CAI: China & EU Reach Agreement in Principle: The Main Takeaways for EU Investors in China

Introduction

After seven years of negotiations (a total of 35 rounds of talks between the parties), the EU and China reached political approval of the EU-China Comprehensive Agreement on Investments (CAI) on December 30^th via a video conference call with Chinese President Xi Jinping, Charles Michel, President of the European Council, and Ursula von der Leyen, President of the European Commission (as well as President Macron of France and Chancellor Merkel of Germany.)

The full text of the agreement in principle is based on a text that still requires technical work to be finalized and thus has not been released to the general public. The provisions outlined in our article below merely amount to a broad overview of the commitments derived from the Chinese side of the agreement which would be of immediate interest to European investors within the Chinese market as per the current information which has been made public.

It should be noted, that as neither party has signed the agreement yet, there is still a long road ahead for the CAI to become a tangible reality (e.g) finalizing specifics in the agreement, ratification, political opposition by EU Member States, as well as outside factors such as the incoming U.S. Administration. In a statement released by the EU, they have sad that the parties want this process to be completed by early 2022.

 

Main Aspects of Note for EU Investors from the Agreement in Principle

Market Access & the Liberalization of Investments

In terms of Market Access & the Liberalization of Investments, within documentation released by the European Commission, the CAI “guarantees an unprecedented level of access to EU investors in China” with obligations placed on both parties.

In terms of Market Access, commitments on the Chinese side include the elimination of quantitative restrictions, equity caps or joint venture requirements in a number of sectors to which European companies are heavily involved in the Chinese market and may be direct beneficiaries of the CAI moving forward.

Companies who may see the most benefits are inclusive but not limited to:

The Automotive Industry: Removal in some instances and phasing out in others of joint venture requirements as well as committing to market access for new energy vehicles;

Financial Services: Joint venture requirements and foreign equity caps have been removed for companies in the banking, trading in securities and insurance & asset management service sectors;

Health Services: The CAI lifts joint venture requirements for private hospitals in key Chinese cities;

Business Services: Eliminating joint venture requirements in real estate services, rental and leasing services, repair and maintenance for transport, advertising, market research, management consulting and translation services;

Environmental Services: Removal of joint venture requirements in environmental services).

An important aspect of note for European investors/potential investors is that managers and specialists of EU companies will be allowed to work for up to three years within Chinese subsidiaries without any restrictions ( e.g. labour market tests or quotas) as well as allowing the representatives of EU investors to visit freely prior to making an investment.

 

Fair Competition

 The CAI will require China’s State Owned Enterprises (SOEs) to act in accordance with commercial considerations and not to discriminate in their purchases and sales of goods or services, with the aim of improving the level playing field between public and private companies in the country.

As an important follow on principle from the introduction of this rule, China also undertakes the obligation to provide, upon request, specific information to allow for the assessment of whether the behaviour of a specific enterprise complies with the agreed CAI obligations.

The CAI also aims to bring the Chinese market more in line with World Trade Organization rules (as well as in some cases expanding upon them), examples of which can be found in regards to transparency in subsidies and forced technology transfers.

 

Standard Setting & Transparency

China will provide equal access to standard setting bodies (e.g. financial reporting standards) for European companies will also enhancing transparency, predictability and fairness in authorisations in this regard.

The CAI includes transparency rules for regulatory and administrative measures in order to enhance legal certainty and predictability, as well as for procedural fairness and the right to judicial review, including in competition cases.

Licensing and qualification requirements and procedures shall be made publicly available so as not to act as an unnecessary barrier to investment.

 

Concluding Thoughts

The President of the European Commission, Ursula von der Leyen has remarked that : the “agreement is an important landmark in our relationship with China and for our values-based trade agenda. It will provide unprecedented access to the Chinese market for European investors, enabling our businesses to grow and create jobs.”

As stated, the agreement will now undergo extensive scrutiny as talks regarding specifics in the investment deal will continue prior to the signature from the two sides, with commitments such as the effective implementation of the Paris Agreement on climate change and the International Labour Organisation Conventions (ILO) yet to be crystalized, as well as the establishment of enforcement (state-to-state dispute settlement) and monitoring (institutional oversight) mechanisms to allow for reciprocity, information sharing, compliance & dispute resolution between the parties under the CAI still open matters at the time of writing.

We will continue to monitor the updates in relation to CAI and will keep you updated. In the meanwhile, should you have any questions, do reach out to us at info@dandreapartners.com.