The Straw That Broke the Dragon's Back: A Critical Analysis of the EU Regulation on the Screening of Foreign Direct Investments. How Will the Regulation Influence Chinese FDI In Europe And Does A Regulatory Alternative Exist Within EU Competition Law?

• Author: Shane O'Hanlon
• Position: Recent BCL (Law and Chinese Studies) graduate of University College Dublin
• Pages: 27-55

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THE STRAW THAT BROKE THE DRAGON’S BACK: A CRITICAL ANALYSIS OF

THE EU REGULATION ON THE SCREENING OF FOREIGN DIRECT

INVESTMENTS. HOW WILL THE REGULATION INFLUENCE CHINESE FDI IN

EUROPE AND DOES A REGULATORY ALTERNATIVE EXIST WITHIN EU

COMPETITION LAW?

Shane O’Hanlon*

A INTRODUCTION

Traditionally, the laws and policies of the European Union (EU) have focused on developing

a commercial environment that facilitates foreign investment.1 As such, the free movement of

capital under article 63 of the Treaty on the Functioning of the European Union (TFEU) has

long remained a cornerstone of EU economic law that underpinned these values.2 This

openness has translated directly in shaping the EU’s economic landscape in which Third

Country-Investors control 3% of EU companies and 35% of assets.3 However, the recent

geopolitical onslaught experienced at the hands of Brexit, the Trump presidency and the rise

of China as a global superpower, has led to the steady erosion of the EU’s liberal policy on

foreign investment, giving way to rising economic nationalism. Amongst a cacophony of

protectionist sentiment, no cry has been heard louder than the opposition to economic and

security threats posed by Chinese investment. The growing tensions are perfectly encapsulated

in the European Commission’s (the Commission) recent publication, branding China a

‘systemic rival’ to the EU.4 China’s unique approach to economic policy brings with it a

number of unprecedented legal and political challenges which, if left unaddressed, have the

potential to exploit the EU’s liberal investment regime.

* Shane O’Hanlon is a recent BCL (Law and Chinese Studies) graduate of University College Dublin. He has a

keen interest in Sino-European relations and international business law, having completed an exchange year at

Renmin University of China (󰥂), as well as various legal internships at corporate law firms in

London and Dublin. The Editorial Board are gratefully acknowledged for their helpful suggestions and for

maintaining the highest standards of professionalism in such challenging circumstances.

1 Alison Jones and John Davies, ‘Merger Control and the Public Interest: Balancing EU and National Law in the

Protectionist Debate’ (2014) 10(3) European Competition Journal 453, 458-459.

2 Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C326/47, article 63.

3 Commission, ‘Foreign Direct Investment in the EU’ (Commission Staff Working Document) SWD (2019) 108

final, 67.

4 Commission and High Representative of the Union for Foreign Affairs and Security Policy, ‘EU-China - A

Strategic Outlook’ (Communication) JOIN (2019) 5 final, 1.

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Chinese outbound acquisitions in Europe have grown dramatically in the last 10 years, with

FDI increasing by 50 times from €700 million in 2008 to €35 billion in 2016.5 A key feature

of this surge is that FDI has regularly taken the form of acquisitions by Chinese State-Owned

Enterprises (SOEs) in sensitive or strategically important sectors.6 Therefore, the tactical use

of SOEs in outbound FDI transactions as a staple of Chinese economic policy is a source of

concern for both European leaders and institutions. As the COVID-19 pandemic sets to further

cement China’s position within the global order, it has never been more important for the EU

to develop safeguards against threats posed by Chinese investment, whilst maximising on this

major source of external capital. The solution to this difficult balancing act has been proposed

in the form of the EU Regulation on the Screening of Foreign Direct Investments (FDI

Screening Regulation).7 This EU FDI screening framework is unprecedented and became fully

operational on 11 October 2020.8 In light of these significant developments, this author seeks

to: explore the unique economic and security threats posed by Chinese FDI; analyse the FDI

Regulation, the impact that it will have on Chinese FDI and its overall effectiveness; investigate

the potential for the FDI Regulation to develop into a system of centralised FDI screening; and

determine whether a regulatory alternative exists under the EU Merger Regulation (EUMR).9

B AN OVERVIEW OF CHINESE FDI IN EUROPE

I The Corporate Structure of Chinese SOEs

In the case of mixed-ownership SOEs such as China’s, the government state is the majority

shareholder of the company which also has private-sector shareholders. 10 The Chinese

government has a particularly pervasive role within the structure and governance of these

enterprises. In accordance with article 19 of the Chinese Company Law, there must be a party

5 Thilo Hanemann and Mikko Huotari, ‘EU-China FDI: Working Towards More Reciprocity in Investment

Relations’ (Mercator Institute for Chinese Studies, 2018) 10 <https://merics.org/sites/default/files/2020-

04/180723_MERICS-COFDI-Update_final_0.pdf> accessed 17 March 2021.

6 Frank Bickenbach and Wan-Hsin Liu, ‘Chinese Direct Investment in Europe - Challenges for EU FDI Policy’

(2018) 19(4) CESifo Forum 15.

7 Parliament and Council Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening

of foreign direct investments into the Union [2019] OJ L79I/1.

8 ibid, article 17.

9 Council Regulation (EC) 139/2004 of 20 January 2004 on the control of concentrations between undertakings

(the EC Merger Regulation) [2004] OJ L24/1.

10 Evan B Shaver, ‘Two Paths to Development: Policy Channelling and Listed State-Owned Enterprise

Management in Peru and Colombia’ (2019) 21(4) University of Pennsylvania Journal of Business Law 1006,

1012.