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  • The Economist

Europeans fret that Chinese investment is a security risk

They worry that the Chinese government is gaining control of crucial technology firms and infrastructure

“WE ARE not naive free traders. Europe must always defend its strategic interests,” said Jean-Claude Juncker, the president of the European Commission, last year as he introduced plans to screen foreign investment into the European Union. America has had such rules since the 1970s; they are set to tighten further. The EU used to be more relaxed about acquisitions by foreigners. Now it too is toughening up.

The target is China, whose firms have been on a shopping spree (see chart). Purchases of fripperies such as football clubs and hotels have been curbed by the Chinese authorities, but investment continues to flow into technology and infrastructure, notes James Zhan of the UN Conference on Trade and Development (UNCTAD).

Several European countries, including Germany and Italy, have extended investment-screening rules beyond energy and transport infrastructure to cover technology deemed important for public security, for example in telecoms. Chinese involvement in building Hinkley Point C, a nuclear-power plant, led Britain to tighten its rules. Last month France’s government blocked the sale of its share of Toulouse airport to a Chinese consortium, which would have gained a majority stake.

European lawmakers suspect that purchases by private Chinese investors are an extension of their government’s “Made in China 2025” strategy, which aims at overtaking Western innovation, says Franck Proust, a French member of the European Parliament. Attitudes have soured most in Germany. A turning-point came in 2016, says Cora Jungbluth of Bertelsmann Stiftung, a think-tank, when a Chinese firm acquired KUKA, a German robotics firm, for €4.5bn ($5bn). Critics fumed that, even as Chinese companies gained Western know-how, German ones were facing discrimination in China. Last year Germany, with France and Italy, pushed for an EU-wide regime that could block acquisitions in sectors where European firms did not have reciprocal access in China.

Mr Juncker’s proposals, which are now before the European Parliament, are more timid. They allow the commission to issue non-binding opinions on foreign acquisitions, and encourage EU members to share information on the possible effect on public security. They represent progress, says Mr Proust, considering that more than half of EU members do not even have a framework in place to assess such deals. But he would prefer something harder-edged.

Not every EU member feels this way. China’s Belt and Road Initiative, which involves it underwriting billions of dollars of infrastructure investment along the old Silk Road linking it with Europe, is regarded by some southern and central European countries as a source of much-needed investment. Other EU countries worry that such eagerness could be exploited to divide the continent. Awkwardly, austerity measures imposed as a condition of bail-outs during the euro crisis contributed to Chinese influence. Privatisations intended to help stabilise wobbly public finances mean that the Chinese state now controls Piraeus, a Greek port, and owns the largest stake in Portugal’s electricity grid.

The Nordic countries and the Netherlands meanwhile argue that stricter rules on Chinese investment could inflame trade tensions, even as the global trade environment worsens. Business groups fear that tighter screening could be used as a cover for protectionism. International organisations, including UNCTAD, warn that it could scare off investors and harm economic growth. A less starry-eyed approach to foreign investment brings risks, too.

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