An EU-China bilateral investment treaty would provide a better mechanism for investment protection and attract new EU FDI flows into China's service industry

Over the last decade, China has emerged as a global investor. Indeed, in 2012, it became the third most important source of foreign direct investment. Chinese multinational enterprises have rapidly globalized, especially through overseas mergers and acquisitions in which they have targeted sectors where American and European companies have built up technological, operational and managerial expertise.

According to Deloitte, Chinese multinationals announced 79 M&A deals in Europe last year with a total value of 8.3 billion euros ($8.7 billion), or an average value of 320 million euros per project. In contrast, European investors closed 54 deals in China last year, with the average deal valued at 145 million euros, and total value of all deals worth 1.76 billion euros.

Several trends can be observed in EU-China FDI relations. First, China has gradually switched from being a host of investments to a country driving investments in FDI flows, though its share of total EU inward FDI stock is quite limited at about 0.5 percent.

Second, M&As have become an important form of China's OFDI in the EU and have been targeting tangible and intangible assets, such as high-tech companies, well-known brands, distribution channels, telecom, transportation facilities and public utilities.

Third, although private enterprises have recently emerged among major Chinese acquirers, Chinese state-owned enterprises are still dominant in Chinese outbound M&As in the EU.

Fourth, Chinese multinationals have increasingly experienced difficulties and challenges in their European operations, such as Ping An Insurance Co's conflict with the Belgian government and China Overseas Engineering Group's failure in Poland.

The rise of China's direct investment in the EU coincides with the entry into force of the Treaty of Lisbon in December 2009, which brought FDI issues under the authority of the European Commission as part of its common commercial policy. The EU and China then began negotiating a new bilateral investment treaty to consolidate the existing BITs between China and 26 EU member states into a single and coherent agreement.

The potential impact of this process is important for both European and Chinese firms, especially regarding market access, investor status of state-owned enterprises and how investor-state disputes are settled.

Although the negotiation of market access commitments could take a significant amount of time, the outcome of this process could create new investment opportunities for both EU member states and China. For instance, given the rapid restructuring of the Chinese economy from low-cost manufacturing to knowledge-intensive service activities, removing FDI restrictions in Chinese service sectors could attract new FDI flows from the EU and enhance the competitiveness of China's service industry in the global market.

With regards to Chinese state-owned enterprises' M&As in Europe, concerns were raised about their privileged access to preferential government financing. But the EU-China BIT and the EU Merger Regulation clarify the investor status of China SOEs and reduce any uncertainty when they carry out M&A projects in Europe.

The ongoing EU-China BIT negotiations are expected to provide a better mechanism for investment protection and the settlement of disputes between investors and state.

The author is a professor of Asia and China business strategy and management at the NEOMA Business School in France. The views do not necessarily reflect those of China Daily.

( China Daily European Weekly 03/20/2015 page9)