How to Handle State-Owned Enterprises in EU-China Investment Talks

Abstract

Chinese state-owned enterprises (SOEs) are among the main obstacles preventing China and the European Union from agreeing on a bilateral investment agreement (BIT). Given the benefits that both China and the EU could obtain from a BIT, the question of SOEs should be addressed most effectively. We examine the main differences between Chinese and European SOEs regarding their sectoral coverage and, most importantly, their corporate governance. We argue that preferential market access for Chinese SOEs in China is the key to their undue competitive advantage globally and is also why global consumers might not necessarily benefit from Chinese SOEs in terms of welfare gain. Preferential market access in China, rather than ownership of SOEs, should be critical when evaluating the undue advantage enjoyed by Chinese corporates because private companies with ties to the Chinese government might also benefit from preferential market access. We also offer a checklist of issues for EU-China investment talks concerning Chinese SOEs. First, creating barriers to prevent Chinese companies from acquiring European assets will not solve the problem. Instead, equal market access in China is a much better goal to pursue in order to reduce the seemingly unlimited resources that Chinese SOEs seem to have to compete overseas. Second, bringing Chinese corporate governance closer to global market principles is also essential to ensure European, and Chinese corporates operate on an equal footing in their cross-border investment decisions.

This article draws upon the report: Alicia García-Herrero and Jianwei Xu, ‘How to handle state-owned enterprises in EU-China investment talks’ (June 2017) Bruegel Policy Contribution Issue n ̊18.

Both authors are affiliated with Bruegel and have written this paper in 2017.