New investment opportunities under the EU-China Comprehensive Agreement on Investment

On 30 December 2020, the European Union (EU) and the People’s Republic of China concluded the EU-China Comprehensive Agreement on Investment (CAI) after 7 years of negotiations. The CAI aims to facilitate greater market access across different sectors and to reduce thresholds on doing investments in both EU and China. The CAI will replace the existing bilateral investment treaties between the 26 individual EU member states and China.

Although the text of the CAI has not yet been finalized and requires adoption and ratification by all parties involved, there is an opportunity for investors to consider new investments. In this article we will deepen on which ways the CAI endorses EU investments in China and vice versa and to which extent this will have an impact on the practice.

Market access
Pursuant to the main principles of the CAI, China pledged to open up several market sectors including the manufacturing (e.g. transport and telecommunication equipment, chemicals, health equipment) and automotive sectors which are the most important industries for EU investments in China. More than half of the EU direct investments in China have gone to those sectors.

Although the commitments made under the CAI are significant, it should be kept in mind that China will maintain its foreign investment negative list (‘Negative List’) which enumerates the industries and fields where foreign investment will be either prohibited or restricted in China. Furthermore, some liberations made by China under the CAI are already covered by domestic rules or policies. For instance:

• Automotive sector: China agreed with the EU to lift joint venture requirements for production of vehicle engines and to improve market access in the new energy vehicle industry. This has already been disclosed by China’s National Development and Reform Commission in 2018 in order to fulfil its commitments to the World Trade Organization (WTO);

• Business services: China will withdraw joint venture requirements with regard to real estate services, rental and leasing services, repair and maintenance for transport, advertising, market research, management consulting and translation services. These limitations have already been removed from the Negative List;

• Environmental services: Joint venture requirements in environmental services including sewage, noise abatement, solid waste disposal, will be removed for EU investors. These requirements have already been withdrawn in the Negative List;
   
• Financial services: Joint venture requirements and foreign equity caps will be removed for EU investors in the field of banking, asset management and trading in securities and insurance. These restrictions have already been removed from the Negative List;

• Healthcare sector: China pledged in the CAI to allow EU investors to operate wholly owned hospitals in key cities, including Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen. This has already been part of a pilot program which was announced by China’s National Health and Family Planning Commission in 2014, permiting wholly foreign-owned medical organizations in the seven major provinces and cities in China;

• International maritime transport: China will allow EU companies to invest without restrictions in cargo-handling, container depots and stations and maritime transport. However, the requirement that the domestic maritime transport company needs to be controlled ultimately by a Chinese party still exists;

• Telecommunication/Cloud services: China will remove the investment ban and allow EU companies to invest subject to a 50% equity cap. This commitment has already been implemented in the Negative List.

We further note that there are opportunities for EU companies to invest in China for the following industry sectors:

• Air transport-related services: While air traffic rights fall outside the scope of the CAI, China agreed to open up computer reservation systems, ground handling and selling and marketing services to EU investors. The minimal capital requirements for rental and leasing of aircrafts will also be removed;
• Construction services: China will eliminate the project limitations as currently reserved in the General Agreement on Trade in Services (GATS). The question remains how this will turn out in practice as the Chinese state-owned enterprises (SOEs) dominate the domestic construction industry. In addition, local governments do prefer Chinese suppliers pursuant to which the competitiveness by foreign companies is unlikely to improve;
• Computer services: China agreed to bind market access for computer services and will include ‘technology neutrality’ ensuring that equity caps on value-added telecommunications services will not be applied to other services in areas such as the financial, logistics and medical sectors if offered online; and
• R&D (biological resources): China is willing to open for foreign investment in research and development in biological resources. In practice, this may interfere with the domestic rules regarding cross-border data flows.

On the EU side, the market is already open for service sectors under the GATS. EU will also give China greater market access in the wholesale, energy and renewable sectors. It seems that scrutiny will be eased towards Chinese technology firms including Huawei, but this has not been confirmed. Notwithstanding the fact that EU member states have yet the power to hinder such investments on the basis of national security grounds.

Level playing of field
The EU and China have made arrangements to create a more equal and level playing field in the field of foreign direct investments. In the CAI, China agreed that SOEs will make decisions based solely on commercial considerations and not discriminate towards EU investors. EU companies will furthermore have equal access to standard setting bodies which will enhance transparency and certainty in China. This is particularly relevant for legal proceedings conducted by foreign investors in China.

The CAI also obliges China to be transparent in the applicable rules and subsidies granted to SOEs that may have negative effects on the investment interests of EU companies. The aim is to prevent China of having state-funded companies that accelerate in certain industries where no or limited competition is possible by EU companies. EU member states are concerned regarding the strong presence of SOEs in acquiring EU targets. There is a specific need to ensure that all companies can compete on equal footing while preserving the benefits of international competition and foreign direct investments in the EU internal market. In that context, EU and China have agreed that there will be no interference in companies' freedom to license technologies. The CAI will thus increase the protection of IP-sensitive business information including trade secrets.

Sustainable development
Both, the EU and China, made the commitment that standards of protection in the fields of labor and environment should not be lowered to attract investments. This is particularly important for making progress with the implementation of the Paris Agreement (climate change) and the ratification of the ILO Convention (labor), which to date has not yet happened. In addition, the standards for corporate social responsibility and business practices will be upheld by EU and Chinese companies. Specific working groups will be set up to follow this closely.

Conclusion
It now seems that the CAI will improve market access to both EU and China, but this does not apply to all sectors. The sectors benefiting for EU companies are air-transport related, construction and computer services. For the Chinese side, these sectors are in the field of wholesale, energy and renewable. It furthermore remains to be seen how the commitment to the principle of a level playing field and fair competition between EU companies and SOEs will be explained in the final text of the CAI. Nevertheless, the CAI will most likely play a role in creating new opportunities for EU and Chinese companies to consider new investments.