The rise of ‘state capitalism’ in the field of investment catches the eyes of western countries. The North is currently getting stuck and facing uncertainty while the South is actively participating in global markets and embracing economic globalization. Protectionist stances on trade and immigration result in a more conservative view towards inbound foreign investment in the North. The South sees China becoming an active and important capital exporter. Given that, the USA and EU seek solutions to the changing investment dynamics and issues raised by Chinese state-owned investors in critical infrastructure. National security, reciprocity and competitive neutrality are frequently raised by the USA and EU when dealing with China’s state capitalism. This paper therefore aims to explore the implication of the US and EU measures on Chinese investment and domestic reform by comparing investment policies and treaty practices adopted by these two leading economies. The reasons behind and the convergence and divergence of adopted approaches are discussed. It found that concerns about China’s state capitalism is a clash between two types of development models presented by the North and South. The paper recognizes the legitimacy and necessity of state intervention in foreign investment to protect national security and ensure a level playing field while it also emphases the principles of proportionality and non-discrimination in rule-making. An adaptive version of competitive neutrality and increased transparency are critical for China to respond to the US/EU demands and to further domestic reform.
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Usually, sovereign investment refers to investments conducted by sovereign wealth funds (SWFs), while in this paper it mainly represents those investments undertaken by state-owned or funded investors. It mainly includes merger and acquisitions (M&A) and minority or portfolio investment made by state-owned enterprises (SOEs) and SWFs. Those investments that have foreign government background may also easily be regarded as ‘sovereign investment’.
A free market economy in the strict sense is an economy in which individuals can freely trade goods or commodities without the intervention of the government. The free market in terms of financial market is often linked to the ‘neo-liberal capitalism’, under which market participants are less regulated to allow the invisible hand of the free market system to promote economic prosperity and achieve free mobility of capital (Rigby and Zook 2002; Borts and Stein 1964). Kotz suggested that the financial crisis is the signal of the beginning of a systemic crisis of neoliberal capitalism (Kotz 2009).
The foreign government-controlled transaction is defined by ‘any covered transaction that could result in control of a US business by a foreign government or a person controlled by or acting on behalf of a foreign government.’ 31 C.F.R. § 800, 214.
FINSA does not define what constitutes ‘control’, but the Treasury Department’s proposed rules define control. See 31 C.F.R. pt. 800.
In terms of Chinese investment in the USA, the USCC recommended the Congress various suggestions to tackle Chinese investment, especially to restrict Chinese investment in strategic assets. For example, the USCC recommended the Congress consider ‘prohibiting the acquisition of U.S. assets by Chinese state-owned or state-controlled entities, including sovereign wealth funds’, ‘requiring a mandatory review of any transaction involving the acquisition of a controlling interest in U.S. assets by Chinese entities not falling under the above class of acquitting entities’, ‘prohibiting any acquisition or investment that would confer “control” with regard to critical technologies or infrastructure’ and ‘including a net economic benefit test to assess the impact of acquisitions by Chinese entities in the United States to ensure they advance U.S. national economic interests’. It seems that the future US foreign investment policy towards Chinese investment will be getting more harsh and strict (USCC 2017).
The ‘other investment’ transactions that are considered as ‘covered transactions’ under the FIRRMA include any investment, direct or indirect, that affords any foreign person access to sensitive technical information, the rights to nominate important position, or involvement in substantive decision-making of the US business regarding relevant actions concerning critical technologies, sensitive personal data or critical infrastructure.
Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, COM/2017/0487 final—2017/0224 (COD).
Those projects or programmes, which involve a substantial amount or a significant share of EU funding, or which are covered by EU legislation in relation to critical technologies, critical infrastructure or critical inputs, are particularly included.
TPP Article 17.1. SOEs means ‘an enterprise that is principally engaged in commercial activities in which a Party: (a) directly owns more than 50 per cent of the share capital; (b) controls, through ownership interests, the exercise of more than 50 per cent of the voting rights; or holds the power to appoint a majority of members of the board of directors or any other equivalent management body.’ SWFs herein means ‘an enterprise owned, or controlled through ownership interests, by a Party that: (a) serves solely as a special purpose investment fund or arrangement for asset management, investment, and related activities, using financial assets of a Party; and (b) is a Member of the International Forum of Sovereign Wealth Funds or endorses the Generally Accepted Principles and Practices (“Santiago Principles”) issued by the International Working Group of Sovereign Wealth Funds, October 2008, or such other principles and practices as may be agreed to by the Parties, and includes any special purpose vehicles established solely for such activities described in subparagraph (a) wholly owned by the enterprises, or wholly owned by the Party but managed by the enterprise.’
See Article 17.11 of the TPP and Article 22.11 of the USMCA.
See Article 11.4.1 (b) (c) of the EU-Vietnam FTA, Article 22.4.1 of the USMCA, Article 17.4.1 of the TPP.
See Article 22.4.2 of the USMCA, Article 17.4.2 of the TPP
EU-Vietnam FTA s. III, art. 3 (1) (2)
EU-Vietnam FTA s. III, art. 4
EU-Vietnam FTA s. III, art. 6
See Article 13.7 of the EU-Japan FTA
See Article 11.6 of the EU-Vietnam FTA
EU-Vietnam FTA s. III, art. 5
See Article 13.6.2 of the EU-Japan FTA, see Article 11.5. 2 and 3 of the EU-Vietnam FTA
See Article 13.6.1 of the EU-Japan FTA
See Article 17.5.1 of the EU-Vietnam FTA
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Yin, W. A comparison of the US and EU regulatory responses to China’s state capitalism: implication, issue and direction. Asia Eur J 19, 1–25 (2021). https://doi.org/10.1007/s10308-020-00570-7