All eyes on China following the CAI deal

On 30 December 2020, the EU and China finally announced the completion of the Comprehensive Agreement on Investments (CAI) deal. Then, at February’s meeting of the French-German Defence and Security Council, both Angela Merkel and Emmanuel Macron backed the message that the EU should define its own policy towards China.

The EU’s policy is likely to reflect points of accord with the US, which continues to push for a common US-EU policy, while also encompassing the battle against climate change, the reinforcement of multilateralism, and other economic factors that make close cooperation with China prudent.

Politics and the pandemic

The EU has already made a significant step in this direction through the CAI deal with China, a mammoth undertaking that has spanned 35 rounds of negotiations since its launch in 2013. Enactment remains subject to the consent of the EU member states and the European Parliament.

The deal is good news on a number of levels for both sides. The cumulative amount of Chinese direct investment into the EU over the years is upwards of $180 billion, and EU direct investment into China even more, at the north of $200 billion. As China and wider Asia continue to rise in global importance, greater strategic cooperation is imperative.

As economic giants on the world stage, China and the EU have the opportunity to promote the benefits of an open global economy and the CAI will boost transparency and better global governance.

Prior to this deal, EU member states each maintained an individual treaty with China, but the CAI aims to bring in a level of consistency. While the world remains on pause due to the ongoing pandemic, once travel restrictions begin lifting, there is a wealth of opportunities for the EU and China to explore with one another in the post COVID-19 world.

Opening up to new opportunities

Perhaps the most relevant pillar of the CAI to European companies with eyes on China is greater market access. Access to the world’s largest buyer in terms of purchasing power; a market that emerged from lockdown last summer and recorded the only growth in GDP in 2020. Further, China is now forecasted to match the GDP of the US even earlier than previously predicted.

Within the framework of the CAI, China is granting European companies much greater market access than before. In the future, European entities will be able to invest in all sectors of the economy, including the automotive industry, the market for cloud services, financial services, and healthcare. China will subject its State-Owned Enterprises (SOEs) to a more level playing field, though with various restrictions to not affect the crucial role of these entities in a socialist market economy. For example, China has not yet committed to fully opening up its public procurement markets, but things are now headed in that direction.

Market access works both ways, of course. In recent years, and especially in light of COVID-19, there has been intense regulatory scrutiny on foreign investors as European governments, and those around the world, worry about foreign investors buying up cheap assets. For Beijing, the investment deal secures existing market access rights for Chinese companies in the EU. It also offers China new opportunities in manufacturing and renewable energy sectors with certain limitations.

Investment protectionism in the EU has risen significantly. The acquisition of European targets by Chinese investors in sectors such as energy, data processing and storage, artificial intelligence, robotics, cybersecurity, defense, and financial infrastructure is likely to trigger security reviews. This poses a challenge for Chinese companies doing business and expanding in the EU, but we anticipate the CAI maintaining a balance here.

At Intertrust Group, we’re passionate about helping businesses and investors scale and grow internationally – whether that’s China (and wider APAC) based companies and investors operating in Europe and Americas, or Western funds and companies doing business with China. We’ll continue to keep an interested eye on developments.