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Europe has to come up with a plan for China

China-based businesses have specific objectives and are working hard to achieve a presence on the global markets. The world does not have a plan for dealing with Chinese commercial expansion – commentary on the Inter-Pacific Bar Association conference.

The main topic at the annual Inter-Pacific Bar Association conference held on 13-16 March 2018 in Manila was foreign investment. A series of sessions addressed the subject of Chinese investments, in particular investments under the ‘One Belt One Road’ initiative. The following describes the discussion held in one session, Chinese Investment in the Western Hemisphere.

The only obstacle faced by Chinese firms is Chinese bureaucracy

Currently there are no formal local barriers preventing Chinese investors investing in European countries, as one of the fundamental principles of the EU is freedom of investment, and there are no restrictions at European level for third-country investors. The bureaucratic procedure for obtaining a permit to invest abroad, required under Chinese law, can be a barrier to closing a foreign transaction. The lengthiness of this procedure can delay the decision-making process considerably, and thus closing as well, undermining the competitiveness of Chinese investors.

Over the last two years, domestic measures giving government-level authorities the power to monitor investments crucial for the country on the grounds of maintaining public order and safety have been introduced in Germany, Lithuania, Poland, and other countries. In Poland, this legislation was passed in the form of the Act of 24 July 2015 on Monitoring of Certain Investments. Legislation protecting the market against foreign capital, as that is the true intention, does not distinguish between buyers. It provides for the same requirements for all entities performing investments, and thus EU and Chinese business are treated in the same way.

Protecting sectors of strategic importance

Recently however the European Parliament has proposed passing legislation to control foreign (meaning from outside of the EU) investment in the strategic sectors: power, transportation, and telecommunications.

The initiative comes in particular due to inequality being observed in access to investments. Non-EU-based companies have full freedom to invest on the single market, and at times receive state aid from a member state. EU-based firms come up against a range of obstacles on third-country markets which considerably limit their investment options. In relations with China in particular, the European Commission has said in the past that it expects reciprocity in commercial relations. The principle of reciprocity is not respected. An EU-China investment treaty has been under negotiation since 2013, and negotiations continue. For more than 10 years, China has also been negotiating accession to the Government Procurement Agreement (GPA) with the EU. This agreement would provide for reciprocal access to government contracts on the EU and Chinese markets.

At the moment, EU-based contractors do not work on government contracts in China, while there are no restrictions on Chinese firms taking part in tenders in the EU. European public procurement law prohibits discrimination of contractors based on country of origin. The Polish Public Procurement Act only provides for one situation, as an exception, in which a non-GPA contractor, for example a Chinese firm, can be discriminated against legally. This applies to sector-specific supply tenders where products of EU origin do not make up more than 50% of the bid.

The aim of the new EU legislation, for which the Commission put forward a proposal in 2017, is to set up a special investment monitoring committee, effectively agreeing at EU level with third countries a level playing field for investments and respect for the principle of reciprocity, in other words to remedy this observed imbalance.

The image of Chinese firms in Europe and Poland

The level of anti-Chinese sentiment in Europe varies. In the Balkans, for example, Chinese investments are welcome, as they guarantee local communities additional benefits such as jobs or development of infrastructure. In Romania, an inflow of labour from China when investments or projects are carried out helps compensate for the local labour shortage.

The history of Chinese-Polish relations is slightly complicated. A recent case was the contract for construction of a section of the A2 motorway, carried out by the Chinese firm COVEC. The fact that the company understated its bid is widely commented upon. This was a time however of accumulation of infrastructure projects ahead of EURO 2012, and of an aggressive price war. Many Polish companies suffered – they not only walked away from building sites, but many also went bankrupt and were unable to pay subcontractors. The Chinese contractor however took effective legal measures in China to protect against paying compensation to the client. This led to expressions of dislike for Chinese firms. Now, following a settlement in 2017, Polish-Chinese business relations are improving, although there is not complete openness as some mistrust of know-know and qualifications of Chinese firms remains. This particular argument no longer seems to be valid today due to the extensive involvement of Chinese firms in advanced technology sectors and also in light of foreign investments.

Is there anything to fear?

As far as trading with China is concerned, the scale and rate of foreign investment expansion, which Chinese firms are pursuing with consistency and according to a particular plan, supported in addition by the Chinese government, could be cause for concern. From the Chinese point of view, these are measures to make China a world industrial power under the “Made in China 2025” plan. A series of Chinese investments concern industrial sectors of strategic importance and there are no mechanisms regulating the inflow of these investments. The countries hosting these investments therefore have reason for concern that Chinese firms could take over strategically important assets.

Also noticeable is the disproportionate approach to investments: China-based firms have specific goals and working hard to pursue their plan to establish a presence on global markets and gain access to global technologies. The world does not have a plan with respect to China’s global expansion, and Europe, while being so open towards investors on the internal market, has not guaranteed European businesses access to the Chinese market on equal terms.

The scale of Chinese investments will certainly rise. The host countries will have to devise mechanisms to regulate the inflow of these investments and control over their own resources. Systemic legal solutions are needed so that the process of entry by Chinese firms into the Western markets is transparent for all and does not cause unnecessary distress.

Above all the global economies, including the EU economy, should consider what they wish to obtain from China and devise a plan to achieve their own commercial objectives as regards the Chinese economy.

Mirella Lechna, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners