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German minister proposes tougher rules on Chinese foreign direct investment

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Germany’s deputy chancellor has set out proposals to increase scrutiny of Chinese investments as Europe’s largest economy grapples with increased geopolitical risks surrounding its biggest trading partner.

The measures put forward by Robert Habeck, a Green who also serves as economy minister, would toughen restrictions on foreign direct investment in Germany in critical sectors such as semiconductors and artificial intelligence, and come just weeks after Berlin warned that Beijing was becoming “more repressive internally and more aggressive externally”.

The proposals, confirmed by a government official, come at a time of intense debate in Europe and the US about western economic relations with Beijing but risk stoking fresh tensions within chancellor Olaf Scholz’s bickering coalition as well as with business groups.

China has been criticised by western allies for its growing authoritarianism, sabre-rattling towards Taiwan and continued close ties with Russia despite the latter’s full-scale invasion of Ukraine last year.

The proposed legislation is being circulated across government departments for consultation and follows the publication last month of Berlin’s long-awaited China strategy, which said that the government was assessing the effectiveness of existing investment screening as part of a broader evaluation of ties.

Germany’s three ruling parties are already at loggerheads over a series of issues, from child support payments to industrial policy.

Scholz, a member of the Social Democrats (SPD), is less eager than his Green coalition partners to take steps that would dramatically curb economic ties with Beijing, fearing that they could damage political and trade relations with a country that was Germany’s largest trading partner for the seventh year running in 2022.

The chancellor has clashed with cabinet colleagues over issues such as Chinese conglomerate Cosco’s purchase of a stake in a Hamburg port terminal, which Green ministers, including Habeck, had wanted to block.

The new measures do not focus on outbound investment in China’s technology industries, which was recently subjected to new rules by the White House. Germany is part of EU discussions about how to respond to those measures. 

Businesses and investors from outside the EU are already subjected to a screening process when buying assets in the country, with the government holding the right to veto the acquisition if it believes it poses a threat to public order or national security.

But Habeck’s proposals would aim to simplify and consolidate an array of existing rules. 

Although they do not explicitly mention China, they include tighter restrictions on sectors where Chinese dominance or influence is seen as a threat to western economic security, such as semiconductors, AI and quantum computing, an official familiar with the proposals said.

Habeck is also seeking to crack down on what Berlin sees as China’s efforts to circumvent existing rules, such as the acquisition of intellectual property under licensing agreements, by expanding the definition of what types of investments are subject to screening.

Noah Barkin, an expert on Europe’s relations with China at US-based research firm Rhodium Group, said the proposals showed that Habeck’s economy ministry “wants to use the momentum from the strategy [on China] to adjust some policies — in part to limit the chancellery’s wriggle room”.

He expected to see the economy ministry, along with the Green-led foreign ministry, make “full use of the language in the China strategy to push their more hawkish agenda”. He added: “It will be interesting to see how Scholz reacts.”

The German official stressed that Germany “is and will remain an open investment location” that would continue to welcome international investors. They stressed, however, that FDI “must not jeopardise our goal of ensuring German and European economic security.”

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