Research

Strategic Foresight

Op-ed

Europe needs to screen Chinese investment

14 Aug 2009 - 11:36

Last month Wen Jiabao, China's premier, announced that Beijing will use its foreign exchange reserves to support and accelerate overseas expansion and acquisitions by Chinese companies. Maaike Okano-Heijmans and Frans Paul van der Putten argue that his "going out" strategy will benefit Europe and should be welcomed.

Estimated at more than $2,000bn, the Chinese reserves are the largest in the world. Like all foreign investment, Chinese capital will bring employment, tax revenue and reciprocal market access. More generally, a welcoming stance could in the long run stimulate investing companies to adopt - to some degree - standards of corporate governance and social responsibility that are compatible with Europe's economic interests.

To say that foreign investment from China is welcome, however, is not to argue that governments should just sit back and enjoy the benefits. On occasion, it can be at odds with the national interests of the host country. To maintain oversight, therefore, a case-by-case review system should be in place. Such a system would also help address unwarranted public anxiety about investment from countries whose political and economic systems differ from our own. This would in turn facilitate the continued growth of investment from emerging economies such as China, which is still small compared to the high level of bilateral trade already in place.

What has already caused anxiety in some European countries, particularly Germany and France, is the fact that the leading Chinese companies, banks and investment funds are state-controlled. Because Europeans regard China's autocratic political system as incompatible with their own democratic norms, the growth of Chinese influence in European companies is a highly sensitive issue.

The EU does not have an investment review system comparable to those of the US, Australia or Japan. The best-known review body is the Committee on Foreign Investment in the United States (Cfius), established in 1975 and strengthened by the Foreign Investment and National Security Act of 2007. The committee investigates transactions that involve foreign governments, national security threats or control of critical infrastructure. While the UK, France, and Germany have their own systems to review sensitive takeovers, none is as developed as Cfius. More importantly, it is essential that the EU as a whole has one review system. Europe can hardly afford to turn away foreign investors, including state-controlled entities. Europe's need for Chinese investment is likely to increase, and without collective bargaining power on the European side China is able to play one country off against another.

The point of a European screening system is not to block particular investments. Once in place, the review system should not discriminate between non-EU investors in terms of nationality or type of ownership. For the time being, Chinese companies and funds do not seek controlling shares in European entities. When they start doing so, there are already ways for countries to prevent takeovers that pose a risk to security. The greater benefit lies in reassuring foreign investors. A transparent European review body could take away fears that protectionism and inconsistencies play a part in prohibiting certain takeovers, increasing the inflow of foreign investment.

The biggest benefit of a review system is that it would stimulate policymakers and experts to consider the implications of proposed investments from China and other emerging economies. Problems to be addressed include identifying which entities are vital to European security, what level of Chinese investment constitutes an undesirable influence, and what the benefits of foreign investment are in relation to national security interests. The main issue is not the Chinese taking over European companies of great strategic importance; it is how to respond to the longer-term accumulation of economic power in Europe by a country such as China.

There is a justifiable concern that today's commercially-motivated investments by state-controlled entities may at some point be used by foreign governments to pursue political goals. The sooner politicians and policymakers start thinking through the implications of this, the better.

This article was first published in the Financial Times. The article also appeared as an on-line publication on East Asia Forum.