EU flags outside the EU commission. Source: EU Commission

Stricter Scrutiny Awaits Chinese M&A or Bids in EU

Editor 's Note : The chamber congratulates Hong Kong on its 25th anniversary of return to the motherland! This week's CCCEU Weekly Update will focus on the EU's new unilateral economic tool against foreign subsidies, as well as keep you up to date on the China-EU dynamics. Have a wonderful weekend and enjoy your reading!

Policymakers and lawmakers hammered out a political deal on foreign subsidies regulation in the final hours of Thursday, the final day of France's rotating presidency of the Council of the EU.

The last round of talks is said to have begun at 3 p.m. that day, and around 9 p.m., European Commission Vice-President Vestager, Internal Market Commissioner Breton, Chairman of the European Parliament's International Trade Committee Lange, French Foreign Trade Minister Riester, and others "celebrate" the conclusion of the negotiations.

One man's meat is another's poison. European legislators have acknowledged that the new foreign subsidies legislation is primarily aimed at Chinese firms, claiming that they have distorted the EU's single market. This starting point, however, has numerous flaws. From the standpoint of Chinese enterprises, state-owned enterprises, like other types of enterprises, are the market's main players.

The main reason for the success of mergers and acquisitions and bidding in Europe is the market competitiveness of Chinese enterprises, not because they are heavily subsidised. Because of the enormous attractiveness of the Chinese market, it is sometimes preferred by European firms; additionally, both the EU and the WTO have corresponding countervailing tools.

However, the EU, including France, a key policymaker, hopes to speed up the development of unilateral tools: the 5G security toolbox, as well as FDI screening and dual-use item export control, are already in place. The International Procurement Instrument, or IPI, is set to go into effect in two months, and anti-coercion tools as well as a ban on forced labour products are in the making.

The perception of China as a systemic rival may have spread to the supply chain, standard setting, and scientific research collaboration to some extent. For example, Brussels decided to reduce its reliance on China for rare earth and batteries and to collaborate more with "like-minded" allies on global standards and research, risking increasing fragmentation.

From the release of the white paper in June 2020 to the introduction of the European Commission's legislative initiative in May last year, and then to the trilogue that began in May, the EU has put a lot of effort into new legislation on foreign subsidies.

Earlier this year, during a debate in the European Parliament, Minister Riester stated that the development of various tools, such as the one on foreign subsidies, would be one of France's priorities during its presidency. Ms. Vestager was amazed by the speed with which the legislation was moved forward on Thursday evening.

The new foreign subsidy legislation, antitrust regulations, and FDI screening will have become the "three mountains" for Chinese firms seeking to acquire other firms in the EU. Multiple reviews would be triggered, adding uncertainty and undermining competitiveness.

The EU has yet to release the specific text of the new regulations on foreign subsidies, but the main content of the agreement can be roughly understood from the EU’s press releases.

The European Commission press said the Foreign Subsidies Regulation, or FSR, is "an important addition to the EU toolbox to address distortions caused by foreign subsidies and ensure a level playing field for all companies operating in the EU Single Market."

Under the FSR, the Commission will have the power to investigate financial contributions granted by public authorities of a non-EU country which benefit companies engaging in economic activity in the EU in order to redress their distortive effects. The Commission will be able to do so through three new tools: two notification-based tools and a general market investigation tool.

More specifically, the regulation sets out an obligation for companies to notify:

• Concentrations where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million and the transaction involves a foreign financial contribution of at least €50 million;

• Tenders in public procurement procedures, where the estimated contract value is at least €250 million and the bid involves a foreign financial contribution of at least €4 million per third country.

The Commission can impose fines on companies that breach notification obligations, which may reach up to 10% of their aggregated turnover. It can also prohibit a subsidised concentration or the award of a public procurement contract to the subsidised bidder.

The Commission will be empowered to investigate subsidies granted up to five years before the entry into force of the regulation and distorting the internal market after its entry into force.

“In order to ensure uniform application of the regulation throughout the EU”, the Commission will be exclusively competent to enforce the regulation. During this centralised implementation, member states will be kept regularly informed and will be involved, through the advisory procedure, in decisions adopted under the regulation.

The FSR grants the Commission ample powers to gather the information necessary for its investigation including: (i) sending information requests to companies, (ii) conducting fact-finding missions and inspections; and (iii) launching market investigations into specific sectors or types of subsidies. The Commission may also rely on market information submitted by Member States, by any natural or legal person or an association.

If the Commission finds that a foreign subsidy exists and that it distorts the Single Market, it may, where needed, conduct a balancing test to take into account the positive effects of the subsidy. If the negative effects, deriving from the distortions in the Single Market, outweigh the positive ones, the Commission may impose structural or non-structural redressive measures on companies to remedy the distortion, or accept them as commitments (e.g. the divestment of certain assets or the prohibition of a certain market behaviour).

Retroactive period

The Council of the EU said the Commission will be empowered to investigate subsidies granted up to five years before the entry into force of the regulation and those distorting the internal market after its entry into force.

SOEs targeted 

The parliament said that EP negotiators made sure that state-owned companies are explicitly included in the scope of the regulation. MEPs also shortened the period available for the Commission to investigate potentially distortive foreign subsidies in public procurement. 

Commission to issue guidelines

The Commission will have to issue guidelines on how it assesses the distortive nature of foreign subsidies and judge a subsidy’s market distorting effect against its potential benefits.

Engage with non-EU countries

MEPs insisted on allowing the Commission to engage with non-EU countries "that have repeatedly been granting distortive subsidies." "MEPs successfully argued that once multilateral rules render the new tool redundant, it can be scrapped."

Next step

Foreign subsidy regulations need to be approved by the European Parliament and the Council of the EU. The European Parliament's S&D mentioned that the plenary will vote on it in September. The Regulation will enter into force on the 20th day after publication on the EU’s official Journal. It will directly applicable across the EU 6 months after entry into force, notification will begin to apply 9 months after entry into force.

Ms. Vestager stated at a press conference that the new regulations are expected to apply in Mid-2023.

The trilogue agreement on foreign subsidies regulation has the following features:

First, the Council and Parliament reached an agreement with the European Commission on the notification threshold; additionally, on the notification threshold for public procurement, a threshold for foreign financial contribution of 4 million euros per third country was added, which is more aligned with the EU's state aid rules, as a gesture in response to many stakeholders' concerns.

However, the foreign financial support threshold of €50 million for "one-size-fits-all" mergers and €4 million in public procurement are generally too low.

Second, foreign subsidy regulations will be exclusively the responsibility of the European Commission. Furthermore, ex officio investigations (below the notification threshold) will significantly broaden the European Commission's discretion.

Finally, foreign financial contributions will not only cover state-owned enterprises, but also private enterprises. State-owned enterprises are supposed to be heavily scrutinized. When calculating "foreign financial contributions", a large number of potentially irrelevant circumstances will be included. According to Borderlex, comparing a range of international financial flows from governments to private firms with the EU state aid environment in its single market is ”risky enough” from the perspective of World Trade Organization legality. 

Xi administers oath of office to HKSAR Chief Executive John Lee

According to Xinhua, Chinese President Xi Jinping, also general secretary of the Communist Party of China Central Committee and chairman of the Central Military Commission, administers oath of office to the sixth-term Chief Executive of the Hong Kong Special Administrative Region (HKSAR) John Lee at the Hong Kong Convention and Exhibition Center, south China's Hong Kong, July 1, 2022.

Xi attended a meeting held here Friday morning to celebrate the 25th anniversary of Hong Kong's return to the motherland and the inaugural ceremony of the sixth-term government of the HKSAR and delivered an important speech.

May 2022 Euro area unemployment at 6.6% EU at 6.1%

In May 2022, the euro area seasonally-adjusted unemployment rate was 6.6%, down from 6.7% in April 2022 and down from 8.1% in May 2021. The EU unemployment rate was 6.1% in May 2022, stable compared with April 2022 and down from 7.3% in May 2021. These figures are published by Eurostat, the statistical office of the European Union.

Eurostat estimates that 13.066 million men and women in the EU, of whom 11.004 million in the euro area, were unemployed in May 2022. Compared with May 2021, unemployment decreased by 2.515 million in the EU and by 2.165 million in the euro area.

Eurostat: How is the economy recovering after the COVID crisis?

According to Eurostat: As a result of the Covid-19 pandemic and containment measures by EU Member States, EU production indices for industry, construction, services and the trade volume index showed unprecedented decreases around March and April 2020. According to the latest available data, all four economic areas have recovered to, and even surpassed, to different degrees, pre-crisis levels as of February 2022.

Turkey greenlights Sweden, Finland's NATO bid

According to Xinhua, Turkey changed its position and agreed to support Sweden and Finland's NATO membership applications on Tuesday during the ongoing NATO Summit in Madrid, while conflicts within the military bloc still remain.

After an extended meeting among leaders from the three countries together with NATO Secretary General Jens Stoltenberg on Tuesday afternoon, a trilateral memorandum addressing Turkey's security concerns was agreed and signed, paving the way for the two Nordic states' NATO membership applications.

Guaranteeing access to food for the world’s poorest

According to Food and Agriculture Organization of the United Nations, the global agrifood sector faces fundamental challenges over the coming decade, particularly the need to feed an ever-increasing population in a sustainable manner, the impacts of the climate crisis and the economic consequences and disruptions to food supply linked to the war in Ukraine, according to a report released today by the Food and Agriculture Organization of the United Nations (FAO) and the Organisation for Economic Co-operation and Development (OECD).

 What are experts talking about?

"EU Digital Development Strategy and Opportunities for Cooperation" by Zhang Min was published by the Institute of European Studies of Chinese Academy of Social Sciences. The article points out that the digitalization strategy is one of the important means and basis for safeguarding the EU's technological sovereignty. This may be an area of more intense competition and cooperation between China and Europe during the next ten or even twenty years.

The article concludes by emphasizing that the overall level of digital development between China and Europe and the differences between regions create a huge development space for deepening cooperation between China and Europe in the digital field. In the future, it is necessary to create a win-win situation in the digital field and to realize the complementary advantages of the digital field between China and Europe.

“REPowerEU: will EU countries really make it work? ”by Simone Tagliapietra was published by Bruegel. The European Commission on Wednesday 18 May published its plan setting out how the European Union can eliminate its dependency on Russian fossil fuels. REPowerEU also proposes EU-level backstop options in the face of the plausible risk of a sudden interruption of Russian gas supplies, particularly after the supply cuts to Poland and Bulgaria. The article concludes by pointing out that by acting together, the European Union can optimise its response to the energy crisis in all scenarios but each country will have to make concessions.

Please note: the English version of this issue is slightly different from our Chinese one. The views and opinions expressed in this article do not necessarily reflect the official position of the CCCEU.