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Europe must resist the lure of Chinese money

EU needs tough rules to scrutinize inward investment and ensure countries comply

| China
The Energias de Portugal example shows Chinese companies' seriousness in buying critical infrastructure and a need for Europe to deal with it.

The attempt by China's Three Gorges to take control of Portugal's energy group, Energias de Portugal, highlights Beijing's accelerating campaign to invest in Europe -- and a growing push from the European Union to hold back the financial onslaught.

The state-owned conglomerate, which is already the largest EDP shareholder with a 23% stake, had its initial bid rejected on the grounds that it was "inadequate." But Three Gorges is trying again, how determined Chinese companies are, especially when it comes to buying critical infrastructure.

Beneath the nuts and bolts of this takeover bid lies the bigger question of how much more of China's massive inward investment the EU should allow. Should European utilities groups, such as Portugal's energy supply company, be in the hands of companies beholden to the Chinese Communist Party? What about high-technology companies, which are also attracting Chinese buyers?

China invested less than $3 billion in Europe in 2010. But, as the continent struggled economically, foreign shareholders became openly welcome. Chinese companies snapped up hi-tech businesses, ports and other infrastructure projects pumping in $80 billion in 2017 alone, and more than $300 billion since the spending spree began.

So far, neither the EU nor individual governments have come up with a cohesive policy to balance the needs of commerce against those of security. Neither has Brussels found an adequate solution to the economic imbalance under which Chinese companies are free to buy control of EU businesses, but European companies face strict limits in China.

Instead the union has been embroiled in internal crises and when it comes to threats from foreign powers, the focus has been more on Moscow and the unpredictability of U.S. President Donald Trump's administration, than on Beijing.

"To the extent that Europe looks at China, it sees a huge opportunity for a continent that is struggling economically," says Ian Kearns of the European Leadership Network and author of "Collapse: Europe after the European Union," an examination of threats to the future of the EU. "Europe does not have the stomach to raise concerns about what China's increasing footprint might ultimately mean for democracy in Europe."

The attraction of trading with China and profiting from its huge market has muted criticism of the authoritarian government and its way of doing business because of fear of reprisal.

But now that the problems of European companies in China are being compounded by the glaring Chinese advance into the EU, Brussels cannot stay quiet any longer. Of concern is the fact that Beijing is increasingly using its investment clout for political ends, notably in the poorer countries of eastern and southern Europe. It is leaning on governments to soften criticism of Beijing notably over human rights abuses. This must stop.

China has focused on the weaker and newer democracies of eastern and central Europe. In 2012, it set up a trade alliance with 16 of these governments, both inside and outside the EU. This 16-Plus-One group is headquartered in Beijing.

One of its most vocal champions is Hungary where the prime minister, Viktor Orban, is a proponent of what he calls "illiberal democracy" routinely challenging EU policies on immigration and democratic values. "If the European Union cannot provide financial support," he says, "we will turn to China."

Last year, Hungary refused to sign an EU letter condemning the torture of lawyers detained in China. For the first time in its history the EU failed to deliver a joint statement to the U.N. Commission on Human Rights because Greece, another vulnerable economy drawing Chinese capital, would not agree to criticize China's human rights record.

Here, we can detect similarities to China's Asian strategy of targeting the poorer and weaker governments such as Cambodia while treading more carefully with the stronger, richer ones such as Singapore.

On top of this comes China's grab for advanced technology. European companies have long been concerned about the fact that the price of doing business in China has been to turn over key technology to Chinese partners. Last year, the EU Chamber of Commerce published a 70-page document criticizing this approach as "highly problematic." While EU officials might blush at Trump's tactics in his economic conflict with China, they are not unhappy that he has made technology access a key issue.

But the problems are made much worse by the fact that Chinese groups are now not only extracting technology from foreign partners in China but are increasingly buying technology in Europe.

Key Chinese investments have included the German robot company Kuka, the Swiss pesticides and seeds group, Syngenta (which has extensive EU operations), and a stake in France's PSA Peugeot Citreon.

The EU Commission president, Jean-Claude Juncker, has tried to put down markers by saying there must be "transparency, with scrutiny and debate," but there are still no hard and fast rules on the protection of critical infrastructure or tech companies, how much foreign shareholders should be permitted to own and what measures to take when foreign economic muscle is used for political aims.

The EU has no official mechanism on screening foreign direct investment and less than half the member states have legislation that would allow governments to intervene on the grounds of security.

Germany and France are leading the call for action, and the EU's first analysis into FDI and security is due at the end of this year. There are also plans to set up a commission to advise on investments that pose a risk. Even then, it would be up to individual governments to decide, thus opening the way for national politicians to cut corners and compete. The U.S. by contrast has long had in place a tough system run by the secretive Committee on Foreign Investment in the United States for scrutinizing inbound takeovers from a security view point.

"If we do not succeed in developing a single strategy toward China, then China will succeed in dividing Europe," warns former German Foreign Minister Sigmar Gabriel.

EU leaders should rise to the challenge posed by China in three ways.

First, they must step up the pressure for an early and transparent FDI screening mechanism with teeth and explain more clearly to voters the concept of critical infrastructure and advanced technology, and the scrutiny needed when selling to foreign investors stakes in energy, water, communications and transport networks.

Second, they can lead by example in curbing Beijing's political machinations by preventing senior retired politicians taking highly paid jobs with Chinese organizations. They include Britain's former prime minister, David Cameron, and Philipp Roesler, the former German vice-chancellor.

Thirdly, they can change the benign language used in dealing with Beijing, moving away from thinking about China's bottomless treasure chest and focusing on the reality of an ambitious, rising power.

The much-heralded Belt and Road Initiative has become convenient shorthand for what is a political as well as economic global expansion. "Wrong language can be dangerous," warns British diplomat and long-time China specialist Charles Parton. "It hinders us in seeing China's aims clearly, and thereby in prescribing policy wisely."

Europe remains battered by the last decade. It feels threatened by Russia. Its common currency and immigration issues remain unresolved. Next year the EU faces the upheaval of Britain's leaving and Euroskepticism is on the rise. But it must find the time to deal with the challenge from China.

Humphrey Hawksley is an Asia specialist. His book"Asian Waters: The Struggle in the Asia-Pacific and the Strategy of Chinese Expansion"is published in June.

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