“Three Great Mountains” for the Chinese State-Owned Investments in the European Union

In April of 1948, Chairman Mao Zedong in his speech to a conference of political cadres mentioned the “three great mountains” that need to be overcome by the revolutionary forces: imperialism, feudalism and crony capitalism. The commentators of the current affairs argued that the current Chinese leadership is facing the “three great mountains” of pandemic containment, post-pandemic economic recovery and diplomatic crises in international affairs. After labelling China “an economic competitor in the pursuit of technological leadership, and a systemic rival promoting alternative models of governance” in its 2019 policy paper “EU-China – A strategic outlook”, the European Union (EU) has been solidifying its own regulatory “three great mountains” in order to “level the playing field” for the European companies and their Chinese competitors on the European and global markets. The present post is discussing the features of this three-prong regulatory framework and its likely effects on the Chinese state-owned enterprises (SOEs) and their investments in the EU.

First “great mountain” – merger control

The first “regulatory mountain” already encountered by the Chinese SOEs is the EU merger control. Their investments in the form of acquisitions of control over enterprises with substantial presence in the internal market have to be notified to the Commission under the EU Merger Regulation (EUMR). While the EU merger control rules adopt an ownership-neutral approach, their application to the large centrally controlled SOEs with significant presence on the global markets has prompted a number of challenges for procedural and substantive assessment of the notified concentrations. For example, the Commission struggled to apply the concept of “single economic entity” that would encompass individual SOEs, Chinese SOEs active in certain markets/sectors or all Chinese SOEs controlled by the central government. For the time being, since the Chinese SOEs have not yet reached substantial market shares in the internal market, their concentrations have been cleared under the EUMR. At the same time possible application of the “single economic entity” concept that would encompass all Chinese SOEs could result in a conclusion that the competition on the relevant market would be affected, which could lead to the prohibition or conditional approval of future concentrations.

Nevertheless, various stakeholder groups linked to the European industries viewed the application of the EU merger rules to the Chinese SOEs as overly lenient and called for reform of EU merger control in order to incorporate industrial policy considerations such as competitiveness of the European companies on the global markets. Realizing the political consequences of inserting various non-competition goals into the merger control decision-making process, the Commission was unwilling to proceed in that direction. In her speech at the International Bar Association 24th Annual Competition Conference, Executive Vice President of the European Commission, Margrethe Vestager remarked “the principle behind the EU merger rules is to concentrate on the things that matter for competition, and leave the rest alone.” The “rest” was left to the second regulatory “great mountain” – the newly established EU FDI screening framework.

Second “great mountain” – FDI screening

Unwilling to further “politicize” the EU merger control, the Commission moved with the establishment of an alternative regulatory framework for defending the strategic interests of the EU and its Member States – the EU FDI Screening Regulation, which entered into force in April 2019 and became fully operational from 11 October 2020. While the decision whether to adopt or maintain an FDI screening on the grounds of public security remains with the Member States, the EU FDI Screening Regulation provides a non-exhaustive list of strategic interests that may be protected through FDI screening: (1) critical infrastructure; (2) critical technologies; (3) supply of critical inputs such as energy, raw materials, and food; (3) access to sensitive information including personal data; and (4) freedom and pluralism of media. Among the substantive criteria that can be used for assessment of individual FDI projects is “whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding.” The factor of state ownership and state influence over a foreign investor places the Chinese SOEs in the spotlight, as their investments in the strategic sectors are now more likely to trigger the alarms under the new FDI screening framework. The EU FDI Screening Regulation requires Member States to “notify the Commission and the other Member States of any foreign direct investment in their territory that is undergoing screening”, which would allow them to provide comments to the Member State undertaking the screening. The adoption of the EU FDI screening framework was applauded by the European Union Chamber of Commerce in China, which in its 2020/2021 position paper urged the EU to “strengthen investment screening to better mitigate distortions emanating from both China’s state-owned economy and state-directed capital”.

As of 14 January 2021, sixteen Member States have maintained various forms of FDI screening legislation. These national mechanisms differ substantially in terms of sectors/industries, notification thresholds, procedural timelines and institutional settings. Some Member States have entrusted the FDI screening to their competition authorities while others created new intra-governmental bodies for security assessment of foreign investments. It remains to be seen whether and how the Commission and Member States will coordinate the FDI screening undertaken by the individual Member States but it certainly adds an additional level of scrutiny and increased legal uncertainty for the prospective Chinese state-owned investments in the strategic sectors of the European economies.

Third “great mountain” – control of foreign subsidies

In June 2020, the Commission published the White Paper on foreign subsidies as a foundation for the third “regulatory mountain” for the foreign investments, which is expected to take the form of a legislative proposal in 2021. In addition to the first and second “regulatory mountains”, the White Paper proposes three modules to address the existing regulatory gaps by targeting potential market distortions caused by foreign subsides: (1) in the internal market generally; (2) at the time of acquisition of European companies; and (3) in the course of public procurement. A company that would receive subsidies from a foreign state greater than EUR 200,000 over a consecutive period of three years will be considered as distorting the internal market.

As the Chinese SOEs are among the primary recipients of various forms of state support including subsidies, the White Paper paves the way of an additional regulatory framework for “levelling the playing field” when it comes to the SOE investments, commercial practices and participation in the public procurement tenders in the EU. As expected, Chinese stakeholders have been rather critical of the expected third regulatory “great mountain”. The spokesperson of the Mission of the People’s Republic of China to the European Union contrasted the EU’s approach towards foreign subsidies with that of China: “subsidy is a commonly used policy instrument. Developed countries such as those in Europe and the United States are the primary users of subsidy policies. China’s approach to subsidies is crystal clear, namely, following the WTO rules and China’s commitments made on its accession to the WTO.” The China Chamber of Commerce to the EU warned that the proposed foreign subsidies instrument lacks a clear legal basis under the TFEU, overlaps with the existing EU and Member States’ instrument, and may be WTO-incompatible.


In 2015, the EU Competition Commissioner Margrethe Vestager has stated in her speech at the New York University: “Deng Xiaoping was famous for his saying that it doesn’t matter whether a cat is black or white as long as it catches mice. The antitrust enforcer version of this saying should be that: it doesn’t matter where the company comes from, as long as it competes – by the rules”. Although the three regulatory frameworks discussed in the present post are not discriminatory de jure, it is not hard to see that they may present substantial challenges for the Chinese state-owned investments in Europe.

So far, the Chinese SOEs have managed to climb the first regulatory “great mountain” – the EU merger control – as the Chinese companies have not yet achieved substantial presence on the European markets to warrant the ex ante competition-based remedies under the EUMR. The challenges of the second regulatory “great mountain”, the FDI screening, will depend to a large degree on the intra-European cohesion of the Member States and their commitment to cooperate in safeguarding the strategic assets and technologies. The contours of the third regulatory “great mountain” will become visible in 2021 when the legislative proposal on control of foreign subsidies will be tabled by the Commission.

While the Commission officials continuously pledged that the EU will remain open to the foreign investments, the Executive Vice-President Dombrovskis specified that “this openness is not unconditional.” One of the implied conditions could be the reciprocal access to the Chinese markets for the European companies both in terms of trade and investment, as well as post-establishment “level playing field” vis-à-vis Chinese domestic companies, both private and state owned. Thus, the looming presence of the three regulatory “great mountains” for Chinese investments in the EU will be shaped by the long-awaited EU-China Comprehensive Agreement on Investment. Until then, the three regulatory “great mountains” could safeguard the competitiveness and the strategic autonomy of the EU and its companies within the internal market.



Alexandr Svetlicinii

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