision of output from the newly acquired producer and 3) the potential threat that an acquisition of a US company might allow a foreign company or its government to penetrate the US company’s system so as to monitor, conduct surveillance, or place destructive malware within those systems” (Moran, 2017, p. 5).

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rather narrow approach, as it only includes genuine security threats and excludes cases of unfair competition (despite occasional pressure to include them) (Grieger, 2017, p. 9).

When one looks back at the research question in the beginning of this chapter, it would be tempting to stick with the observation that EU member states, who are inherently open to foreign investment, hardly used their investment screening instruments (if they have any) to block foreign acquisitions from China for national security concerns, and to subsequently conclude that the EU member states have not used national security considerations as a vehicle through which to express the grievances discussed in chapter 5.1. However, the invocation of national security concerns is not necessarily confined to the instigation of foreign investment reviews or the rejection of a foreign investment. National security considerations may also be invoked by decision makers in the public sphere or in their political institutions, without any necessary legal consequences. From this point of view, one might discern a different picture.

In the previous chapter, it was observed that the debate in Brussels on Chinese inward investment flows, and related consequences for national security, was infiltrated by several other concerns, such as the lack of reciprocity and the state-ownership of Chinese investors, which is by European leaders perceived as unfair. Furthermore, there is a fear that this unfair competition could threaten the EU’s industrial base, the competitiveness of its industries and future economic prosperity. There is no solid basis and no reason to argue that the European political reservations towards Chinese investments, because of security concerns, are insincere, since chapter 5.1.1. concluded a widely expressed concern by European politicians that Chinese investment in certain security sensitive industries could pose a threat. However, the very fact that the political response and debate to those security concerns are immediately accompanied by a pronounced indignation related to the issues of reciprocity and Chinese state aid, does raise suspicions that security concerns are not the only factor on the table, and might be used as a vehicle through which to express those economic interests. Even more, the circulating proposal by Germany, France and Italy explicitly advocated the inclusion of economic criteria in an EU-coordinated framework to screen foreign investment, which was discussed in the Council, while a similar proposal found its way in the Parliament.

The inclusion of economic concerns in an investment screening framework would considerably deviate from the academic recommendations as discussed in chapter 4.4.2., and from OECD-guidelines (OECD, 2009). This is exactly the proposition of Moran (2017), who draws lessons from CFIUS for the European Union. According to his analysis, the CFIUS takes a very narrow look at national security threats, recommending the EU to follow a similar path in the future. First, CFIUS tried to identify threats within sectors (such as the energy or telecom industry) and does not exclude entire sectors from foreign acquisitions. Second, although CFIUS devotes additional attention to SOEs, this attention is limited to national security threats and not to possible unfair competition. Third, CFIUS does not conduct an economic-benefits test, and does not base rejections of transactions on reciprocal treatment for US investors in the country of the investing firm (Moran, 2017). Furthermore, he warns that the broadening the CFIUS-mandate along those lines would open the door to protectionist responses from other countries, could lead to retaliation against US investors abroad and threaten the benefits of the free flows of cross-border investments (Moran, 2017, p. 2)44. In contrast with Moran’s recommendations, the recent political developments in Brussels almost seem an antipode.

44 It should be said that Moran’s conclusions may seem to contradict Tingley et al. (2015), who argue that reciprocity issues, acquisitions in sectors under economic distress, acquisitions by Chinese SOEs and acquisitions of enterprises with a high brand recognition increase the probability of political opposition to an acquisition, which could be expressed through national security considerations. However, the political expression of national security concerns related to a certain acquisition, as observed in the dataset of Tingley et al., may be a reality in the political arena and public sphere, without a necessary investigation by the CFIUS

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In these uncertain times of growing anti-globalist sentiments, several sources have warned the EU for a potential populist backlash and the politicisation of investment deals from China (Hanemann & Huotari, 2015, p. 46). It may as well be that European leaders, in an attempt to fend off the populist threat, increasingly work to ensure a fair global order through a tougher stance on trade and investment vis-à-vis China (Bibby, 2017). Or as the Commission states in its Reflection Paper on Harnessing Globalisation: “Openness to foreign investment remains a key principle for the EU and a major source of growth. However, concerns have recently been voiced about foreign investors, notably state-owned enterprises, taking over European companies with key technologies for strategic reasons. EU investors often do not enjoy the same rights to invest in the country from which the investment originates. These concerns need careful analysis and appropriate action” (European Commission, 2017c, p. 15). However, the growing opposition against unfair investments from China are a recent phenomenon, and although this could be an interesting topic for research, it is too soon to draw any conclusions for the future. The European narrative remains in favour of free and open trade and against any sense of protectionism, of which the recent conclusion of a free trade agreement with Japan could even testify.

Whether or not the recent political developments in Europe are the beginning of a spiral into investment protectionism, caused by anti-globalist sentiments or a populist backlash; and even though this may again be a fascinating topic for further research, it is not the main point of this chapter. The matter at stake is whether governments in the EU have invoked national security considerations through which to express the grievances discussed in chapter 5.1. It is not easy to give an unambiguous answer to this question. On the one hand, the EU’s general openness, its complex division of competences with regard to foreign investment and the sheer volume of actual foreign investment reviews may point to the fact that EU member states in the past barely invoked any national security concerns whatsoever. On the other hand, the growing politicisation of Chinese acquisitions has resulted in a debate, in which the proposals on the table suggest to change the legislative framework in order to include those economic concerns in a (European) procedure for foreign investment reviews. Simultaneously, and independent of any progress on the European level, several member states have unilaterally decided to tighten their foreign investment review procedures. This may as well point to the fact that, in the current political climate, some decision makers are more than sure willing to do so.

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6 Conclusions

6.1 FINDINGS

China’s growing global importance and its increasing integration in the global economy has come to the point where Beijing has even become a net exporter of capital. Although its total FDI stock in the EU is still relatively low, its recent boom of mergers and acquisitions in Europe has led to a growing awareness among political actors in the old continent. Some see this as a unique opportunity to invigorate their sluggish economy or to attract new jobs, resulting in plenty of mutual state visits during which Beijing was courted by its European counterparts. However, there is an increasing momentum of European opposition against Chinese investments, which can be discerned from press statements by decision makers as well as the recent political development in the EU’s institutions and member state capitals.

Based on this finding, this dissertation investigated the possible factors that may contribute to the European political opposition towards investments from China. It starts from the conclusion of Tingley et al. (2015), who found that US opposition to acquisitions from China is more likely:

1. In security sensitive industries 2. In sectors where US companies faced similar investment restrictions in China 3. By state-owned enterprises 4. In economically distressed industries 5. Of target firms with a high brand recognition

Eventually, the same question is asked with respect to Europe, namely: whether those five concepts are present in the political opposition to Chinese investment in the EU? In order to explore this question, each factor was subjected to a qualitative analysis, based on an extensive volume of primary and secondary sources.

First, there were indeed indications of a wider concern in Europe with regard to acquisitions in security sensitive industries, in particular after the attempted takeover of Aixtron in Germany. This has resulted in a political discussion within the European institutions, leading to proposals to coordinate screenings of extra-EU investments on a European level, but also to unilateral steps by Germany, the UK and even the Netherlands to tighten their national screening procedures. However, it was as well observed that several other grievances had infiltrated the debate on foreign investment screenings, including China’s lack of reciprocal market access for investment, and the involvement of Chinese state-owned enterprises, which were proposed to be included as criteria for future investment screenings. Furthermore, there appears a division between those EU member states who favour a stronger screening of non-EU enterprises (in particular Italy, Germany and France), and those EU member states who refused the proposal (in particular CEE-countries and traditionally free trade-minded countries).

Second, there were indeed indications of a strong concern in Europe with respect to asymmetrical investment restrictions, or a lack of reciprocity in market openness by China. This has been reason for concern for almost 20 years, and there is an increasing agitation on the European side in which the EU is willing to act, especially since the “Elements for a new EU strategy on China” came into play. There is a genuine sense of unfairness that China is able to acquire European enterprises in sectors that are closed for European investors in China.

Third, there were indeed indications of a wider concern in Europe with regards to acquisitions by Chinese state-owned enterprises. These concerns are rooted in two main causes, namely 1) European policymakers suspect that politically motivated interests may drive an SOE’s decision to invest in Europe, with potential consequences for national security. 2) there appears a deeply rooted sense of unfairness

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and discrimination as a result of the fact that SOEs benefit from a preferential treatment by Chinese authorities and therefore fail to follow market principles.

Fourth, if ‘economically distressed industries’ were interpreted as those sectors that are under pressure of relatively higher unemployment figures, which could lead to a political reluctance to eventual job losses, there was little evidence found that Chinese investment in those industries would result in higher political opposition in Europe. To the contrary, the consulted sources even point to a certain degree of optimism. However, when applying a wider scope of what constitutes ‘local economic interests’, one can observe a certain anxiety in Europe related to the potential economic harm by Chinese investments, and resulting technology transfers, to the EU’s industrial base, the global competitiveness of its enterprises and its economic prosperity. These economic concerns are accompanied with a sense of unfairness, a result of the lack in reciprocal market access and the competition with Chinese SOEs on the European market.

Fifth, only two anecdotal cases were found of an increased political opposition in Europe if firms with a high brand recognition were acquired, which is therefore negligible.

Subsequently, the research continued in order to answer the question: have EU governments invoked national security considerations through which to express these grievances?

If this question should be answered based on the effective number of rejected transactions out of national security considerations, then the simple answer is ‘no’. EU governments are still subject to provisions in EU law, which forbids restrictions on capital except for reasons of national security or public policy. Furthermore, the EU member states are according to OECD standards among the most open countries for FDI. However, if the invocation of national security concerns is not confined to the effective rejection of a transaction, indications were found that the European political process witnessed a growing tendency to defend economic interests as a consequence of growing FDI flows from China, such as proposals to include those economic considerations in EU legislation as a criterion to block extra-EU investments. This desire is deeply rooted in a conception that Chinese investments by SOEs or in sectors that are not open to European companies in China, are unfair.

6.2 RESERVATIONS

The findings of this essay are informative and may provide one piece of the puzzle when it comes to the political opposition in Europe towards Chinese investments. Furthermore, the breakdown of investment figures, and dynamics in investment flows from China are a worthy synthesis of a contentious topic with increasing relevance in Brussels. However, the results should be interpreted with caution, as the selection of qualitative sources may be biased, despite attempts from the author to collect a balanced database of information. Furthermore, one should take into account that the booming investment flows from China are a rather recent phenomenon which are still in full progress. As discussed in chapter 4, there are signs on the wall that Chinese FDI flows may face downward pressure, which could abruptly alter the political dynamics in Brussels. Nevertheless, even in this scenario could the conclusions of this essay be useful, as an indicator of political perceptions in Europe vis-à-vis China, and perhaps as a framework for further research to the emergence of investors from countries who are no democracy or market economy.

6.3 SUGGESTIONS FOR FURTHER RESEARCH

One might suggest further research to quantifiably confirm the conclusions of this dissertation. Other topics of interest could be the public opposition to Chinese investment, contrary to political opposition,

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or a comparative analysis between the growing investment flows from China and those from earlier investors in Europe such as the United States, Korea and Japan.

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Annex

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