An investment agreement signed by China and the EU in the last days of 2020 has been hailed by both sides as a significant breakthrough, but observers are concerned about its possibility to ensure a more reciprocal EU–China economic relationship. 

The deal, officially called the “Comprehensive Agreement on Investment” (CAI), has been seven years in the making with 35 rounds of negotiations. It will replace the 25 bilateral investment treaties that China signed with individual EU countries. 

The European Commission said in a statement posted on December 30 that the CAI “will be the most ambitious agreement that China has ever concluded with a third country”, adding that it will provide European investors better access to China’s 1.4 billion consumer market.

Cumulative foreign direct investment (FDI) flows from the EU to China over the past twenty years have reached more than €140bn, while €120bn worth of Chinese FDI has flown to the EU, according to figures cited by the European Commission. 

The CAI aims to ensure European companies can “compete on a better level playing field” in China. The bloc's two largest host countries of Chinese investment and contracts, Germany and France, pushed through the deal with consent from other member states. Notable examples of such investments are Geely Auto’s 2018 decision to buy a $9bn stake in Germany’s Daimler, and China Investment Corp’s $3.2bn stake in France’s GDF Suez.

In terms of greenfield investment, European companies have been far more active in China than their Chinese counterparts in the EU.

Figures from investment monitor fDi Markets indicate that European companies have announced more than 4700 greenfield projects in China since 2003, compared with 1817 Chinese company projects in the EU. 

However, the annual number of greenfield projects announced between the EU and China has been converging, as Chinese companies have become increasingly active as overseas greenfield investors. Nonetheless, EU-based companies have announced more projects in China than the reverse every year since records began, according to fDi Markets.

Lack of access

Despite some optimism about the CAI, critics have focused their attention on issues in China — such as intellectual property theft, lack of reciprocal market access, use of forced labour, abuse of state subsidies and compulsory joint ventures — and question the extent to which the deal will redress any of these. 

While full details of the agreement are yet to become publicly available, experts are wary that the deal may not provide as much access to the Chinese market as European companies may be hoping.

Derek Scissors, a Chinese economy expert and author of the China Global Investment Tracker, says that the overarching issue is “China under Xi [Jinping] will never allow substantial competition with centrally-controlled state-owned enterprises or in newly labelled ‘strategic’ sectors”. 

“That point has been driven home in detail for eight years in official documents. No EU deal will change it,” he clarified, adding that official summaries of the deal have thus far been “so vague as to be meaningless”.

Other observers are more positive about the market access the CAI could provide to European companies, but highlight that it comes shortly after China’s new regulations to review foreign investment brought in on December 19.

“CAI removes the barriers for EU investors into several industries, ranging from financial services to brand new digital economy sectors, like cloud computing,” said Winston Ma, a former managing director of China’s sovereign wealth fund CIC who now serves as an adjunct professor at NYU.

“However, this is balanced by China’s recent national security review of foreign investment rules, especially for the digital economy sectors,” he added.

In geopolitical terms, there is concern that the EU–China deal could undermine efforts by incoming US president Joe Biden to create an alliance with the EU, putting collective pressure on Beijing to redress its aggressive trade practices.

A report published today by the European Chamber of Commerce in China and Berlin-based think tank Mercator Institute for China Studies finds that European companies are at risk of being caught in the crosshairs of any further US-China decoupling.

The “rapidly evolving reality is both complicated and distressing for European companies, particularly as they seek to expand their contribution and exposure to China’s post-COVID growth story,” the report reads.

Chinese access to Europe

Many view the CAI as a win for China as it ensures existing rights for Chinese companies in the EU and offers new opportunities in manufacturing and renewable energy.

“The China–EU investment partnership may become the ‘external circulation’ for China for its ‘dual circulation’ strategy,” says Mr Ma.

China unveiled its so-called ‘dual circulation’ strategy in September 2020, aiming to reduce its dependence on overseas markets and technology in its long-term development. 

Aside from domestic policy in China, it remains to be seen what the shape of the EU-China negotiations will be as we move into 2021.

Ning Huang, a lecturer at Baden-Württemberg Cooperative State University (DHBW Stuttgart) and expert in business relations between Germany and China, says “the Chinese have a different understanding and handling of negotiations and contracts than Europeans”. 

“As long as the business relationship exists, negotiation is ongoing. The question is not whether China will keep its promise, but how the EU would like to interact with China in order to achieve the ultimate goal,” Ms Huang says.

*The above article was changed to reflect that overall FDI flows from the EU to China (€140bn) exceed Chinese FDI to the EU (€120bn).