The European Union will remain open to Chinese foreign direct investment (FDI) in the coming years, but will limit China’s access to strategic sectors of its economy (such as technology). Brussels will also continue to confront Beijing over political, human rights and security issues. The European Union and the United States are the Continent’s primary sources of FDI, which limits China’s ability to leverage FDI to gain political influence. Investment in European infrastructure, such as ports and railways, offers Chinese exporters greater access to European markets, while the acquisition of high-tech companies and know-how gives Beijing access to sophisticated technology it can use for its domestic industrial plans. Europe sees the Asian giant as a source of funding, but in recent years, most countries have become concerned about the national security implications of rising Chinese investment. The European Union also wants to make the bilateral relationship more reciprocal, as the bloc is currently much more open to Chinese investment than the other way around.
- China’s FDI in Europe rose constantly during the first half of the 2010s and peaked in 2016, but has decreased since then. This was the result of two factors: domestic issues in China that resulted in a reduction in global investment, and rising regulatory barriers in Europe to Chinese investment. While complete data for 2020 is not available, the COVID-19 pandemic has probably resulted in a steep reduction in Chinese FDI in Europe as well.
- According to the Rhodium Group, in 2019, the main sectors of Chinese investment in Europe were information and communications technology, health and biotechnology, automotive, financial and business services, and consumer products and services.
- In recent years, the European Union has increased the screening of Chinese investment and has introduced mechanisms to warn member states about potentially problematic investments. This trend will continue in the coming years.
- Individual countries, such as Germany and France, have also tightened their scrutiny of non-EU investments in strategic areas of their economies (such as telecommunications and high-tech), which has largely targeted China. In some cases, European countries have also blocked operations. In 2018, for example, Germany vetoed a Chinese takeover of German manufacturing company Leifeld. That same year, Berlin also increased its own participation in the power distributing company 50Hertz to prevent a Chinese company from entering it.
- Countries including Germany, France and Italy have advocated for reforming the European Union’s competition rules to allow for the merger of large European companies in order to create bigger corporations to compete with their Chinese, American and Russian rivals. Such a change, however, remains controversial, with smaller EU member states fearing it would result in the creation of monopolies in the bloc.
- Due to a combination of national security concerns and U.S. pressure, the United Kingdom and EU countries such as Germany, France and Poland have limited the participation of Chinese telecommunications giant Huawei in the development of their 5G networks.
China’s FDI in Europe is mostly concentrated in the large, high-tech markets of western countries. But southern Europe’s closer proximity to Chinese trade routes and Eastern Europe’s more opaque legal framework also offer Beijing strategic investment opportunities. In western Europe, China is looking to access wealthy consumer markets, while acquiring strategic assets and technological expertise. In southern Europe, China is primarily interested in the access or purchase of energy and port infrastructure that can enhance the role of ports in the region that are closer to Chinese maritime routes (as opposed to Northern European ports such as Rotterdam and Antwerp). Eastern Europe, meanwhile, offers China a bridge into more attractive Western European markets, but otherwise lacks the know-how, technology and economic sophistication that China often values when it comes to FDI. China also seeks to acquire technology from Europe through scientific cooperation and by buying into, or even developing science parks or start-up campuses. In addition to its broad strategic goals, China also acquires profitable companies in other areas of the European economy (such as tourism and entertainment), as well as struggling companies in different areas that are in desperate need of cash.
- China’s acquisitions in Germany, such as the robot maker Kuka and pharmaceuticals firm Stada, are representative of Beijing’s interests in northern Europe’s expertise, research capacity, and technology.
- Greece’s Piraeus port is a key part of China’s interests in southern European infrastructure because it is linked to prospective transportation hubs across the Balkans. China has also expressed interest in infrastructure in other southern European countries like Italy, Spain and Portugal. The COVID-19-related recessions, which are particularly deep in southern Europe, could make the region more accepting of Chinese investment as well.
- Traditionally, Chinese firms have struggled with reputational problems, both at home and abroad, associated with vaccine scandals. But China’s COVID-19 vaccine sales to Serbia and Hungary in early 2021 may enable Chinese pharmaceutical companies to break into the European market.
Trade is still China’s strongest lever for political influence in Europe, where countries like the United States, Germany, the United Kingdom and France remain the primary sources of FDI. Despite the European Union’s concern about China, Chinese transactions and projects account for less than 5% of FDI in Europe. China, however, is the European Union’s second-biggest trading partner behind the United States, while the bloc is China’s biggest trading partner. China has tried to use FDI to carve its own sphere of influence in central and eastern Europe through the 17+1 format (which excludes Western governments and EU institutions). But there is a significant gap between the announcement of investment projects and their actual realization, which somewhat limits Beijing’s real influence. More importantly, the European Union has significant investment tools of its own that translate into political influence, such as cohesion funds and agricultural subsidies for the bloc’s central and eastern members, along with pre-accession funds for candidate countries in the Western Balkans.
- In its outreach to eastern and southern Europe, China is interested in enlisting allies within the European Union to help sway the bloc (or complicate efforts) on measures such as China’s market economy status, human rights issues or EU bandwagoning with the U.S.-led containment policies toward China.
- The European Union is worried that China’s investment in eastern Europe and the Balkans will result in higher debt levels, a weaker rule of law and stronger political influence in the region.
- Poland and Hungary are examples of China’s limitations when competing for influence with the European Union. According to the American Enterprise Institute, China’s total FDI in Poland between 2005 and 2020 was around 3 billion euros. By contrast, EU cohesion funds for Poland for the 2014-2020 period alone exceeded 77 billion euros. In Hungary, China’s total FDI for the 2005-2020 period was of around 6 billion euros, as opposed to roughly 25 billion euros in EU cohesion funds Hungary received between 2014-2020.
- On Feb. 9 Chinese President Xi Jinping chaired a virtual summit with central and eastern European countries, which shows the importance that Beijing places on the format. However, six EU countries (Bulgaria, Estonia, Latvia, Lithuania, Romania and Slovenia) sent ministers instead of their heads of state or government to the summit, which suggests that the region is taking a cautious approach to China amid Beijing’s intensifying rivalry with the United States.
- China only resorts to open explicit pressure, protests or threats against national governments when issues very close to its national interest are involved — most notably on issues related to Taiwan and the South China Sea, as well as human rights issues in Xinjiang, Hong Kong and Tibet.
The European Union’s interest in Chinese FDI will not prevent the bloc from confronting Beijing over issues such as political and human rights, as well as China’s increasing demonstrations of military power. But Brussels will be reluctant to impose any meaningful economic sanctions on Beijing for fear of retaliation, especially through trade. The European Union is critical of China’s extensive maritime claims and military buildups in the South China Sea and demands for representation on Arctic issues. More broadly, Brussels also sees China’s increasing military capabilities as a potential security threat to the bloc. The European Union wants China to do more in the fight against climate change as well. In addition, Brussels will continue to criticize Beijing over domestic human rights violations and the crackdown on dissent in Hong Kong, but this will, for the most part, remain political. Given China’s key role in reforming the World Trade Organization, Brussels will also seek to cooperate with Beijing to ensure a level playing field and eliminate unfair practices and subsidies in China, as well as forced technology transfers.
- The European Union has repeatedly criticized the crackdown on political dissent in Hong Kong. In January, Brussels called on Beijing “to respect Hong Kong’s rule of law, human rights, democratic principles and high degree of autonomy under the ‘One Country, Two Systems’ principle, as enshrined in the Hong Kong Basic Law and in line with domestic and international obligations.”
- In June of 2020, European Commission President Ursula von der Leyen said that “China needs to engage seriously on a reform of the World Trade Organization, in particular on the future negotiations on industrial subsidies.”
- In September of 2020, European Council President Charles Michel expressed the bloc’s “concern” over “China’s treatment of minorities in Xinjiang and Tibet,” as well as the treatment of human rights defenders and journalists” in the country.
- China and the European Union have cooperated on global security issues in the past, including the 2015 Iran nuclear deal, as well as counter-piracy operations in the Gulf of Aden and off the Horn of Africa. The European Union also sees China as a key player on issues such as North Korea’s nuclear program.
Follow us everywhere and at any time. Theinfocorridor.com has responsive design and you can open the page from any computer, mobile devices or web browsers. For more up-to-date news from us, follow our Youtube, Twitter and Facebook pages.