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August, 2018

Germany blocks Chinese investment in strategic assets

Original article: Sina

The German government will buy a 20% holding in electricity transmission system operator 50Hertz to prevent Chinese investors from taking a majority stake in the firm. The move is part of Berlin's efforts to stymie Chinese investment in Germany's strategic assets.

Analysis:

When China launched a new round of economic reforms nearly 30 years ago, then paramount leader Deng Xiaoping advised his country to keep a low profile and bide its time. Deng knew that bold steps by China to flex its muscles would alarm its neighbors, Europe and the United States. Pushback harmful to China's interests would inevitably occur. 


In recent years, a cash-flush China has jettisoned Deng's maxim, aggressively seeking strategic technology and energy assets in the U.S. and Europe. In 2015, Beijing declared its intention to dominate next-generation industries from robotics to clean energy. 


In Europe, China has zeroed in on Germany, the EU's strongest economy. Research by Ernst & Young found that Chinese investment in Germany surged from $530 million in 2015 to $12.6 billion in 2016 and $13.7 billion last year. There have been a number of big-ticket acquisitions of German firms by Chinese companies. Midea bought robotics maker Kuka in 2016. The HNA Group acquired Hahn Airport last year. Additionally, last year, Geely Automobile purchased approximately 9.7% of the Daimler Group's shares at a price of 7 billion euros, becoming Daimler's largest individual shareholder.  


But by attempting to take a stake in Germany's electricity grid, China crossed Berlin's red line. In July, Germany's federal government blocked China's State Grid from buying a stake in the electrical power company 50Hertz. "On national security grounds, the federal government has a major interest in protecting critical energy infrastructure," the statement said. A government bank will temporarily take ownership of the stake.


Australian infrastructure fund IFM initially put up the stake in 50Hertz for sale. China's State Grid tried twice to buy the stake. Elia, a Belgian firm that is the majority shareholder of 50Hertz, blocked the first attempt by upping its stake to 80%. 


Shi Mingde, the Chinese ambassador to Germany, suggested Berlin was being protectionist. "China is opening itself further, but we are concerned that the door to Germany that has been opened will be closed again," Shi was quoted as saying by the Stuttgarter Zeitung newspaper. 


We have to disagree. Berlin is merely implementing a policy of reciprocity. China doesn't allow foreign ownership of its strategic assets. Foreign investors are forbidden from holding stakes in the Chinese electrical grid. Moreover, German firms don't enjoy state backing for their investments in China. 


The Mercator Institute for China Studies (Merics) in Berlin has lauded the pushback against Chinese investment. "China’s forceful push to close the technological gap should be a wake-up call for the EU," Merics wrote in a July 27 blog post. "The current arrangement with China is based on a trade-off in accepting ownership restrictions or intellectual property violations in return for market access. But this arrangement no longer works as China’s companies are becoming more competitive domestically and internationally." 


Beijing doesn't see it that way. An August 14 commentary in Sina Finance, attributed to the German Studies Department at Tongji University, opines that Western governments and media wary of China's rise have maligned the global reputation of Chinese firms and "deliberately ignored China's efforts to strengthen intellectual property protection and further open up its services and manufacturing industries."


The commentary warns that Germany's rebuffing of Chinese investments risks "scaring off foreign investors." It urges Berlin and the EU "to work to promote the principles of market openness and economic equality on a global scale."

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