Recent trends in foreign investment regulation reflect shared concerns on both sides of the Atlantic over diversifying supply chains and reducing overall dependence on the Chinese economy.
On August 23, Reuters published an article reporting that Germany has reduced the number of guarantees provided to companies investing in China. The German government provides investment guarantees to German companies investing abroad, particularly in developing countries, to indemnify losses suffered by political events and account for other risks. This past year, the deal volume in guarantees for companies investing in China significantly decreased, from €745.9 million to €51.9 million. This follows a move by Germany to cap the size of guarantees for investments in a single country last November, and the termination of all investment guarantees for investments into the Xinjiang-Uyghur Autonomous Region last May. As the Reuters article notes, these measures come after trade between Germany and China reached a record $320 billion in 2022.
The United States recently began the process of creating a regulatory regime focused on U.S. investments in certain sensitive technologies in China. Western capitals have increasingly aligned on such targeted measures to “de-risk” from China — an approach seen as a less aggressive alternative to the notion of “decoupling” that gained traction in Washington during the prior U.S. administration. Germany’s recently issued Strategy on China references this concept numerous times, defining it as “reducing dependencies in critical areas, keeping geopolitical aspects in mind when taking economic decisions, and increasing our resilience.”
For now, the United States alone has taken formal steps to enact an outbound investment regime that will prohibit certain investments by its persons in China. However, the European Commission has also stated its intention to explore such mechanisms, with Germany participating in an assessment alongside a number of other EU Member States.
The Federal Ministry for Economic Affairs and Climate Action is also currently working on a complete overhaul of Germany’s foreign investment regime, which will not only be restructured and converted into a new law, but also substantially strengthened. Elements under consideration include: (a) an effective lowering of thresholds for certain sensitive sectors; (b) the ability to review contractual arrangements (such as license agreements), rather than just acquisitions of voting shares; and (c) a potential presumption that transactions by certain investors (in specific state-owned or -affiliated companies) in particular sectors are generally viewed as sensitive.
Specific policy rationales and the ultimate form that such regimes take will naturally vary based on the unique economic considerations of each jurisdiction. The executive order establishing the U.S. regime focuses on specific categories of “transactions,” including U.S. capital expenditures by private equity and venture capital firms. As indicated in its Strategy for China, Germany may be more concerned with the risk for technology transfer through direct investments in China. These considerations may expand, however, in response to the overall investment climate as perceived by foreign businesses on the ground in China.
Germany's new China strategy, introduced in July, warned that investments in plants in China could lead to sensitive technologies being given away, and promised new measures to deal with that security risk after trade between the countries hit a record $320 billion in 2022.