An important agreement between the European Union and the People's Republic of China was announced on December 30, 2020. After seven years of negotiations and presentation of arguments, the detailed fundamentals of the EU-China Comprehensive Agreement on Investment (CAI) were laid between the parties.
The agreement aims to balance the investment environments and conditions in the EU and China. The major component of this equalization is the easing of strict rules in China and the opening up of new industries for EU investors. The agreement presents new advantages and freedom for foreign direct investment coming from the Union to the PRC.
No more joint venture requirements
In the manufacturing sector, China has made comprehensive commitments, excluding only the sectors with significant overcapacity. These are important points of the agreement, as nearly half of the European FDIs in China is in the manufacturing sector.
In the automotive sector ̶ which is very important for Germany ̶ , China has agreed to remove and phase out joint venture requirements. After signing the CAI, EU car makers will be able to establish 100% foreign-owned factories or assembly lines. The joint venture requirement was a four-decade-old rule in China in the automotive industry, starting with the first foreign automotive industrial investment in Shanghai by Volkswagen. (A few months ago, Volkswagen announced its intention to buy 50% of the shares in the Chinese automotive giant, Anhui Jinghai Automobil, the owner of JAC Motors, Volkswagen's Chinese partner company. The investment value was set around EUR 900 million.)
China has agreed to remove the joint venture requirement in a number of other industries as well. It leaves a wider playground for establishing private hospitals and clinics in major cities like Beijing, Shanghai and Tianjin, as well as large southern cities like Guangzhou and Shenzhen, which is the technological hub of China.
Chinese leaders have started to open up the financial sector for foreign financial institutions, with the removal of the joint venture requirement in the banking sector considered to be a huge step in the liberalization efforts. European banks and insurance companies will be allowed to invest in China without the forced partnership with a local professional partner institution. Joint venture requirements were also lifted for companies providing rental and leasing services in the real estate sector. After signing the agreement, European advertising agencies and market research companies can also operate in China without sharing the ownership of their Chinese entities with local partner organizations.
The new investment agreement presents remarkable advantages and multiplies the business opportunities for forwarding and logistics enterprises. Without the joint venture requirement, they can provide door-to-door shipping services to their international customers without depending on a local forwarding partner in China.
Forced transfer of technology abandoned
European negotiators succeeded in reaching an agreement about very clear rules against the forced transfer of technology with China. After validating the agreement, investors of the EU countries in China will not be forced to share their technology secrets even with their joint venture partners. These rules would also include disciplines on the protection of confidential business information collected by administrative bodies from unauthorized disclosure.
The United States is not expected to be happy about the announcement of the EU-China CAI, and some European countries have also expressed their concerns about the quick announcement of the deal. While this announcement coming after seven years of negotiations cannot be considered "sudden," Italy and Poland strongly recommended waiting until it can be negotiated with the Biden administration. These two countries, together with Belgium and Spain, also raised some human rights issues against the early announcement of the CAI, with Italy also expressing criticism against the "German engine" (referring to chancellor Merkel, President Ursula von der Leyen and Trade Department Director Sabine Wayand) pushing through with the agreement one day before the end of the German presidency.
Compromise for sceptics
Despite the arguments, all 27 member states eventually came to an agreement. As a compromise for those who are sceptic, EU countries can still valuate and oppose planned Chinese investments based on possible national security risks even after the agreement is signed by both parties.
Hungary has supported the CAI from the beginning, as the agreement is in line with the country's economic interest. Hungarian-Chinese economic relations have been traditionally good, which in the past 10 years have been developing at a remarkable rate and opening up the Chinese investment environment in front of EU companies can mean direct and indirect advantages for Hungarian entrepreneurs. A big number of Hungarian companies are suppliers of huge EU ̶ mostly German ̶ manufacturers, so widening their markets and productions will also benefit Hungarian suppliers. We must also mention that more and more Hungarian company owners are interested in Chinese opportunities, not only as regards market entry but in relocating their production facilities as well. While their number and investment value are still low compared to bigger countries' investors like Germany or France, the upward trend is recognizable. The removal of the joint venture requirements and the new rules against forced technology transfers eliminate their main concerns against investing in China.
The agreement announced on December 30 doesn't mean that mutual investments can immediately start according to the new set of rules. Taking into account EU bureaucracy, the CAI will be ready for final signing by the first half of 2022.
(Csaba Wolf is Senior China Advisor at Baker McKenzie)
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