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The Case of Chinese State- Owned Enterprises and EU Merger Control Regime

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The Case of Chinese State- Owned Enterprises and EU Merger Control Regime The Interactions of Competition Law and Investment Law: The Case of Chinese State- Owned Enterprises and EU Merger Control Regime Alexandr Svetlicinii Contents Introduction ....................................................................................... 2 Chinese SOE Acquisitions under the EU Merger Control Scrutiny ............................. 5 “Legitimate Interests” of the Member States in the EU Merger Control Regime . ............. 12 The EU FDI Screening Framework as a Regulatory Response to SOE Acquisitions . .... 15 Conclusion ........................................................................................ 20 Cross-References ................................................................................. 21 Abstract With the unveiling of the Belt and Road Initiative and the industrial policy “Made in China 2025,” the outward investments of the Chinese state-owned enterprises (SOEs) have been on the rise with the strong political backing and financial support from the state-owned banks. The acquisitions of the Chinese SOEs have been scrutinized under the EU merger control regime with the EU Commission attempting to forecast their effect on competition. The EU merger cases involving Chinese SOEs demonstrated significant challenges in assessing the corporate governance of these enterprises, exercise of state control, and possible coordination of commercial conduct among the SOEs. The competition authorities of the EU Member States have not managed to develop a coherent methodology for competitive assessment of the SOE acquisitions either. The difficulties of applying traditional competition law tests to the mergers and commercial conduct of SOEs have prompted numerous calls for the revision of the current merger control regime to allow for the establishment of the European “national champions.” In parallel, the EU has considered application of alternative regulatory means such as trade defense measures and foreign investment screening. The present chapter analyzes the challenges posed by the SOE acquisi- tions for the EU merger control. It also addresses the emerging EU framework for the A. Svetlicinii (*) Faculty of Law, University of Macau, Macao SAR, China e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2019 1 J. Chaisse et al. (eds.), Handbook of International Investment Law and Policy, https://doi.org/10.1007/978-981-13-5744-2_36-1 2 A. Svetlicinii security screening of the foreign investments that has been partly prompted by the abovementioned challenges. The combination of the merger control rules with the foreign investment screening and other regulatory frameworks could significantly affect the future of the Chinese SOEs’ investments in the EU in light of the ongoing negotiations of the EU-China investment agreement. Keywords State-owned enterprise · China · European Union · Merger control · Foreign direct investment · National security · Competition law · Investment law Introduction The Action Plan on the Belt and Road Initiative (BRI), released by the Chinese authorities on 28 March 2015, proclaimed the removal of investment barriers among its overarching goals: “We welcome companies from all countries to invest in China, and encourage Chinese enterprises to participate in infrastructure construction in other countries along the Belt and Road, and make industrial investments there.”1 The BRI Action Plan pledged that that these investments “will abide by market rules and international norms” so that the market will play a decisive role in resource allocation.2 Another direction of the Chinese industrial policy unveiled in 2015 was “Made in China 2025,” which aimed at gradual replacement of the foreign manufacturing technologies by the domestic ones with the aim of launching the Chinese technology companies as powerful players on the global markets.3 According to the Chinese President Xi Jinping, “We will move Chinese industries up to the medium-high end of the global value chain, and foster a number of world- class advanced manufacturing clusters.”4 The Chinese companies have been requested to “steadily make outbound investment that drives the export of domestic superior production capacity, high-quality equipment, and applicable technology” and “enhance investment cooperation with overseas high-tech and advanced manufacturing enterprises, and are encouraged to establish R&D centers abroad.”5 1State Council, Full text: Action plan on the Belt and Road Initiative (30 March 2015), http:// english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm 2Ibid., Section II Principles 3MERICS (Mercator Institute for China Studies) (2016) Made in China 2025: the making of high- tech superpower and consequences for industrial countries. https://www.merics.org/sites/default/ files/2018-07/MPOC_No.2_MadeinChina2025_web.pdf. Accessed 25 Mar 2019 4Xi Jinping, “Secure a decisive victory in building a moderately prosperous society in all respects and strive for the great success of socialism with Chinese characteristics for a new era” (18 October 2017), http://www.xinhuanet.com/english/download/Xi_Jinping’s_report_at_19th_CPC_National_Congress. pdf 5Notice of the General Office of the State Council on Forwarding the Guiding Opinions of the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China, and the Ministry of Foreign Affairs on Further Guiding and Regulating the Directions of Outbound Investment (4 August 2017), Article 3 The Interactions of Competition Law and Investment Law: The Case of Chinese... 3 As a result of the abovementioned policies, the Chinese outbound foreign direct investment in Europe saw a 77% increase between 2015 and 2016.6,7 A substantial portion of these investments has been realized by the China’s national champions – state-owned enterprises (SOEs) with funding provided by the state-owned banks.8 Among the factors pushing the expansion of the Chinese SOEs overseas were “empire building incentives, exacerbated by weak corporate governance structures and the lack of financial disclosure”.9 The support for SOE-led investments went in parallel with the suppression of the FDI by private companies through tightening financial regulations due to the concerns about capital flight.10,11,12 In the early 2019, the EU Commission released a report on the scope and scale of the foreign invest- ment in the Union, which noted the growth of investments by the SOEs, primarily from China, Russia, and the United Arab Emirates, during 2007–2017 period.13 When considered in terms of number of acquisitions, the Commission’s report shows that out of total 385 mergers by SOEs in 2007–2017, China accounts only for 60 (including Mainland, Hong Kong SAR, and Macao SAR).14 The initial official rhetoric from the EU was cautious of China’s industrial policy aspirations: “It is important for the EU to work with China to promote open and fair competition in each other’s markets and to discourage China from underwriting its companies’ competitiveness through subsidisation or the protection of domestic markets.”15 The EU was generally welcoming Chinese investment in Europe and 6MERICS (Mercator Institute for China Studies) (2017) Record flows and growing imbalances: Chinese investment in Europe in 2016. https://www.merics.org/sites/default/files/2018-04/MPOC_ 03_Update_COFDI_Web.pdf. Accessed 25 Mar 2019 7European Parliamentary Research Service (2017) Briefing: foreign direct investment screening: a debate in light of China-EU FDI flows. http://www.europarl.europa.eu/RegData/etudes/BRIE/2017/ 603941/EPRS_BRI(2017)603941_EN.pdf. Accessed 25 Mar 2019 8Huang B, Le X (2018) China ODI from the middle kingdom: what’s next after the big turnaround? BBVA Research. https://www.bbvaresearch.com/wp-content/uploads/2018/02/201802_ ChinaWatch_China-Outward-Investment_EDI.pdf. Accessed 25 Mar 2019 9Zhang A (2014) Foreign direct investment from China: sense and sensibility. Northwest J Int Law Bus 34(3):395–453, 451 10Hanemann T (2014) Chinese direct investment in the EU and the US: a comparative view. Asia Europe J 12:127–142. https://doi.org/10.1007/s10308-014-0379-5 11Jacoby W (2014) Different cases, different faces: Chinese investment in Central and Eastern Europe. Asia Europe J 12:199–214. https://doi.org/10.1007/s10308-014-0380-z 12Huang B, Ortiz A, Rodrigo T, Le X (2019) China: five facts about outward direct investment and their implication for future trend. BBVA Research. https://externalcontent.blob.core.windows.net/ pdfs/201903_edit_ChinaWatch21stmar.pdf. Accessed 25 Mar 2019 13EU Commission, press release IP/19/1668 Foreign direct investment report: continuous rise of foreign ownership of European companies in key sectors (13 March 2019), http://europa.eu/rapid/ press-release_IP-19-1668_en.htm 14EU Commission, Staff Working Document on Foreign Investment in the EU following up on the Commission Communication “Welcoming Foreign Direct Investment while Protecting Essential Interests” of 13 September 2017, SWD(2019) 108 final, 13 March 2019, p. 57 15EU Commission, Joint Communication to the European Parliament, and the Council “Elements for a new EU strategy on China” JOIN(2016) 30 final, 22 June 2016, p. 6 4 A. Svetlicinii expecting reciprocity for EU investments in China: “the EU expects Chinese Over- seas Direct Investment in Europe to be based on free market principles, and will use all the means at its disposal to address the potential market distortions and other risks of investment by enterprises which benefit from subsidies or regulatory advantages provided
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