EU Told to Be More Assertive on China to Address Investment Gap

(Bloomberg) -- The European Union suffers a “significant gap in investment openness” with China that hurts the bloc’s interests, and needs to develop a strategy to address longstanding market access issues.

Those are the conclusions of a new joint report released by consulting firm Rhodium Group in New York and the Mercator Institute for China Studies in Berlin. About three out of four major Chinese acquisitions in Europe since 2000 couldn’t have happened the other way around, according to the report, citing deals such as Tencent Holdings Ltd.’s acquisition of Finnish gaming house Supercell Oy as something Beijing’s restrictions would bar at home.

“Chinese investors enjoy one of the most open investment regimes in Europe, with almost unfettered access to all industries,” analysts wrote. “China on the other hand continues to strategically limit access for foreign companies in many sectors and there is rampant informal discrimination against foreign firms.”

The cure requires Europe to pursue a more assertive economic strategy, they said. That means pushing for a strong bilateral investment treaty and reciprocal market access where the EU has leverage, as well as introducing transparent screening of foreign investment for national security concerns. The authors also advocate building coalitions with like-minded countries such as Organisation for Economic Cooperation and Development members.

A shift in flows between Europe and China was observed from 2010, with Chinese FDI in the EU overtaking flows the other way since 2014, researchers said. China FDI in the EU has been more than triple the continent’s in the Asian nation for three years, driven almost exclusively by M&A that’s heavily restricted in the other direction.

Chinese FDI in the EU fell to 29.7 billion euros ($37 billion) last year from a peak of 35.9 billion the year before, data compiled by Rhodium show. European investment fell to 6.9 billion euros from 7.5 billion euros during the same period. China’s cumulative FDI has surged in recent years to 132 billion euros in 2017, nearly matching European FDI in China.

The lack of investment reciprocity is a problem with “tangible negative economic impacts” that, if allowed to persist, can generate serious harm to European producers and consumers, according to the research by Thilo Hanemann, a senior policy fellow at Rhodium, and Mikko Huotari, who heads the program on China’s foreign relations at Merics.

“Uneven market access is a distortion of free competition, which poses a serious threat to the functioning of efficient markets,” they said. “It protects less competitive Chinese firms from being defeated or swallowed by more productive overseas companies. It could even allow these less productive firms to acquire or defeat more productive overseas firms in their own home market, especially if additional subsidies and other distortions exacerbate the situation.”

To contact Bloomberg News staff for this story: Jeff Kearns in Beijing at jkearns3@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Alan Crawford, Richard Bravo

©2018 Bloomberg L.P.

With assistance from Jeff Kearns