The Practical Implications of the EU-China Investment Deal

Orrick, Herrington & Sutcliffe LLP
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Orrick, Herrington & Sutcliffe LLP

On December 30, 2020, the EU and China announced the conclusion of the negotiations of the investment treaty, the EU-China Comprehensive Agreement in Investments (CAI). The CAI represents a strategic opportunity for EU companies, financial institutions and funds to invest in China. This treaty contains two significant overarching commitments by China: market access and fair competition. The CAI did not appear overnight and certainly not without hard work on both sides; it took seven years and 35 rounds of negotiations to come to this point. While the text still needs to be finalized, with additional discussions to come on investment protections and the formal adoption by the European Parliament and the Chinese government, the CAI nonetheless represents a groundbreaking achievement between two of the world’s largest trading partners.

This alert provides a preview of some of the practical opportunities for EU companies, financial institutions and funds investing in China.

Elimination or reduction of quantitative restrictions, equity caps and JV requirements

The principles of the CAI are transparency, a level playing field, sustainable development and market access between EU and China. To give a sense of the breadth of the CAI, listed below are some of the sectors where the CAI eliminates or reduces quantitative restrictions, equity caps, or joint venture requirements:

Sector

Current Status

CAI, December 30, 2020

Automotive

Except for special-purpose vehicles, new energy vehicles and commercial vehicles, foreign investment in manufacturing of whole vehicles are limited to Sino-foreign joint ventures and the Chinese shareholder(s) must hold at least 50% of the shares of the joint venture. In addition, one foreign investor may only establish up to two joint ventures that produce the same category of whole vehicle products within Mainland China.

China announced that in 2022 foreign ownership caps and number of investments will be removed.

Removal of joint venture requirement

Full market access to new energy vehicles

Financial Services

Foreign investment restrictions already removed in the latest 2020 Negative List.

Removal of joint venture requirement

Removal of foreign equity cap

Telecommunication/Cloud Services

Foreign investment is prohibited in cloud services.

Other telecommunications companies must be controlled by Chinese shareholders (excluding e-commerce, domestic multiparty communications, storage and forwarding and call center services; these are not subject to this restriction).

EU entities can invest in cloud services—up to 50% equity cap

Includes a “technology neutrality” clause—50% equity caps are applicable to value-added telecoms (VATS), but the equity cap will not apply to other sectors merely because they are offered online

Internet Services

Foreign investment in the internet news information services, online publication services, online audio-visual program services, online cultural business (excluding music services) and the internet public information release service is prohibited.

Agreement to have a binding obligation to grant market access

Includes a “technology neutrality” clause the value-added telecoms (VAT) equity cap (50%) will not apply to other services merely because they are offered online

Private Health Services

Foreign investment in medical institutions are limited to Sino-foreign joint ventures, subject to the following exceptions:

According to the Interim Administrative Measures for the Establishment of Wholly-owned Hospitals by Hong Kong/Macau Service Providers in the Mainland and its subsequent regulations, service providers from Hong Kong and Macao can set up wholly owned hospitals in specific areas of the Mainland under Closer Economic Partnership Arrangement (CEPA).

In addition, China issued the Pilot Scheme of Establishing Wholly Foreign-owned Hospitals in 2014 which allows foreign investors to set up wholly foreign-owned hospitals via M&A or greenfield investment in seven major municipalities or provinces, including Beijing, Tianjin, Shanghai, Jiangsu Province, Fujian Province, Guangdong Province and Hainan Province.

Removal of joint venture requirement—specific to private health services in Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen

Manufacturing (for example, health equipment, chemicals, transport and telecommunication equipment)

There are market access requirements (applicable to both foreign and domestic investors). For example, without obtaining licenses, no one shall engage in:

  • production, sale or import or export of medical devices or pharmaceuticals;
  • import and export transportation, warehousing of specific goods, logistics service; or
  • production, import or operation of telecommunications, radio and other equipment or special products for the security of computer information systems.

Removal of certain market access requirements

Exceptions only in sectors with significant overcapacity

Certain Business Services

Market research is limited to Sino-foreign joint ventures. Radio and television rating survey sectors must be controlled by Chinese shareholders.

Foreign investment in social survey is prohibited.

Removal of joint venture requirement—specific to management consultant services, real estate services, market research services, translation services and other undisclosed business services

R&D (Biological Resources)

Foreign investment in the development and application of human stem cells and genes diagnosis and treatment technologies is prohibited.

Removal of certain investment restrictions

Agreement not to introduce any new restrictions

Construction Services

The Provision on the Administration of Foreign-Funded Construction Enterprises was repealed on January 17, 2020, and the application and review process of the Construction Enterprises’ qualification become the same for foreign-invested companies and domestic companies.

Elimination of project restrictions currently limited to those in the General Agreement of Trade and Services (GATS) commitment to WTO members

Protection against force technology transfers

The CAI lays out clear rules prohibiting the forced transfer of technology. Included are prohibitions of several types of investment requirements that compel technology transfer, such as requirements to transfer technology to a joint venture partner, and prohibitions to interfere in contractual freedom in technology licensing.

Greater transparency with SOEs

The CAI provides that China state-owned entities (SOEs) will take decisions based solely on commercial considerations. In addition, there will be transparency regarding subsidies granted to SOEs. This means that China may need to disclose subsidiaries granted to a SOE in a particular sector, including those that may be above the current WTO commitments. Further, SOEs may be obliged to provide certain information, make business decisions in accordance with commercial criteria and not to discriminate against EU companies in their purchases and sales of goods and services. As an overarching theme, the CAI signals that SOEs will be subject to further scrutiny with respect to their business decisions and the rules and subsidies involving them.

State-to-state dispute resolution mechanism

There will be a two-step mechanism to resolve issues between the EU and China. The first step involves consultation and mediation, and then, if the issue is still unresolved, it will proceed to an independent arbitration panel, composed of independent, qualified and experienced experts. All arbitration decisions will be final and binding on the parties.

In addition, the CAI establishes a framework to monitor day-to-day issues that may arise between the EU and China at a pre-litigation phase. This institutional oversight mechanism will be established at a senior political level—the Vice Premier of China and the Executive Vice President of the EU. It will also include an ad hoc mechanism to address urgent issues that may arise.

Labor commitments

Under the CAI, China commits to working towards the ratification of the International Labor Organization (ILO) fundamental conventions and commits specifically to the two ILO fundamental Conventions on forced labor that have not been ratified yet. In addition, China commits not to lower the labor standards of protection in order to attract investment and not to use labor standards for protectionist purposes.

Next steps and the global context

The text of the CAI still needs to be finalized, including negotiations on investment protections and investment dispute settlements. According to the EU Commission’s press release, the EU and China agreed to complete the negotiations within two years of the signing of the CAI. After this, the agreement needs to be adopted and ratified by both parties. Once the CAI comes into effect, it will replace the 26 existing bilateral investment treaties between 27 individual EU member states and China.

The speed and timing of announcement of the CAI took much of the world by surprise, perhaps no one more so than the U.S. The quicker-than-expected agreement of the CAI comes on the virtual eve of Joseph Biden’s inauguration as the U.S. President. The timing of this sends the strong signal that the EU wishes to gain some independence in its relationship and discussions with China and not stay in the shadows of the U.S. and China negotiations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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