Impact of the Foreign Subsidies Regulation on Chinese enterprises

Cheng Shi
AllBright Law Offices, Shanghai
shicheng@allbrightlaw.com

Jennifer Wang
AllBright Law Offices, Shanghai
wangqinghua@allbrightlaw.com 

As early as the proposal and legislative stage of the Foreign Subsidies Regulation (FSR), the European Union's antitrust commissioner specifically proposed that the establishment of the legislative system on foreign subsidies was intended to address Chinese state-owned enterprises’ (SOEs) more unfair competitive advantage than European counterparts’. During the public consultation process of the FSR, many supporters specifically mentioned subsidies from China. For example, AEGIS Europe's comments on the draft of the FSR clearly stated that national strategic plans formulated by third countries like China, such as ‘Made in China 2025’, should be presumed to pose a serious risk of substantial and irreparable damage to competition on the EU's internal market. The impact of the FSR on China is undoubtedly significant. To be specific, the impact of the FSR on Chinese enterprises includes the following three aspects.

First, the investment and merger and acquisition activities of Chinese investors in the European market will be uncertain. Although the effective FSR does not specify China, any other specific country or specific institutional model, due to the extremely broad definition of foreign subsidies in the FSR, it is highly likely that the Chinese investors will be subject to the supervision of the FSR, including but not limited to Chinese SOEs funded and held by the State-owned Assets Supervision and Administration Commission, privately-held enterprises enjoying non-universal preferential policies of local governments, or private enterprises receiving project loans from Chinese policy banks. When Chinese investors trade or have transactions with European companies and non-EU subsidies are involved, the European Commission will review and supervise that specific trade/transaction according to the FSR. Compared with European enterprises, the investment activities of Chinese investors in the EU will be negatively affected to a certain extent, with the uncertainties of investment further increased.

Second, Chinese investors will have to bear the increased compliance and operational costs. The FSR clearly states that this regulation does not affect or apply jointly with the EU's existing effective systems for antitrust filing, foreign investment review, etc. Therefore, for Chinese investors who would like to enter the European market, it is necessary to attach more importance to the improvement of corporate compliance with respect to foreign subsidies, anti-monopoly, foreign investment and others in order to prevent investigation or transaction prohibition by the European Commission. If the relevant investment in Europe and participation in public procurement projects are subject to the European Commission’s review, the administrative approval procedures and length of time for Chinese investors in relation to the above transactions will also increase. Along with the increased uncertainty of transactions, the burden of compliance and operational costs on Chinese investors will be further aggravated.

Third, Chinese investors’ development and layout will face certain obstacles. If Chinese SOEs or local enterprises receiving government financial support and subsidies wish to engage in trade or investment in Europe, and the European Commission imposes a prohibition on the transaction or the relevant enterprise violates the provisions of the FSR, on one hand, the target enterprise will face a hefty penalty of up to ten per cent of its total turnover in the previous year, and its economic situation may face crises and challenges. On the other hand, the development of the target Chinese investors in the European market will also be hindered, including the impact on the overall planning and layout of the enterprise in the European market. Therefore, the prospects for Chinese investors receiving government subsidies in the European market are unoptimistic.

FSR’s promulgation has had a negative impact on Chinese investors’ investment in Europe. Chinese investors should be aware of the negative impact. It can be predicted that foreign subsidies will become another threat for Chinese investment in the EU in addition to national security review and merger control review, which will bring greater uncertainty for Chinese investors. Therefore, Chinese investors should be cautious and take effective measures to prevent investment risks. In addition to compliance considerations, it is also necessary for Chinese enterprises to improve their core advantages and competitiveness. In addition, China investors can also explore more markets in areas other than the EU to avoid the risk of EU-policy changes.