Will the EU move to curb Chinese investments?

Germany's ruling coalition has approved a controversial Chinese investment in the Port of Hamburg but limited the scale of the purchase.

China's state-owned shipping giant COSCO originally planned to acquire a 35% stake in the Tellerort container terminal — one of four Hamburg container terminals owned by German logistics company HHLA.

COSCO will be allowed to buy a stake "below 25 percent," the Economy Ministry said in a statement Wednesday (October 26), saying the "reason for the partial prohibition is the existence of a threat to public order and safety."

The compromise reportedly being pushed by Chancellor Olaf Scholz will see Berlin approving the sale to COSCO, though Germany's economy and foreign ministries were advising against the deal, even with the amended terms.

China a 'rival with an alternative world vision'

The COSCO deal comes after EU leaders agreed last week that China should be thought of primarily as a rival promoting "an alternative vision of the world order." The 27 leaders discussed ways to reduce dependence on China for tech equipment and raw minerals used to make microchips, batteries and solar panels.

But opinion is split at national level and among experts on how best to go forward.

"China is not going to go away. On the contrary, it is going to become more and more important," said Martin Jacques, a leading global expert on China and senior fellow with the China Institute at Fudan University. "Europe needs a strategy that is informed by that rather than a knee-jerk response to 'security' factors, which can be a catch-all phrase for saying no," he told DW.

Some observers do make precisely that strategic connection between economic interdependence and security concerns.

"We can expect growing levels of Chinese assertiveness, especially if the Chinese economy does not pick up, and growing attempts to weaponize Europe's existing commercial dependencies," Matej Simalcik, executive director of the Bratislava, Slovakia-based think tank Central European Institute of Asian Studies (CEIAS) told DW.

Ruslan Stefanov from the Economic Programme of the Center for the Study of Democracy (CSD) believes the EU must learn from its experience with Russia, where he said it "sleepwalked into Putin's trap" led by Germany.

"Europe increased its dependence on Russian gas even after the invasion of Crimea in 2014. But companies exiting Russia are now rushing to invest in China," the director of the Bulgarian think tank told DW.

Investments down

COSCO's acquisition of the Port of Piraeus in Greece in 2016 was the peak for Chinese investment in the EU, with €44.2 billion ($45 billion) flowing in that year, including a stake in French carmaker PSA.

Chinese investment in the bloc had fallen between 2016 and 2020, in part due to Trump's pressure on foreign allies to shy away from Chinese cooperation. 

But in 2021 it briefly picked up again, with China's foreign direct investment in Europe (EU-27 and the UK) increasing 17%, according to consultancy firm EY, to €10.6 billion, from €7.9 billion in 2020.

The increase was dominated by the €3.7 billion acquisition of Philips by Hong Kong-based private equity firm Hillhouse Capital.

Activity in automotive was mainly driven by Chinese greenfield investments in electric vehicle batteries.

These two sectors accounted for a combined 59% of investment. The next three biggest sectors were health, pharma and biotech, information and communications technology, and energy.

Opaque China investment funding

The reasons for the slowdown include the Chinese government's increase in domestic investment as part of its so-called 2025 Made in China policy, which aims to position the country as a global technology powerhouse.

The world's second-largest economy was also hampered by tight capital controls, financial deleveraging and COVID-19 restrictions.

On the European side, Chinese FDI has been slowed by screening mechanisms introduced to check those investments against national security risks. This is in part connected to fear of a spread of "corrosive capital," meaning external sources of financing that lack transparency, accountability and market orientation.

"EU investment screening mechanisms still scrutinize US transactions at a much higher rate than those coming from China," Eric Hontz, director of the Center for Accountable Investment in Washington, told DW.

"We need to understand [China's] capital flows more fully, the true beneficial owners of companies, and the legal structure (and its risks) at the origin of the investment," Hontz said.

According to EY, Chinese companies are increasingly taking part in venture capital funding, making data collection difficult. Datenna — a Dutch company that monitors Chinese investments in Europe — has found 40% out of 650 Chinese investments in Europe between 2010 and 2020 had "high or moderate involvement by state-owned or state-controlled companies."

For example, after the Chinese took over Italian drone maker Alpi Aviation, Italian authorities found that the buyer Mars Technology was a shell company traceable to two Chinese state-owned companies. More recently, a Chinese state-linked entity took over Newport Wafer Fab, the UK's largest producer of semiconductors.

Smaller firms in the focus

The coming phase of Chinese infrastructure investment in Europe is unlikely to resemble previous ones, with Beijing increasingly looking at smaller companies to try and stay below the threshold of attention of EU screening.

According to London-based technology advisory and investment firm GP Bullhound, Tencent was the most active Chinese investor into Europe at the end of 2021. Five out of six deals going into European fintechs were made by the tech conglomerate, including investments in French payment platform Lydia, Germany's 'Buy now, pay later' firm Billie, and Poland's game software company Gruby Entertainment.

The most attractive sectors for China's venture capital investment in Europe are biotech, cleantech, fintech, e-commerce, gaming, and artificial intelligence. In 2021, Chinese VC and crypto funds more than doubled their funding in Europe to a record level of €1.2 billion, concentrated mainly in the UK and Germany.

Another way to avoid EU screening is greenfield investment, meaning the building of research and development centers, and partnering with European universities.

EU divided or united?

Whatever the EU decides, some observers worry about a lack of unity within the bloc over how to deal with China's investment drive.

Eric Hontz thinks that China is "picking winners and losers" to exert significant economic pressure, causing friction among EU member states. "If we trade Russian-produced gas for Chinese-produced solar and wind, where does this leave Europe?" he said. 

So how should the EU do business with China? "In a word — carefully," Hontz stressed, adding that the EU needs to recognize that this is not the China of 15 years ago. "Xi's apparent intent is not to maximize prosperity of the people but to increase the power and influence of the state," he warned.

Martin Jacques takes a different perspective, asking what had been "in the round of experience of Chinese investment hitherto?"

"It seems to me that [China carmaker] Geely's investment has been crucial to transforming Volvo into an increasingly competitive force. Far better than its previous owner Ford who were driving it into the ground," he noted.

European skepticism towards Chinese investment could be motivated by "a new cold war and Sinophobic mentality," he assumes.

"My guess is greatly — is this for the good or for the bad? I would personally say for the bad. Europe needs to act independently of the US and have its own distinctive way of thinking about and relating to China," he concluded.

Edited by: Uwe Hessler