New EU scrutiny mechanism to cool Chinese acquisition of strategic assets in Europe, says ING

Chinese appetite for assets in sectors such as energy and power utilities will be affected by the passage last week of an European Union-wide mechanism for the screening of direct foreign investment into strategic sectors, Hu Jia, head of Greater China corporate finance at Dutch multinational banking and financial services firm ING, said on Wednesday.

Increased scrutiny could pull down total China outbound acquisitions in the EU this year, after it doubled last year, said Jia. “We see reduced enthusiasm for certain sectors due to the increased scrutiny,” she said. “That may also impact the overall [transactions] value, because certain sectors – such as utilities and energy – tend to attract larger deals.

“Consumer and brands, on the other hand, are not as sensitive and big, [and] are expected to still attract lots of interest.”

A plenary session of the European Parliament agreed on February 14 to adopt an EU-wide investment screening framework first proposed in September 2017, for assets involving critical infrastructure and technology, supply of critical materials and access to sensitive information.

The mechanism gives the European Commission the power to issue opinions to member states on whether to approve deals that are likely to affect security and public order. The member states must justify their decision if they choose not to comply with the commission’s recommendations.

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This will particularly affect state-owned enterprises looking to acquire strategic assets in EU. Jia gave the example of hydropower giant China Three Gorges’ attempt to raise its 23 per cent stake in power generator and distributor Energias de Portugal to 100 per cent for €9.07 billion (US$10.3 billion) in May 2018. China Three Gorges is still in the process of obtaining regulatory approval, which Jia said has been “very tough”.