EU halts investment agreement and curbs Chinese state-owned enterprises
by Emanuele Scimia

Political conditions unfavourable for the ratification of the agreement. New legislation proposed to curb (Chinese) state investors. The EU aims for reduced dependence on Chinese imports in key sectors. China and pro-Beijing European governments yet to respond.

Brussels (AsiaNews) – Over the past three days the European Union has sent three clear signals to China – the suspension of the ratification of the investment agreement; a new law clamping down on state subsidized foreign investors; a review of the industrial strategy to reduce dependence on imports in strategic sectors.

Relations between Europe and Beijing became strained in March after European sanctions were imposed on Chinese officials held responsible for human rights violations in Xinjiang. The Asian giant responded to the EU's move with countermeasures against MEPs, academics and European institutions.

EU trade commissioner Valdis Dombrovskis explained that the political conditions are no longer favourable for the ratification of the investment agreement with China.

On December 30 the two sides had reached an agreement in principle under the auspices of Germany and France. The deal is opposed by most of the groups in the European Parliament, which is called upon to approve it definitively. Resistance from MEPs increased after the announcement of Beijing’s counter-sanctions.

One key point contained in the draft agreement limits Chinese state subsidies to home grown industries, which the EU claims tips the market balance damaging European companies. With the new bill, the European institutions have decided to unilaterally resolve the matter.

In the future, the European Commission will be able to investigate and, if necessary, block foreign investments in European companies with profits exceeding €500 million, made by investors who have obtained state subsidies above €50 million. The measure applies to every foreign company, but Chinese state giants are the real target.

The EU also has imports of raw materials (especially rare earths) and pharmaceutical items from China in its sights. There are 34 products in these two sectors that the bloc is forced to import – half of them are of Chinese origin. The new industrial policy aims to decrease this dependence.

"It is all about level playing field, but on our turf," Joerg Wuttke, president of the EU Chamber of Commerce in China, told AsiaNews. He argues that the new legislation has some good features, especially the fact that only the European Commission will be responsible for enforcing it. According to Wuttke, the instrument put in place by the bloc will not be protectionist: "The notification thresholds for subsidised concentrations and public procurement procedures are set high to capture the most distortive subsidies."

Several analysts note that while the investment agreement has a more political value for China (weakening the Euro-Atlantic link with the US) than an economic one, limits on the operations of its state-owned enterprises in Europe could lead to retaliatory measures. Much will depend on how the Commission applies the new rules, whether rigidly or more flexibly.

Then there is the behaviour of individual member states. Their collaboration will be needed to allow the European authorities to carry out checks on Chinese activities. Pro-Beijing governments like that in Hungary could "sabotage" the process. Last month Budapest already blocked a declaration of joint condemnation and the imposition of sanctions for the repression of the democratic movement in Hong Kong. According to the South China Morning Post, such an obstructionist policy is still being pursued.