Germany in China-bashing mode over strategic takeovers

Germany’s bellyache about China’s foreign direct investment policy is a sign of Europe’s growing displeasure with what is perceived as an imbalance in the economic ties between the Old Continent and the Asian giant.

Sectors of the government in Berlin are calling bluntly for an intervention of the European Union (EU) to protect its members against unfair investment practices from Chinese state-owned and private companies. While both EU institutions and member states are sending mixed signals over this German proposal, hawkish supporters of Brexit – Britain’s exit from the EU – are pushing for their leaders to seize on the “China-bashing” that is taking place across the Channel.

Berlin fears that the rise in China’s takeovers of German national assets, notably in the dual-use (i.e. civil and military) hi-tech industry, is driven in large part by the Chinese undisguised desire to buy up Western know-how and intellectual properties, something that will negatively affect the country’s security.

In the run-up to and during his just-concluded five-day visit to China and Hong Kong, German Economic Minister and Vice Chancellor Sigmar Gabriel warned of the current mismatch between China and Europe, with Beijing easily snatching up European technologies while making it difficult for European companies to buy Chinese assets. Not least, on November 7, the standing committee of the Chinese National People’s Congress passed through a cyber-security law requiring overseas enterprises to store data in the mainland and face security scrutiny.

Protectionism is hardly the path that Germany and other EU countries are eager to tread. Berlin does not want to cut ties with China; it actually calls on Beijing to ensure a level field to foreign players, as voiced many times by Michael Clauss, the German ambassador to Beijing.

In the absence of reciprocity, Germany has already blocked some Chinese acquisitions of high-tech national companies. In particular, Berlin recently prevented China’s Fujian Grand Chip Investment Fund from taking over chip-equipment maker Aixtron, in a purchase worth US$740 million. The German government justified the move by advancing security reservations, reportedly pushed by the United States.

Gabriel advocated the introduction of a EU-wide regulation allowing member countries to halt acquisitions of strategic businesses in the continent by non-European firms. As German Chancellor Angela Merkel has not taken a strong public position on the issue, she has often stressed that her country welcomed Chinese takeovers of its enterprises, but it expected that its firms were protected from unfair treatment.

The European Commission – the EU executive body – has so far steered clear of the current Sino-German spat. Only Germany’s EU Commissioner Guenther Oettinger, a Christian Democrat like Merkel, who has recently come under the spotlight after talking about Chinese officials in racist terms, did embrace Gabriel’s initiative.

The EU Parliament is notoriously more apt than the European Commission to adopt protectionist rules against China’s market distortions; it is not by chance that it has been opposing Beijing’s recognition as a market economy in the past months. Decoding the stance of the single EU members is instead more complex. EU Northern countries usually shun market restrictions, but tend to back any Berlin’s move; France is increasing its investment relations with China, but its Foreign Minister Jean-Marc Ayrault toed the German line during a recent trip to Beijing, demanding more reciprocity from China. Central and Eastern European countries, as well as southern members like Greece and Portugal, would barely swallow any EU legislation to limit Chinese acquisitions, as they have largely benefited from Chinese cash over the past few years.

When contacted by AT, Joerg Wuttke, chairman of the EU Chamber of Commerce in China, maintained that “the topic on how to increase transparency on incoming investment in Europe is on the agenda of some member states, including Berlin; this is a process that we shall accompany with great interest.”

The EU has no body comparable to the US Committee on Foreign Investment, but its anti-trust regulators have already questioned and stalled a number of Chinese bids for industrial takeovers in Europe, like ChemChina’s attempt to secure Swiss seed maker Syngenta.

For their part, the Chinese leaders have tried to counter German blows. The Chinese Foreign Ministry contended on November 2 that the volume of European investment in China was constantly growing and that exceeded the amount of Chinese capital in Europe. Beijing’s figures are at variance with those released by the EU Commission in late October; according to Brussels, in fact, the stock of European foreign direct investment in China has been remained below US$2 billion in the last four quarters.

With no breakthrough in the offing, it is highly improbable that China and the EU conclude a bilateral investment agreement and a free trade deal anytime soon. Against this backdrop, hardline Brexit advocates see in this potential rift between Beijing and the European bloc an opportunity to attract further Chinese money. In their view, the free-market playbook teaches that an “open door” approach is always the best choice, even when competitors do not reciprocate. It seems that British Prime Minister Theresa May thinks the other way; she would indeed be shaping rules on the model of Washington’s foreign investment regulation to safeguard sensitive industrial sectors in the country from overseas takeovers.

Now, a dramatic rupture of the Sino-German “special relationship” and, accordingly, the dynamic economic synergy between China and Europe, is to be excluded. Down the road, however, if the two actors do not manage to strike a balance between their investment policy, a short circuit will be possible. In this sense, the protectionist sentiment that is mounting among European citizens will not certainly be of help, like the possible decision by the new American administration to further shield the country’s military-industrial complex – and its connections with the Old Continent’s strategic industries – from Chinese capital.