A Report by the EuropeanThink-tank Network on China (ETNC),December 2017

Edited by: John Seaman, Mikko Huotari, Miguel Otero-Iglesias

https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

Contents
FOREWORD _______________________________________________________________ 5
LIST OF INSTITUTIONS CONTRIBUTING TO ETNC __________________________________ 7
INTRODUCTION: SIZING UP CHINESE INVESTMENTS IN EUROPE ______________________ 9
CHINESE DIRECT INVESTMENT IN EUROPE:
WHAT AVAILABLE DATA SOURCES TELL US ______________________________________ 19
BUSINESS VS. SECURITY:
THE CONUNDRUM OF CHINESE INVESTMENTS IN BELGIUM __________________________ 31
THE CZECH REPUBLIC:
RECEIVING THE FIRST RELEVANT CHINESE INVESTMENTS __________________________ 41
CHINESE INVESTMENT IN DENMARK:
AN OPEN ECONOMY AND RARE POLITICAL QUESTIONS _____________________________ 47
CHINESE INVESTMENT IN FRANCE: AN OPENLY CAUTIOUS WELCOME _________________ 55
GERMANY’S CHANGING TAKE ON CHINESE DIRECT INVESTMENT:
BALANCING OPENNESS WITH GREATER SCRUTINY ________________________________ 61
CHINA’S GROWING ECONOMIC AND POLITICAL CLOUT
THROUGH INVESTMENT IN GREECE ____________________________________________ 69
CHINESE INVESTMENT IN HUNGARY:
FEW RESULTS BUT GREAT EXPECTATIONS _______________________________________ 75
CHINESE INVESTMENTS IN ITALY: CHANGING THE GAME? __________________________ 81
ASSESSING (THE LACK OF) CHINESE INVESTMENT IN LATVIA _______________________ 87
CHINESE INVESTMENT IN THE NETHERLANDS:
A KEY ROLE FOR ACQUISITIONS IN THE HIGH-TECH SECTOR ________________________ 93
CHINESE INVESTMENTS IN NORWAY:
A TYPICAL CASE DESPITE SPECIAL CIRCUMSTANCES _____________________________ 101
POLAND’S MEASURED APPROACH TO CHINESE INVESTMENTS ______________________ 109

CHINESE INVESTMENT IN PORTUGAL: GAINING ACCESS TO CUTTING-EDGE KNOWLEDGE

AND EXTENDING GLOBAL INFLUENCE __________________________________________117
CHINESE INVESTMENT IN ROMANIA:
MORE LOST OPPORTUNITIES THAN IMPLEMENTED PROJECTS _______________________125
CHINESE INVESTMENT IN SLOVAKIA: THE TIDE MAY COME IN _______________________135
CHINESE INVESTMENT IN SPAIN:
OPEN FOR BUSINESS, BUT NOT AT ANY PRICE ___________________________________141
CHINESE INVESTMENT IN SWEDEN: ENCOUNTERING OPEN DOORS ___________________151
CHINESE INVESTMENT IN THE UK:
GROWING FLOWS OR GROWING CONTROVERSY? _________________________________159

Introduction: Sizing Up Chinese Investments in Europe
JOHN SEAMAN, FRENCH INSTITUTE OF INTERNATIONAL RELATIONS (IFRI), MIKKO HUOTARI, MERCATOR INSTITUTE FOR CHINA STUDIES (MERICS), AND MIGUEL OTERO-IGLESIAS, ELCANO ROYAL INSTITUTE
Chinese investments in Europe have surged in recent years, and have become a critical feature of Europe-China relations. Foreign direct investment (FDI) in the European Union traced back to mainland China hit a record EUR 35 billion in 2016, compared with only EUR 1.6 billion in 2010, according to data gathered by the Rhodium Group. In a historic shift, the flow of Chinese direct investment into Europe has surpassed the declining flows
of annual European direct investments into China.1 As China continues to grow, develop, and integrate into the global economy, its overseas investments expand in quantity and quality, reflecting both the growing sophistication of the Chinese economy and broader Chinese commercial and policy goals. Going beyond FDI, Chinese investment is creating new realities for Europe-China relations.

This report by the European Think-tank Network on China (ETNC) brings together original analysis from 19 European countries to better understand these trends and their consequences for policy making and Europe-China relations, including at the bilateral, subregional and EU levels. As in all ETNC reports, it seeks to do so using a country-level approach. Through these case studies, including an introductory explanation and analysis
of EU-wide data, the report aims to identify and contextualize the motives for Chinese investment in Europe and the vehicles used. However, the originality of the report also lies in the analysis of national-level debates on China, Chinese investment, and openness to foreign investment more generally. This is not just a story about FDI strictly defined, but about the (geo)political implications that emanate from deeper economic interaction
with China. Ultimately, Europe is far from speaking with a single voice on these matters, and identifying where the divergences and convergences lie, will be crucial in formulating solid and complementary policy positions at the EU and national level moving forward.

China's growing investment interests in Europe
Until recently, it was not uncommon to depict China as a minor source of investment in Europe and elsewhere in relative terms. Indeed, of total FDI stock held in the European Union by the end of 2015, China only accounted for 2 percent according to Eurostat figures, and its investment stock in many European countries remains low when compared with older investors. However, the facts on the ground are evolving rapidly, and China still
has plenty of room to grow: The total stock of Chinese outbound direct investment worldwide still only represents 10 percent of its national GDP. Compare this to France or the UK (50+ percent), Germany (39 percent), the United States (34 percent) and Japan (28 percent).2 If China continues on its path towards more advanced levels of economic development, we must expect a massive further increase in its outbound FDI. Europe has already become a favored destination for Chinese investment, and policymakers need to adapt to a new force shaping the economic and political landscape in Europe.

As the country analyses of this report show, European economies have a wide range of assets and features that Chinese investors seek. There should be no doubt that China needs Europe (maybe even more than vice-versa). Patterns of Chinese investment highlight sources of European attractiveness that need to be better appreciated and leveraged. Among the things that Chinese investors seek in Europe are:
 Technology, to include established high-tech assets, emerging technologies and know-how;
 Access to the European market, for Chinese goods and services;
 Access to third markets via European corporate networks, especially in Latin America and Africa;
 Brand names to improve the marketability of Chinese products both abroad and for the Chinese market;
 Integrated regional and global value chains in production, knowledge and transport;
 A stable legal, regulatory and political environment, particularly in a context of global disruption and political uncertainty;
 Political/diplomatic influence in a region that in aggregate terms remains the second largest economy after the US.

Behind the growth in China’s outbound investments is the story of China’s economic transformation towards more consumption-based growth and higher value-added industries, including technology and services. The success of China’s economic transformation depends on an increased commercial presence abroad and deepening international linkages. This is not only true for all economic enterprises in China, including SOEs and private companies, but it also serves as a critical source of Party legitimacy and
political stability.

In this context, many chapters in this report confirm the importance of Beijing’s policy initiatives in shaping investments overseas, and in Europe in particular. Beijing’s “going out” policy starting in 2001, and intensifying after the Global Financial crisis, has facilitated and encouraged the internationalization of Chinese firms for much of the last two decades as a means to develop the national economy. More recently, both China’s 12th and 13th five-year plans (2011-2015; 2016-2020) have encouraged overseas investments as a
means to access supply chains, quality brand names and advanced technology – all reasons for investing in Europe. As China’s industrial strategy grows in sophistication, plans such as “Made in China 2025” will increasingly channel overseas investments as a means to achieve clear policy goals in the so-called “new strategic industries” defined in Beijing. In 2016, the largest share of Chinese global mergers and acquisitions targeted the high-tech sector (24 percent of total deal values), compared to 20 percent that targeted energy and material assets (Rhodium Group, 2017). The controls on outbound Chinese capital that the Chinese government deployed in 2016 and 2017 also highlight the crucial impact of Beijing’s interests and policies, i.e., the political nature of outbound capital flows. Finally, as China continues to press forward with its Belt and Road Initiative (BRI), an initiative now elevated to constitutional rank within the Chinese Communist Party in fall 2017, Europe can also expect to see an increasing number of related Chinese investments.

Reactions in Europe: Between open doors and growing concerns
Since the onset of the economic and financial crisis in 2008, and still today, many capitals and economic centers across Europe have looked to China and Chinese investors as a source of opportunity and growth. Indeed, promoting investment relations has risen to the top of many bilateral agendas. As demonstrated in the chapters that follow, Chinese investment serves to create and/or maintain jobs, to provide capital for research, development and innovation, generate wealth and tax revenue for cash-strapped governments, create new market opportunities for European firms both in China and in third markets, build and improve infrastructure and even introduce technology and innovative business models into Europe. Moreover, at a broader level, China and Europe face similar, pressing challenges, such as climate change, inequality and calls for protectionism, and there is an increasingly urgent need for joint solutions that crossborder investments can facilitate.

For all of these reasons, Chinese investment is and should be encouraged.

Growing concerns

Given these advantages, European countries actively seek out Chinese investment, but the magnitude and certain patterns of investments have also raised concerns. Finding the right balance between addressing these concerns and holding to the principles of economic openness has proven a serious challenge both in the context of Europe-China relations and for the European Union more generally. European concerns are related to a combination of issues that are often hard to disentangle and are prone to hype and politicization. Challenges raised in the following chapters of this report include:
 The role of the Chinese state in the economy;
 A lack of reciprocity and fair competition;
 National competitiveness and technological leadership;
 Uncertainty about security-related critical infrastructure and sensitive technologies;
 Investments as a source of political and geopolitical influence, and divisions within Europe;
 Broader regulatory concerns;
 Intra-European competition for investment;
 A growing “promise fatigue”.

Such concerns have become more publicly voiced in European capitals and in Brussels as Chinese companies have begun to buy what some consider critical infrastructure across the continent. The best examples here are the purchase of large shares in the port of Piraeus in Greece, the public electricity grid in Portugal, and the creation of the 16+1 framework with the Central and Eastern European countries with promising investments in major projects, such as the Budapest-Belgrade high-speed rail connection. This has
given observers the impression that China is slowly penetrating the “softer” Central, Eastern and Southern outer circles of the EU and is encroaching on “core economies.”It was, however, a series of (proposed) high-tech take-overs in Germany, including the buying of leading German robotics firm Kuka, which proved to be a watershed in Europe. For the first time, parts of the German political class made explicit that Chinese investments could elicit substantial security concerns and become a strategic threat to the country’s industrial leadership.

Clearly, this is not only a German phenomenon, as illustrated in many of the chapters that follow, particularly the Netherlands. After many years of divisions and inaction, this year has seen remarkable synchronicity in debates about a need to regulate and screen (Chinese) foreign investment among OECD countries and throughout the EU. Following earlier developments in France, countries like Germany and even Hungary have proposed or even implemented new national legislation in this field. In Europe in particular, there is an increased realization among policymakers of the risks associated with foreign control over strategic assets, including “enabling technologies” that are key for national and European security.

These concerns are only magnified when considering the likely trajectory of China’s foreign economic policies related to persistent structural imbalances in its domestic economy. Its unsustainable credit growth and overcapacity mean that Chinese firms, especially SOEs, are very keen to buy foreign assets and divert their extra-capacity to foreign markets. Furthermore, the targeting of Chinese investments into high-tech sectors risks whittling away at Europe’s competitive advantage, which relies on technological innovation. If this technology is easily acquired through China’s increased financial power, this will become a strategic threat to Europe’s global economic positioning and standards of living. As such, this increased appetite to enter the European market needs to be welcomed with caution.

China’s increased investment presence in the EU might also have political and geopolitical implications. There are concerns in Brussels and many European capitals that China might exercise, or indeed has already exerted political influence in the countries in which it has invested the most. Already we have seen how Greece and Hungary were reluctant to support a tougher line from the EU towards China regarding the South China Sea disputes. This is a worrisome development, which might also explain why now many EU countries, including the more vocal ones in this area like the UK, Sweden and France, appear more reluctant to criticize China’s human rights record. In general, there is now an attitude of complacency with China because this will bring rewards: more Chinese investment and perhaps more access to the Chinese market. Yet, sometimes the expectations are not fulfilled. The current Hungarian government has been heavily seducing China for some time, but since 2010, and despite many promises from Beijing, only a very limited number of investment programs have seen the day of light. In this sense, it appears that China has been able to use this power of expectation to obtain diplomatic concessions.

Consensus and division on how to respond

In light of these growing concerns, the debate over how to respond has heated up, with many policy makers expressing increasing hesitation over security risks, loss of technological leadership and national economic competitiveness. The formal letter submitted to the European Commission in February 2017 by the Ministers of Economy from Germany, France and Italy highlights growing concerns about Chinese investments
into strategic assets across Europe. In September 2017, the Commission formally proposed new legislation for establishing a common European framework for screening foreign direct investment into the EU.3 The proposed screening mechanism concerns primarily strategic assets that are critical to EU security and public order, including foreign acquisitions of critical technologies, infrastructure, inputs or sensitive information. The proposal would also create a cooperation mechanism between Member States and the Commission, which can be activated when a specific foreign investment in one or several Member States may affect the security or public order of another. Greater transparency and a more coordinated and up-to-date approach to protecting critical infrastructure and sensitive technologies are sensible, and long overdue.

It should be noted here that China is not the only concern. Indeed, in many countries, particularly in Central and Eastern Europe as well as among Nordic states, Russia is considered to be a more immediate threat. Meanwhile, governments, for instance in France, have also expressed concerns in recent years over acquisitions by US companies, and have adjusted their own screening mechanisms as a result. Still, concerns over China have galvanized action at the EU level, and many countries lack both the means and the policy mechanisms to properly assess and manage the situation.4

Formulating a coherent response to this challenge on the European level will be difficult. The broader balance of the EU’s and member states’ competencies on investment is still evolving, although, as a result of the Lisbon Treaty, investment issues fall under the remit of the EU Trade Policy (article 207 TEU). Moreover, safeguarding national sovereignty has proven a core theme for many EU member states. Many in smaller-sized European states have expressed concerns that measures such as an EU-level investment screening mechanism could be used by larger Member States and/or the Commission as an instrument of influence to the benefit of some and the detriment of others. Still others (see the Denmark chapter, for instance) have argued that the strengths of their national economies lie in their high degree of openness to investment and trade, and that measures to control the flow of goods and money will only reinforce a growing international trend towards more protectionism and ultimately prove detrimental to growth and prosperity. The diverging views within the EU on these issues can in some ways be representative of diverging interests relative to the strengths and needs of national economies. Technology and innovation-driven economies will seek greater protection combined with careful exposure to the Chinese market. Meanwhile, those more reliant on internal consumption, tourism and foreign capital see the benefits from Chinese investment in relation to these needs, and therefore have different assessments of the risks that this investment entails for the protection of intellectual property and the loss of competitiveness.

The way forward

In light of this complex picture, both European capitals and the European Union need a more sophisticated response, seeking a proper balance between risk-management and openness. Chinese investment in Europe can be a source of jobs, growth and even development and technological progress, but it can also be a destabilizing, strategic challenge, if not an outright threat. In this light, the following should be considered:

 Implement a more coordinated and focused European framework for investment screening The openness of European economies has proven to be a source of growth, development and prosperity, but in recent years, many countries in Europe have awakened to evolving geopolitical realities and the idea that a more fine-tuned balance between openness,  security and public order is needed. The proposal by the European Commission to establish a framework for screening FDI in the EU is a step in the right direction. It is perfectly reasonable that European states should be both individually and collectively concerned with the protection of critical infrastructure and “enabling technologies” and seek to ensure that foreign investments do not threaten security and public safety across the continent At the same time, there are clear risks of falling into a protectionist spiral. Using investment screening mechanisms as a means to protect broadly-defined, and perhaps politically-motivated “strategic sectors” should be avoided. Moreover, there is a clear need to communicate and conduct outreach both within Europe and to the rest of the world on the drivers and goals of such a framework.

 Tackle the broader challenges: Reciprocity and fair competition

In dealing with China, the question of reciprocity on issues such as trade and investment has proven to be a core concern for many in Europe, and a level playing field for European and Chinese firms in both markets should continue to be sought after. Indeed, the implications of a highly restricted Chinese market and a much more open European economy are significant. For instance, this report shows that a key motivation for many European firms seeking Chinese investors is to facilitate access to China’s internal market. This often gives China an unfair advantage when bidding for European assets, as China’s  market remains comparatively closed. Chinese investors are therefore able to leverage market access and outbid foreign competitors. Support from the Chinese state, such as subsidies and financing from state-owned banks, only increase these advantages for Chinese investors. The call for reciprocity and fair competition has become louder, but it is not particularly new. European and US policymakers have demanded it now for some time, but progress has been very slow. There is now the risk that, if China does not open, Europe and the US could move towards negative reciprocity, i.e., restricting access to their own markets. This would be a lose-lose situation for everyone. The ball is now in the Chinese court. The Chinese president Xi Jinping solemnly declared in Davos in January 2017 that China will do its part to facilitate the next stage in globalization. Now is the time to convert these words to reality. If China does not open sectors such as healthcare, education, telecommunications, energy, multimedia entertainment, and finance, it cannot expect to find continuously open doors in the EU.

 Come to grips with a revived role of the State and the Party in China’s economy

The hardening of the European position vis-à-vis China could already be observed in regard to the debate on whether China should be granted market economy status. For a long time, it was expected that the EU would automatically offer this recognition to China, but this has not been the case. In Europe, there is now a consensus that the participation of the state and the Communist Party of China in the economy continues to be pervasive. Under Xi Jinping, even privately-owned Chinese companies have been called upon to “put country first” and be “patriotic”.5 Indeed, linkages between the government, the Party, the military and both SOEs and private enterprises and investors are growing under Xi Jinping’s leadership and cannot be ignored.6 This has serious implications for security, fair competition and reciprocity. It means that Chinese SOEs get preferential state financing, that public procurement contracts are mostly given to Chinese companies, that there is suspicion that Chinese companies (including those that declare to be private) might have close ties with the government and/or the Party (which would have major national and European security implications) and that in China there is still the “rule by law” rather than a rule of law, with the legal insecurity this implies. Europe is certainly not in a position to ask China to change its state capitalist model, which has proven to be successful in many regards, including in maintaining CCP power. However, if Beijing is serious about deepening the “strategic partnership” with the EU at the economic and political levels, it will have to give concessions or improve in some of these areas to continue to be welcome in Europe. If it does not, the protectionist and political backlash will only increase.

 Think regionally and sectorally

Many of the chapters in this report highlight the regional nature of many Chinese investments – acquisitions often made in one country (Germany, Sweden, France, the Czech Republic or Portugal) can have direct implications for ownership and operations in other countries (Romania, Belgium, Greece, Slovakia or Spain) and beyond. In particular, Chinese investments into sectors such as energy, transport or telecommunications lend themselves to longer-term regional strategies on the part of Chinese investors, whereas the European Union itself has often had trouble formulating regional policies in these areas. This highlights the need for a more coordinated, European dialogue on foreign investment more broadly, but also related to China in particular. More work needs to be done, for instance, on the regional strategies of individual Chinese companies, such as COSCO Shipping, Huawei, HNA, the China State Grid or CEFC, and their relationships with national strategies formulated in Beijing. In the end, it may be discovered that Chinese investments into critical or sensitive European infrastructure are more beneficial than not for national and European interests, but governments would be remiss not to do their due diligence and measure the risks and opportunities. Therefore, communication, coordination and adoption of best-practices should be a long term strategic approach.

 Develop a more sophisticated, data-driven view of capital flows beyond FDI

Many of the chapters in this report highlight the difficulties in defining and assessing Chinese investments using consistent, available data. Focusing on a narrow, statistical definition of FDI fails to measure the full extent of investment-related dependencies (loan obligations, etc.) and benefits (such as job creation, tax revenues, contributions to local innovation, etc.). For instance, investment by Chinese citizens into real estate in the last five years via so-called “Golden Visa” programs has proven a major source of investment and revenue for many countries, including Portugal, Greece, Spain and Latvia. In countries like Germany, Chinese venture capital and early-stage financing are on the verge of becoming a new driver of technological development. Moving forward it will be important to develop a more granular, country-based, bottom-up analysis of different types of Chinese capital flows into European countries, to include more qualitative analysis and study of the individual bilateral context and how the resulting information can then be used to develop a more coordinated EU policy.

 Deepen European coordination and communication on foreign investment

In recent years we have seen the drawbacks of the lack of strategic thinking in the EU. Under the European rescue and adjustment programs, countries like Portugal or Greece were under enormous pressure from other EU member states and institutions to privatize some of their public assets, which have eventually ended up in the hands of well-paying Chinese investors. Only now are we hearing calls for conditionality and/or restraint in selling “strategic” companies to non-EU investors. Yet again, this is another example of the EU’s reactiveness and acting late (although as the saying goes, better late than never). This is not a plea against privatization per se (indeed, many public assets have proven to be structural burdens for their societies at large), but rather for a better thought-out process. Perhaps these acquisitions were needed to open the eyes of politicians and policymakers in powerful capitals such as Berlin and Paris and also in Brussels. Now is the time to deepen coordination within Europe, sharing experiences and pooling resources can help overcome many of the challenges. In assessing the vulnerability of strategic assets, for instance, exchanges have already increased among European intelligence services on these issues, in the context of the Club of Bern – an informal gathering of European intelligence officers. Such discussions, focusing on perceived security challenges and good practices to address them, could help in formulating some recommendations for national governments and EU institutions.

 Invest in European integration

The story of Chinese investment is as much a story about China’s unquestionable rise as it is about Europe’s alleged fragmentation. Some of the political capital that China has been able to gain across the continent is due to a lack of confidence in the EU and its social market economy model to provide opportunities for future growth and investment. Years of stagnation after the crisis, Brexit and the re-emergence of nationalist forces have certainly dented confidence inside the EU, but it is also true that in 2017 the situation has markedly improved. Growth has returned, unemployment is in steady decline and some key elections have been won by pro-European forces. It is also important to look back and appreciate the level of coordination that has been achieved in regard to China policies. Two years ago, the members of ETNC were pessimistic about the possibility to craft a common position in sensitive areas such as whether China should be considered a market economy, whether there could be a common position on the steel dispute and whether the EU should have an investment screening mechanism. Today there is a more cohesive stance in all these areas, though differences still remain on these and other questions, as has been highlighted above. Nevertheless, the ability for Europe to speak with a stronger, more common voice in international affairs, and towards China in particular, can only come if there is confidence in the prospects of the European project.