EU-China CAI: Opportunities for EU Multinationals in China

This article was co-authored with APCO Beijing intern, Sam Jones.

On December 30, 2020, after seven years of dialogue, the European Union (EU) and China announced, the conclusion in principle of the EU-China Comprehensive Agreement on Investment (CAI). The text will now be finalized, with the EU Commission aiming to complete ratification by 2022.

The CAI is being touted by the EU as an “ambitious opening by China to European investments,” and a significant step to bind China to improve market access for EU companies and ensure concessions from Beijing on state-owned enterprises, equity caps and joint venture requirements. From the Chinese perspective, the deal serves two principal functions: to further improve access for Chinese companies to the EU market, specifically in the energy sector, and to stimulate greater EU investment into its own strategic sectors, such as technology and healthcare.

In a deal which is highly political in nature, which sectors of EU business stand to benefit the most? First, it is important to consider the motivations behind the agreement.

Key Motivations

Despite slowing outbound Foreign Direct Investment (FDI) over the past five years (by 69% between 2016-19), China remains the EU’s second largest source of FDI after the United States. While outbound FDI from EU member states to China has also slowed in recent years, China’s expected post-COVID economic resilience continues to bolster its attractiveness for European investors in the short- and long-term, reinforcing the desire for the CAI.

At the EU-China summit in April 2019, both parties also committed to conclude negotiations by the end of 2020. With insufficient progress made, the final weeks of 2020 saw frenzied negotiations between the two sides to meet the deadline. Specifically, it required the involvement of President Xi Jinping himself to finalize the agreement.

For China, reaching a deal became increasingly important in the context of the global pandemic and heightened tension between China and the US, with Chinese officials viewing both CAI and the recently signed Regional Comprehensive Economic Partnership (RCEP) as an opportunity to stabilize and encourage inbound foreign investment. A stricter foreign investment screening mechanism in the EU, fully implemented at the end of 2020, also sent a message to Chinese negotiators that establishing a stronger investment relationship with the EU was of utmost priority.

For the EU, the agreement presents promising gains for European businesses, and an important political victory for German Chancellor Angela Merkel as she prepares to step down this year. The narrowing window of opportunity for the EU to autonomously set its own China policy ahead of the US presidential transition provided further impetus to conclude negotiations.

Which EU sectors stand benefit from the CAI?

The CAI aims to improve overall market access and protection for Chinese and EU investments beyond existing commitments. However, the text shows that certain sectors stand to gain more than others. While the full text of the CAI is to be finalized this year before ratification, the following five sectors are likely to see the greatest opportunities:

Healthcare Providers – Impact: Significant

• Commitment: “China will offer new market opening by lifting joint venture requirements for private hospitals in key Chinese cities, including Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen.”

China previously introduced two pilot schemes permitting wholly foreign-owned hospitals, first in Shanghai’s Free Trade Zone (FTZ) and subsequently in seven cities in 2013 and 2014 respectively. However, these programs were never implemented at the local level, and a new regulation in 2015 eliminated their legal basis. If enacted, the CAI will help reanimate these earlier reforms and bind new opening up measures.

Cloud Services – Impact: Significant

• Commitment: “China has agreed to lift the investment ban for cloud services. They will now be open to EU investors subject to a 50% equity cap.”
• Commitment: “China has agreed to bind market access for computer services. China will include a ‘technology neutrality’ clause, which would ensure that equity caps imposed for value-added telecom services will not be applied to other services such as financial, logistics, medical etc. if offered online.”

Currently, only Hong Kong or Macao based agents can invest in cloud services under the Closer Economic Partnership Arrangement (CEPA), with foreign investment prohibited. The CAI would allow EU entities to invest in cloud services up to a 50% equity cap – a significant win for EU businesses.

Automotive & EV – Impact: Moderate

• Commitment: “China has agreed to remove and phase out joint venture requirements. China will commit market access for new energy vehicles.”

The European automotive industry has long lamented the joint venture requirements imposed on their China operations. The opportunity to establish a wholly foreign-owned enterprise (WFOE) in China is a significant victory for European OEM’s and automotive suppliers. However, this concession should not be wholly attributed to the CAI. In 2018, the National Development and Reform Commission (NDRC) announced China’s intention to phase out foreign ownership limits on automakers over a five-year period.

Financial Services – Impact: Moderate

• Commitment: “Joint venture requirements and foreign equity caps have been removed for banking, trading in securities and insurance (including reinsurance), as well as asset management.”

Concessions made in the financial services sectors are reiterations of earlier commitments to remove foreign investment restrictions as part of the revised 2020 Negative List. The CAI also brings the EU in line with market opening provisions made to US investors under the U.S.-China Phase One Trade Agreement.

What’s Next for EU Multinationals in China?

Although many of China’s market access commitments reflect existing regulatory and legislative changes, the CAI is a critical step in the right direction that will create opportunities for EU multinationals.

However, the path to ratification will be fraught with challenges. The deal is subject to revision by negotiators before it is approved by the European Council and ratified by the European Parliament. It has already been scrutinized by the Biden administration for its impact on transatlantic relations, while ensuing criticisms from EU politicians over labor rights may further complicate the process.

In 2021, EU multinationals should actively monitor for developments ahead of the planned ratification in 2022. Whether a company is looking to enter or expand their presence in China, now is the time to get ahead of the game by assessing the potential business opportunities created by the agreement. Companies that prepare a cohesive, well-researched China strategy stand to benefit the most from the CAI’s implementation.