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Will the West welcome or shun Chinese FDI?

In recent weeks a number of governments have raised red flags over proposed investments from Chinese companies. While it’s too early to tell if these individual episodes represent a broader trend, they do suggest many governments are uncertain and apprehensive of their nations’ strategic interests vis-à-vis Chinese capital. Yet with China emerging as the world’s largest creditor, establishing clear policies on attracting, screening, and regulating Chinese foreign direct investment (FDI) should be an urgent priority for Western governments.

Earlier this week, Australia announced that it was preliminarily blocking a Chinese investor from buying a controlling stake in Ausgrid, Australia’s largest electricity distribution network, over national security concerns. Meanwhile in Germany a debate has emerged over Chinese acquisitions of technology and robotics firms, as the Chinese company Midea closes in on its offer to buy the German robotic company Kuka. A number of German and European politicians had sought to recruit a European investor to take over Kuka instead, but found no willing bidders.

The most prominent of the recent cases comes from the United Kingdom, where new Prime Minister Theresa May decided at the last minute that Chinese financing of a proposed nuclear power project at Hinkley Point demanded greater scrutiny—a new review of the project was announced hours before the signing ceremony was due to take place. The decision appears to have caught the Chinese by surprise and has already sparked a minor diplomatic row, with the Chinese ambassador to the U.K. writing in an op-ed for the Financial Times that the two countries’ “mutual trust” was at stake. (And in a further twist in the case, after May announced the review it was revealed that the Chinese company involved in the project is facing espionage charges in the United States; while it’s unclear if the allegations were known by the May government and played any role in motivating the decision, they will undoubtedly feature in the review process.)

The U.S., for its part, has long taken a more vigilant stance on foreign investment in strategic sectors. The U.S. has a formal process in place, led by the inter-agency Committee on Foreign Investment in the United States (CFIUS), to review proposed foreign acquisitions that could potentially have national security implications. In recent years deals involving Chinese firms have faced more CFIUS reviews than those from any other country, though it’s unclear if this reflects particular concern over China or simply the fact that more and more Chinese firms are seeking to invest in the U.S. When U.S. Sen. Sherrod Brown, a Democrat from Ohio, wrote to Treasury Secretary Jack Lew earlier this spring advocating for a strong and active CFIUS, he focused explicitly on threats posed by Chinese acquisitions.

While the recent spate of government reviews of Chinese FDI projects each has its own specific features and proximate causes, they share a general skepticism of the merits of welcoming Chinese FDI in “strategic” sectors considered vital to a nation’s security, economy, or well-being. And behind this skepticism lurks a larger question, often implied but left unstated: Is there something “different” about Chinese FDI in particular, relative to that from other countries, that merits special caution?

The often opaque relationships between the Chinese government and Chinese firms is one potential area of concern; for obvious reasons, state-owned enterprises tend to be viewed with more suspicion than purely private firms in national security screenings. It may also be the case that China’s economic power is inducing anxiety, with governments reviewing Chinese acquisitions not only for potential military or security concerns, but also out of fear of losing out to an economic rival. As one German politician remarked about the Midea/Kuka deal, “We really need to think about whether we want to give such a key enterprise to the Chinese, or try to keep it in European hands… My concern is that as a result of deals like this, the cars of the future will be no longer be built in Stuttgart and Wolfsburg but in China.”

Ultimately, what these cases seem to reveal is that many Western nations are apprehensive about Chinese FDI, but not always for well-identified reasons. These governments need to more clearly define their strategic interests and objectives—both economic and political—as they relate to attracting Chinese FDI. Rather than relying on ad hoc reviews and unexpected, vaguely-explained decisions to block certain investments, governments should have a clear policy on what specific concerns justify blocking foreign acquisitions and predictable processes for determining if a particular investment crosses this threshold. (CFIUS scores pretty well on the latter, less so on the former.) This will help ensure decisions to welcome or block Chinese investments are based on a reasoned calculation of benefits and risks, rather than unfounded fears or populist pressures.

A final outstanding question is how these recent cases might shape the objectives of Chinese negotiators in their ongoing bilateral investment treaty (BIT) talks with both the U.S. and European Union. Americans and Europeans have long complained that many of their investors can’t access the Chinese market, and even those that do often face arbitrary treatment and discrimination. With increasing scrutiny of Chinese acquisitions in the West, China’s negotiators may start to air some of the same grievances and see greater value in locking in a system that provides reciprocal guarantees of investor treatment. And if the BITs are ultimately signed and ratified, the next time a Western government blocks a Chinese investment through a vague and arbitrary appeal to the national interest, it could find itself facing a billion-dollar claim.

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