Zhang Haiyan has been a keen observer of China-EU economic relations since the 1980s. Fu Jing / China Daily

Negotiators have their work cut out in agreeing on an investment treaty

China and the European Union are both highly keen on negotiating a bilateral investment treaty, but at least one observer predicts it will become a reality only after tortuous, hard-headed negotiations.

"Brussels and Beijing have signaled their eagerness to start talks, but it is hard to say how it will all end," says Zhang Haiyan, academic director of the Euro-China Centre and professor of Asian and Chinese business Strategy at Antwerp Management School.

"This is mainly because the number of things the parties disagree on outweighs the number of things they agree on."

Sitting in his office in Antwerp, Zhang says the talks should be easier than those on the same issue between Beijing and Washington. China and the US began bilateral investment talks in 2008 but they became stalled for political reasons.

With Barack Obama into his second presidential term, Zhang says both sides "got the papers out of the fridge" and reopened talks in the coastal city of Qingdao this month.

"But after a five-year break there is not even a framework for the talks."

Zhang has been a keen observer of China-EU economic relations since the 1980s, and in September his team will publish a report on China's investment in Europe.

Zhang says Brussels and Beijing are strongly committed to reaching an investment treaty agreement despite the many obstacles ahead.

For China, he says, the urgency is a result of its becoming a major player in cross-border investment, attracting huge amount of inbound investment and investing globally in recent years.

The years since 2008, as Europe has been hit by the debt crisis and recession, have been a turning point in EU-China two-way investment, Zhang says.

"The strides China has made in Europe have been impressive."

China's capital flow into Europe surpassed Europe's investment in China three years ago, even if investment from China of 20 billion euros accounted for less than one third of that of Europe to China.

"In theory it would be correct to say China is a net investor in Europe," Zhang says.

China's capital flow to Europe accounts for nearly 10 percent of Chinese total outward investment, and Zhang says it has grown an average of 40 percent annually in recent years.

China's overseas investment accounts for 60 percent of inward FDI, and up to 8,000 enterprises operating in Europe, more than 90 percent of which are private and family businesses, have built up their presence in Europe. Most of the Chinese investors are in Germany, Britain, France and Luxemburg, the latter being an offshore investment center.

China already has bilateral investment treaties with EU member states, excluding Ireland, but previously the focus for China has been on how to attract European investment rather than on protecting its assets overseas.

"So the Chinese government needs to realize the urgency of getting to the negotiating table very quickly so it can protect the interests of its overseas investors and obtain more market share in Europe."

Zhang, who gained his master's degrees and a doctorate after moving to Antwerp 25 years ago, says Brussels needs to take action, too, because since 2009, changes in the Lisbon Treaty have allowed the European Commission to set up a single Europe-wide agreement on investment.

While many saw negotiations with China as hugely problematic, both sides finally agreed to work towards opening the talks in 2010. In May 2011, Brussels completed a public opinion survey on possible negotiations.

Last year the leaders of China and EU pledged to start talks as soon as possible but the process was put on hold as China's leadership transition approached.

In Msy the European Trade Commissioner, Karel De Gucht, asked for a mandate from member states to begin talks. With China's new leaders now in place and personnel changes at the ministerial level complete, Zhang says Beijing is also ready to start.

However, the obstacles are many. Brussels has insisted that non-commercial factors such as corporate social responsibility, sustainable development and human rights be included in the investment treaty.

"The EU has its own principles and values and so does China," Zhang says.

While the EU is highly enthusiastic about the talks, its member states have widely varying expectations. China and Germany signed a bilateral investment treaty in 2008 that covers dispute settlement, investment protection and market access.

"It's a high-grade treaty, and perhaps Germany is not so eager to have a EU-wide agreement with China," Zhang says.

But an agreement with Italy that was signed in the 1980s is in urgent need of updating, he says.

"So the starting points for member states are different and they will display varying degrees of support."

As for the content of the talks, China will have the removal of ownership and market access restrictions high on its wish list. Zhang says this is also the collective appeal of the emerging economies as they aspire to invest in Western countries with an entrenched system of legally protecting property. But when Western countries have invested in emerging economies, their prime concern has been how secure their money was.

Legally, the EU is very open already and by and large none of its members restricts ownership of shares or land. Both sides will need to compromise during the talks, "but Europe has nothing more to offer because it has close to complete openness in legal terms", Zhang says.

Nevertheless, Europe will push China to open more markets and sectors and improve the transparency of it legal system.

"China will ask, 'What can you offer?' If Brussels replies, 'I have nothing', there will be a big problem."

Zhang says China will ask Brussels to treat its state-owned enterprises as analogous to private investors because more than 70 percent of the country's capital flow to Europe is from state sectors.

China should also ask Brussels to accept the SOEs' governance structure, Zhang says. "If not, there is a risk that Brussels will one day accuse the SOEs of abusing their monopolistic position in Europe and block the country's outbound investment."

The EU has recently begun reviewing how China's SOEs operate in Europe. In 2011, five SOEs were investigated, but no conclusion has been reached. One argument that has gained ground in Europe is that these five SOEs belong to the same investor, the State-owned Assets Supervision and Administration Commission of the State Council, and have monopolistic tendencies.

Europeans may also say that through provincial and municipal state-assets supervision commissions SASAC can influence the behavior of provincial and municipal SOEs that invest in Europe, Zhang says.

"This is a time bomb, and Beijing should ask Europe to accept clearly in the treaty the status of SOEs and accept the relationship between SOEs and SASAC."

Despite the rapid growth of China's outbound investment in Europe, Zhang says obstacles are pervasive. Statistics indicate that nearly half of Chinese companies opting to invest in Europe have met difficulties in complicated procedures.

fujing@chinadaily.com.cn

(China Daily European Weekly 06/28/2013 page32)