Can the EU prohibit Chinese giga investment in Hungary?

By RockedBuzz 12 Min Read

The EU regulation imposes two main tasks on the member states. One is the obligation to report to the Commission according to Article 5, according to which, at the end of the given year, the member states indicate the total number of screenings conducted and their results, without detailing the names, identities of the investors and the nature of the projects. The requirement set out in Article 6 refers to the cooperation mechanism between the member states. In the spirit of this, Member States may send comments to another Member State regarding the due diligence taking place in its territory, as well as for the Commission to formulate an opinion on the examined project. According to the report, Member States are often interested in investments in other Member States, while the Commission itself rarely issues an opinion. Otherwise, Brussels cannot oblige the recipient government to comply with the latter. Some experts according to the mechanism strengthens transparency and communication between member states, but has little substantive effect on the authorization of individual investments.

All Member States participate in the cooperation mechanism, regardless of whether they have such an instrument in their own legislation or not. The EU regulation does not anticipate the creation of this, so the role of Brussels is primarily intended to strengthen the harmonization and interplay of the existing systems. Regardless, all EU materials emphasize the protection against toxic, harmful investments, especially if they affect critical infrastructures or other economic sectors of paramount importance from the point of view of national security. From the point of view of the EU, it would be optimal if as many member states as possible operated a similar system.

Right now 18 of the 27 member states have screening tools, this number was only 12 in 2017. Most recently Denmark, Czech Republic and Slovakia adopted legislation on this matter. The Slovak law is the most recent, after its adoption last December, it will only enter into force on the first of March this year. In 2018, the Hungarian Parliament adopted Act LVII on the Control of Foreign Investments Harming Hungary’s Security Interests. lawt, which has been in effect since January 1, 2019. While investors may watch the proliferation of screening tools with concern, the goal is really to expand the defensive arsenal without thatthat these countries would give the impression of protectionism.

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The timing is no accident: the coronavirus epidemic gave these legislative strictures a special boost.

The OECD according to in the context of the pandemic, many governments strengthened the control over the sectors necessary for the effective management of the epidemic (health industry and related supply chains) and supported financially vulnerable domestic companies against malicious acquirers. By the way, the EU also supports these two aspirations advocated. With these interests in mind, the Australian Government in March 2020 below delivered the value threshold required to start filtering, enabling a larger number of scans.

Another topic is investments in emerging economies and protection against them. Knowing the wider context of the due diligence regulation, there is no question that its creation was – at least partially – inspired by European concerns about Chinese companies, that is, the scenario that through investments the Beijing government can get its hands on valuable technologies and industrial development. The Chinese investors themselves discriminatory they hold the new system, assuming that they are actually its implicit targets. While Chinese investments have not even rebounded to the level of the period before the coronavirus epidemic, the question is what exactly is behind the phenomenon. According to 2021 data, Chinese investments in Europe amount to 96 billion euros they stuck at the 2020 level,

while Chinese acquisitions fell to a 14-year low of 25 billion euros.

On the one hand, the Chinese capital export restrictions they have been gaining strength for some time, on the other hand, due diligence dumping itself could have diverted one or another Chinese project if the investors themselves saw the rejection in an envelope. Finally, we should also mention the 2025 Made in China plan, which aims to strengthen China’s technology-intensive sectors aims atpartly by keeping and investing domestic capital.

It is difficult to find specific data on these dilemmas, but it is certain that the European region’s demand for capital is unchanged and may even have increased due to the sanctions following Russian aggression. The Commission’s report last fall also shows that even among the projects that have undergone formal screening, the proportion of those that have been banned is extremely small. According to the aggregated report, in 2021, member state governments received 1,563 approval requests from various investors. Of this, only 29% (453 cases) were cleared within the framework of an official procedure, in the case of the vast majority no circumstances affecting the interest of national security arose. Among the screened cases, only 1% (5 cases) were rejected. Thus, for the entire Union, there were less than half a dozen projects in 2021 in which the Member State carrying out the due diligence decided to stop the investment. Nothing is officially known about the nature of the cases involved and the identity of the investors, although there are some press reports according to the prohibited projects do not include Chinese investment. This is in stark contrast to the European rhetoric urging vetting, which is often exemplified by the danger of foreign investors who maintain close relations with the domestic authorities.

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Another interesting figure in the report is that in 23% (104 cases) of the screened projects, governments requested risk reduction measures, determining in each case, for example, how much of the ownership share of the selected domestic company the investor can buy.

These measures mean that the authorities did not see the emerging risks as unmanageable.

This type of intervention has apparently strengthened compared to 2020. According to the report at the time, the member states reported 1,793 transactions, and the proportion of projects that underwent regular due diligence was 20% (362 cases). In the case of only 12% of these (43 cases), the investors were given risk management conditions, which they successfully complied with. Due to the short period of time, it is difficult to evaluate, but based on the two consecutive years, on the one hand, the appetite for formal vetting is growing, and on the other hand, governments prefer to impose additional conditions instead of an explicit ban. With this selective mentality, they kill two birds with one stone, as the projects deemed harmful can be prevented so that there are no serious concerns about the openness of the investment market.

An excellent example of this maneuvering is the Chinese COSCO project in Hamburg. Last October, the company took a 25% stake earned in a terminal in the port of Hamburg, but only after the German government rejected the 35% share in the original plan. The Berlin management expressed concern about the impact of the investment on ‘public order and security’, and therefore requested a modification of the acquisition. In another case, Hong Kong’s Hillhouse Capital bought it the household appliance division of the Dutch company Philips. The acquisition cost 3.7 billion euros, but the Dutch government did not see the deal as problematic, so it received official approval.

Rubber concepts related to national security regularly appear in the legislation of the member states operating the vetting. These increase the authorities’ freedom of interpretation, ensuring that they are the only ones to decide on the fate of emerging projects. During the decision, national security interests and the wider implications of the investment are nominally scrutinized, but there is no question that the process is far politicized, and other circumstances besides the identity of the investor also influence the result of the due diligence.

The European situation of investment due diligence is not independent of broader economic and geopolitical developments. In principle, the EU and China agreed on the content of an investment agreement in December 2020, but the signature and ratification are still pending, and it can hardly be expected to replace it in the short term. In the spring of 2021, the two sides will impose mutual sanctions it got complicated, after the EU blacklisted Chinese officials for their role in re-education camps in Xinjiang. And in 2022, the Russian invasion and the related Chinese position froze the atmosphere. The agreement would nominally give European companies greater access to the Chinese market, lowering the towering barriers to entry and improving reciprocitywhich has long been a neuralgic point in the relationship between the two parties.

It would be premature to draw far-reaching lessons from the current trends of foreign capital investments, or to determine to what extent the onset of the due diligence period changes investor preferences, targeted economic sectors or domestic companies deemed attractive. It is certain that behind the spread of filtering mechanisms is a broader economic policy dilemma, the solution of which is still pending. Are the European states able to successfully cross the narrow strait that stretches between the Szküllá of protecting national economic actors and the Kharübdis of investor-friendly openness?

Tamas Peragovics scientific associate of the World Economy Institute of the ELKH Economic and Regional Science Research Center.

The article reflects the opinion of the author, which does not necessarily coincide with the position of the Portfolio editorial team.

Cover image: Getty Images

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