China-EU investment deal more vital than FTA

The Comprehensive Agreement on Investment, once inked by the European Union and China, will become an important milestone for the two major economies. To some extent, the CAI, on which the two sides wrapped up negotiations on Dec 30, can be considered more important than a trade agreement for the EU.

We (at Deutsche Bank) believe the CAI will likely boost EU investment in China. For EU manufacturers, China's move to further widen market access and remove shareholding limits will likely help create new opportunities and build a level playing field for domestic and foreign investors. Perhaps the service sector can be expected to make even greater progress after the two sides sign the agreement.

EU subsidiaries in China accounted for 11 percent of the total manufacturing sales, but only 3 percent of services sales of EU subsidiaries worldwide. By further opening up China's financial and information technology services－as well as promising sectors such as environment and health services－to European investment, the CAI will help increase EU subsidiaries' services sales in China.

Although the details of the Sino-EU investment agreement are yet to be revealed, our confidence in the CAI and in China's commitment to further opening up its economy is based on the strength and soundness of the Chinese economy. Further opening-up, as China's recent economic history suggests, will not weaken China's economic competitiveness, but instead benefit all participants in the economy.

China and the EU are already one of the world's biggest trading partners. The EU has long been China's top trading partner, and in 2020 China became the EU's top trading partner. Which means the volume of Sino-EU trade has, for the first time, surpassed that of EU-US trade.

But trade does not reflect the full picture of EU-China economic relations. Between 2000 and 2019, Europe's gross foreign direct investment in China, according to the International Monetary Fund's Coordinated Direct Investment Survey, was $254 billion. Yet the figure likely underestimates the true value of European investments in China, especially because EU subsidiaries' aggregate sales are already higher than EU exports to China. And the gap has widened with the EU subsidiaries sales growing faster than exports over the years.

EU manufacturers have invested in a wide range of industries in China. The automobile industry, not surprisingly, is the top sector for them. Even so, the auto industry accounted for just about a quarter of total sales of EU subsidiaries in China's manufacturing sector. EU manufacturers also have a substantial presence in China's chemicals and machinery industries, which have annual turnovers close to €30 billion ($36.24 billion) each. And sales of the electronics, metals and food/beverage sectors have all exceeded€10 billion.

China's investment in the EU was relatively small until 2010, but it has increased rapidly since then. The sales of Chinese manufacturing subsidiaries in the EU increased from €8 billion in 2010 to €54 billion in 2017. Similarly, the sales of the subsidiaries of Chinese service enterprises in the EU increased from €1 billion in 2010 to €18 billion in 2017. This rapid increase can be attributed to the expansion of many Chinese companies in the EU through mergers and acquisitions.

Chinese foreign direct investment in Europe peaked in 2017 only to decline later. But despite Chinese investments in Europe slowing in the short term, they will likely grow in the long run, as Chinese companies are motivated to expand their businesses in the EU, according to a 2019 survey by the China Chamber of Commerce to the EU.

And although the EU has promised to open up its renewable energy sector to a limited extent, with reportedly a 5 percent shareholding cap, it will be welcomed by Chinese investors, not least because it is the right move toward greater Sino-EU collaboration on the crucial issue of fighting climate change.

The author is Deutsche Bank Chief Economist, China. The views do not necessarily reflect those of China Daily.