China and EU summit aims at mutual benefit

William Liu
Leaders issue declaration to avoid forced technology transfer, while also committing to "non-discriminatory" market access, as guaranteed in China's new foreign investment law.
William Liu
China and EU summit aims at mutual benefit

William Liu, Managing Partner for Linklaters in China

Last week saw Chinese and EU leaders come together at a summit which saw discussions at the highest levels about how flows of goods, services and capital between the two economic superpowers could deliver mutual benefit.

This included a joint declaration to avoid forced transfer of technology as well as a commitment toward “non-discriminatory” market access, both of which are now enshrined in China’s new Foreign Investment Law.

These discussions touched on sensitive subjects against the backdrop of US-China trade talks, coupled with European governments’ increased scrutiny of investments into strategically sensitive sectors.

China’s recent passing of the new Foreign Investment Law, aimed at liberalising capital flows into the country, signals a watershed moment not only for the Chinese economy, but also for Europe and the rest of the world. The new law is expected to bring in an additional US$1.5 trillion of inbound mergers and acquisitions (M&A) over the next decade.

China’s move up the value chain has been supported by a program of outbound investment into foreign assets. That strategy, dented somewhat by increasing concerns in the US and Europe surrounding investments into sensitive sectors such as technology and infrastructure, is now being supported by the liberalization of inbound investment into the country. This creates an alternative route toward an even more sophisticated industrial base, and one over which the Chinese government has more control.

In parallel to this emerging middle class there is a significant demographic shift. The number of Chinese people over the age of 60 is projected to grow to nearly a quarter of the population in the next 10 years. That will drive significant demand in less developed sectors such as health care, pensions and life insurance. And despite the ageing population, more than 200 million Chinese people are expected to start families in the same period, driving huge growth in the real estate, automotive and education sectors.

Alongside these shifting demographics is the launch of initiatives, reflecting the country’s desire to move up the value chain and transition toward being a high end manufacturer. China is already the world’s largest investor in industrial R&D, as well as the most prolific writer of scientific papers.

The automotive industry provides an illustration of the complexity of inbound M&A in China. The sector has evolved to incorporate a complex ecosystem of businesses working in sub-sectors such as electric and autonomous vehicles across a much wider range of size, maturity and structure typical in other developed economies. The potential investment routes are correspondingly wide: including everything from full acquisition, partial investment, joint venture, consortia, incubation, commercial contracts, raising money on capital markets. Finding the right advice and insight to navigate these options will not be easy for outsiders and crucial to any deal’s success will be bringing the right partners together with the right structure.

In relation to differing norms of disclosure, the quality of information provided to acquirers and investors along with the timing of a deal process can vary widely in markets like China cautiously opening up to foreign investors. They will have to work harder and more diligently to ensure that information is presented in an organized, accurate and transparent way, drawing on every ounce of their international deal experience.

Macro-factors such as the US-China trade talks, will likely have an impact on the ability of inbound investment deals into China, particularly given the new Foreign Investment Law’s language on allowing China to take reciprocal measures against countries that discriminate against Chinese investment.

To succeed, dealmakers will need to be smarter and pay much more attention to political scrutiny and restrictions being placed on other foreign investment deals than before. To supplement this, they should also become adept at convening networks of senior local businesspeople, policymakers and other stakeholders to ensure continuous dialogue and understanding about the mutual benefits of investment into China.

Last week’s summit, along with China’s new Foreign Investment Law, present an extraordinary opportunity for dealmakers, but making this a reality will take time, trust and a good deal of hard work. However, the result is the unlocking of increased prosperity between China and Europe and is a goal worth pursuing.

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