An overview of the China/EU Comprehensive Agreement on Investment

Global Publication February 2021

On December 30, 2020, the EU and China concluded in-principle negotiations for a Comprehensive Agreement on Investment (CAI), the first round of which commenced in 20141. Whilst the deliberations on the adoption and ratification of the agreement are yet to take place, the CAI is widely appraised as an ambitious move to create significant opportunities for investors from the EU and China and to strengthen the economic ties between the two strategic markets. Once it becomes effective, the CAI is expected to provide a uniform legal framework for EU members to replace the current bilateral treaties between China and 26 individual EU member states2.

According to publicly available information3, highlights of the CAI are:

  1. Market access
  2. Level playing field
  3. Sustainable development
  4. State-to-state dispute settlement mechanism

There follows an overview of each aspect.

Market access

Currently, EU investors have been entering the Chinese market by primarily relying on (a) China’s commitments in the General Agreement on Trade in Services (GATS) under the WTO framework, (b) China’s regulatory regime under the Foreign Investment Industry Catalogue which was replaced by the Negative Lists issued by the Chinese government from time to time and applicable to foreign investors generally, and (c) other international/bilateral treaties/agreements entered into by China to the extent applicable.

Under the Foreign Investment Law (effective from January 1, 2020), China implemented a regime of pre-entry national treatment plus Negative List for the administration of foreign investment. If the international/bilateral treaty/agreement to which China is a party provides for more favorable market access treatment for foreign investors, provisions in that treaty or agreement may apply.

We set out below a table of summary outlining the relaxation measures adopted/agreed by China in certain sectors under different frameworks by way of example:

No.  Sector  GATS commitment   2020 Negative List4 CAI 
1  Automotive   Committed to amending industry policy, relaxing restrictions on manufacturers and lowering approval levels to a certain extent, and removing foreign ownership restrictions on manufacturers of automobile engines. 

Maximum foreign shareholding in the vehicle manufacture sector (except for special purpose vehicles, new energy vehicles and commercial vehicles) is limited to 50% and the same foreign investor cannot set up more than two joint ventures to manufacture the same type of vehicle product.

The restrictions on foreign investment in manufacture of passenger cars and the limitation on the number of joint ventures referred to above will be lifted in 2022.

China agrees to remove and phase out foreign shareholding restrictions. China will commit to market access for new energy vehicles. 
2  Financial services 

Committed to relaxing limitations in client, business region, business scope and shareholding ratio etc. of foreign investment in certain financial services sectors (e.g., insurance, banking, and other financial services). 

The foreign shareholding restrictions on securities companies, securities investment fund management companies, futures companies, and life insurance companies have all been lifted. 

China has started the process of gradually liberalising the financial services sector and will commit to keeping it open to EU investors.

3  Telecom/cloud services  Committed to relaxing the limitations on business region, and shareholding ratio etc. of foreign investment in certain value-added telecom services (capped at 50%) and certain basic telecom services (capped at 49%). 

Subject to the commitments in GATS, foreign investment must not exceed 50% in value-added telecom services (except for e-commerce, domestic multi-party communication, storage and forwarding, and call center), and basic telecom services must be controlled by Chinese shareholder(s).

China agrees to lift the investment ban for cloud services5 which will be open to EU investors subject to a 50% foreign shareholding restriction.
4  Computer services 

Committed to opening consulting services related to computer hardware installation, software implementation services and data processing services, but software implementation services and part of data processing services must be in the form of a Sino-foreign joint venture (i.e. cannot be wholly foreign-owned). 

N/A  China commits to opening market access for computer services. China will also include a “technology neutrality” clause, ensuring that foreign shareholding limits in value-added telecom services will not apply to other services such as financial, logistics, medical etc. if offered online.6 
5  Health (private hospitals)  Committed to allowing foreign investment in hospitals and clinics in the form of joint ventures, subject to restrictions on numbers and qualification requirements of medical staff.  Foreign-invested medical institutions must take the form of a Sino-foreign joint venture (i.e. cannot be wholly foreign-owned). 

China will offer a new market opening by lifting joint venture requirements for private hospitals in key Chinese cities (including Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen).

         

On the other hand, the EU market is already largely open to Chinese investment. The Chinese investors may still rely on the EU’s commitments in GATS. The CAI binds the EU to open some additional markets (notably, in the manufacturing sector) whereas EU sensitive sectors (such as energy, agriculture, fisheries, audio-visual, public services etc.) are all preserved in the CAI.

Level playing field

State-owned enterprises (SOEs): The CAI aims at improving the level playing field between Chinese SOEs and EU businesses by requiring the SOEs to act in accordance with commercial considerations and not to discriminate against foreign-invested market players in their procurement and sales of goods and services. The CAI will also include provisions that will oblige China to provide, upon request, information to allow for the assessment of whether a specific SOE has complied with the agreed rules set forth in the CAI.

Forced technology transfer: The CAI will contain rules against forced transfer of technology. The provisions will prohibit certain types of investment requirements that compel transfer of technology and interference in contractual freedom in technology licensing. Notably, China has been making efforts to address technology transfer issues in the past few years. The Foreign Investment Law emphasizes contractual freedom and prohibits forced technology transfer by administrative agencies and their working staff. The current version of the Administrative Regulations on Import and Export of Technologies (as amended on March 18, 2019) also removed the provisions which allegedly enabled forced transfer of technologies by Chinese parties. The Civil Code and relevant juridical interpretations, which took effect recently, address transfer of technology and emphasize contractual freedom as well.

Transparency in subsidies: The CAI will impose transparency obligations on subsidies related to services. Both the EU and China will be obliged to engage in consultations with each other in order to provide additional information on subsidies which may have a negative impact on the investment interests of the other side and to seek to address that negative impact.

Sustainable development

The CAI will contain provisions reflecting the EU approach to sustainable development, obliging the parties to make commitments in particular areas such as environment, climate change and labour protection. Specifically speaking, the commitments will be:

  • To effectively implement the Paris Agreement on climate change
  • Not to lower the standards of labour and environmental protection in order to attract investment
  • Working towards the ratification of the outstanding ILO (International Labour Organisation) fundamental Conventions
  • A specifically tailored implementation mechanism to address differences related to the implementation of sustainable development commitments (including government consultations, recourse to an independent panel of experts etc.)

State-to-state dispute settlement mechanism

The CAI will provide for a two-step approach to settle disputes between the EU and China in relation to complaints about violation: (a) consultations (possibly, mediation), and (b) if consultation fails, arbitration panel procedures. This approach is similar to that adopted in the existing bilateral treaties between China and individual EU members7.

An institutional framework will also be established to monitor the effective implementation of CAI: this will include setting up an Investment Committee (for institutional oversight) at a political level as well as a specific working group with respect to sustainable development.

By contrast, the CAI does not contain any investor protection mechanism allowing individual investors to litigate disputes, while China and the EU commit to completing negotiations on investment protection and investment dispute settlement within two years of the signature of CAI8.

China has not published any official text of the CAI and the above summary is prepared primarily based on the information published by the EU. As the final text of the CAI has yet been settled and approved, there is still some degree of uncertainty surrounding it. We will keep monitoring the updates closely.


Footnotes

4

The current negative lists include: (a) Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2020 Version) (2020 Negative List), which is applicable nationwide, (b) Special Management Measures for the Market Entry of Foreign Investment in Pilot Free Trade Zones (Negative List) (2020 Version) (the FTZ Negative List), which only applies to the Pilot Free Trade Zones, and (c) Special Management Measures for the Market Entry of Foreign Investment in Hainan Free Trade Port (Negative List) (2020 Version) (the Hainan Negative List), which will only apply to Hainan Free Trade Port.  The FTZ Negative List and the Hainan Negative List provide for treatment that is more favorable to foreign investors as compared to the 2020 Negative List in certain sectors. For the purpose of this briefing, we only summarize the measures set forth in the 2020 Negative List.

5

Practically speaking, providing “cloud services” in China generally requires telecom licenses of different categories, such as internet data centre services, content delivery network services, Domestic Internet Protocol Virtual Private Network services, Internet access services, and/or information services (ICP License), which are provided in the Classified Catalogue of Telecommunications Services (2015 Version) and were not committed to in GATS.   

6

Under the current legal framework, providing information services for profit via the Internet  would require an ICP License, a subcategory of value-added telecom license which is subject to 50% foreign shareholding restriction, and is difficult to be obtained by foreign invested enterprises. This rule generally applies irrespective of the sector/industry of the service provider. The introduction of the “technology neutrality” clause will likely change the regulatory landscape in this respect. 

7

See Protocol to the Agreement between the Government of the Republic of Finland and the Government of the People's Republic of China for the Protection of Investments, http://tfs.mofcom.gov.cn/aarticle/h/au/200212/20021200058416.html; Agreement between the People’s Republic of China and the Kingdom of Spain on the Promotion and Reciprocal Protection of Investments, http://tfs.mofcom.gov.cn/aarticle/h/au/200611/20061103745093.html; Agreement between the Government of the France Republic and the Government of the People's Republic of China on the Reciprocal Encouragement and Protection of Investments, http://tfs.mofcom.gov.cn/article/h/au/201007/20100707041031.shtml



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