Foreign investment in China is ‘not a level playing field, but a one-way street’

German ambassador to China Michael Clauss explained to the South China Morning Post in a recent interview Berlin’s reasons for its review of acquisitions of German companies by non-EU countries, in particular China

PUBLISHED : Friday, 28 October, 2016, 3:26pm
UPDATED : Friday, 28 October, 2016, 4:11pm

Can you comment on reports that the German government is planning to review its laws about the acquisition of German companies by non-EU countries, especially China?

Sino-German economic ties continue to flourish steadily, notwithstanding a difficult global economic environment. We both have greatly profited from globalisation and there is much potential still left untapped. But recently there is also a growing concern about an imbalance in terms of openness of our respective economies. We are the most open economy for Chinese investment, including the cutting-edge hi-tech sector, as witnessed by a more than 20-fold increase in the first half of 2016 compared to the same period in 2015.

Precisely because China has been successfully catching up, calls for reciprocity have become more urgent. Companies not just from Germany but from all of China’s major trading partners are growing restless, complaining that investor relations cannot remain a one-way street. However, despite repeated declarations of intent there is no progress on market access, rather, market access is restricted even further.

Which sectors are most affected, and what protection measures have been used?

We are registering an unprecedented wave of complaints from a wide array of sectors.

German exporters of agricultural products, for example, face new and unreasonable bureaucratic hurdles in China. Chinese authorities are planning to require import certificates for all imported food products. International standards require certificates only for high-risk foods such as meat. Germany, like any other foreign country, obviously does not have the administrative capacity to check and license every single cookie exported to China.

In the high-speed railway sector, China introduced a new tendering process that systematically gives lower appraisal scores for foreign companies but higher scores for domestic companies. That amounts to a starkly discriminatory bidding process which is already squeezing previously well-established German firms out of Chinese markets. The practice is clearly in violation of World Trade Organisation rules.

We see particularly worrying trends in what should be one of the key areas of our future cooperation, electric vehicles, or E-mobility. We applaud China’s ambitious climate change policies, but in this instance, protectionist industrial policies seem to be the real driving force: artificial production targets for new electric vehicles (NEVs) that favour Chinese carmakers, and forced technology transfers and subsidies only for Chinese-made NEVs. It seems that China’s carmakers are shying away from fair competition for the next generation of mobility.

These are only some examples. From pharmaceuticals to banking services, from intellectual property right violations to entire sectors being closed to foreign investment, the list goes on and on.

Can you name any companies? Are they willing to talk openly?

Knorr-Bremse is one of the companies suffering from protectionism in the high-speed railway sector. Hugo Boss is the victim of a flimsy case of IPR violation. There is a concern that complaining companies might suffer disadvantages, so few complain publicly. The fact that an increasing number of companies is nonetheless speaking up demonstrates how dire the situation is becoming.

How do foreign business interpret this, how is the mood?

I think there is a real shift of perspective from the very optimistic outlook of the past to a more guarded analysis now. For the first time, German CEOs are reconsidering the scale and speed of further investment in China. We can already see that German investment in other countries, such as the US where market access is easier and rule of law stronger, is increasing.

It is not just foreign investors, by the way, who have become more hesitant: investment growth by China’s private sector has slowed to 2.5 per cent from January to September this, a tenth of the investment growth of state-owned enterprises (SOEs). It is the lack of progress in SOE reform that is skewing the level-playing field and sapping business confidence inside and outside China.

How will the overall business situation in China affect the bilateral China-German relationship?

More market access would help make continued openness on Germany’s part sustainable. Reciprocity based on fair competition and strong rule of law could push us both to tap the full potential of our economic ties, thus supporting China’s shift from a capital- to a more innovation-based growth model. Unfortunately, reactions of our Chinese counterparts to our arguments on these issues often seem to give little cause for optimism.