In the Great Decoupling: China, America and the Struggle for Technological Supremacy, former British spy Nigel Inkster spells out a future where mounting tensions between the US and China trigger a technological confrontation with profound consequences for humanity’s future. In many ways the book, published in 2020, has proved prescient, depicting a coming age where the world’s two biggest economies joust for dominance over cyberspace, AI, quantum computing, and other emerging fields.
Marc L. Holtorf, a China expert and partner at law firm Pinsent Masons in Munich, has a better grip on this struggle between the superpowers than most.
“What we are seeing currently is a long shift in the geopolitical environment,” says Holtorf, an expert in intellectual property law who was formerly based in China and has advised Chinese companies for years. He also supports European businesses looking to invest in the country.
Above all, he observes two key trends. First, increasingly stringent capital controls implemented by Beijing on outbound capital which are affecting investment outside China. Second, European countries are following Washington’s lead by taking a tougher stance on foreign investment in sensitive areas.
“We see that already in many countries. Germany, the UK and France are starting to control and protect their critical infrastructure more.”
Although clear-eyed about the challenges, he believes the picture may not be quite as gloomy as has sometimes been portrayed – at least for European nations which still have some scope to maintain cordial ties with both China and the US.
There’s no denying that Europe’s trade links with China have taken a hammering in recent years – a consequence of poisonous geopolitics including Donald Trump’s “America First” mantra, concerns over human rights and mounting tensions over the acquisition of cutting-edge technology by Chinese firms.
But Holtorf remains guardedly optimistic. This year, he expects a rebound in cross-border activity as companies seek to take advantage of new and shifting circumstances. The reopening of China’s economy after three years of stringent Covid restrictions and growing optimism that Europe may dodge a deep recession sparked by the war in Ukraine are fuelling hopes that 2023 could be a stronger year for both outbound and inbound M&A.
Cross-border transactions between China and Europe have indeed fallen sharply over recent years. Chinese investments in Europe slumped to $14.6 billion in 2021 from a peak of $54.4 billion in 2017, for example. But this was only partly attributable to geopolitics, he says.
The COVID pandemic also played a big role, making it virtually impossible for investors to travel, conduct regular due diligence and meet face to face – a combination which forced many deals to be postponed or simply abandoned.
Now, however, with the impact of the pandemic receding and international travel largely reopened – including to China – he expects a flurry of activity in 2023, albeit perhaps not to the peak levels of five years ago, before many European countries slapped stricter rules on foreign investment in sensitive industries.
“You can do a lot virtually nowadays, but when you want to do a real deal, it's very good to have somebody on the ground whether it's inbound or outbound. So, this will certainly help.”
With many areas such as critical infrastructure, defence, telecom, semiconductors and AI all either off limits or under increasing scrutiny, Holtorf says Chinese companies are now turning to less sensitive sectors where they are unlikely to face problems.
Automotive, consumer goods, pharmaceuticals and medical devices are all viewed as easier areas, with many deals being done.
“There is still a lot of room to do these kinds of investments. It's just that specific areas will become more challenging. If you want to do a general investment into automotive in Germany, that should not be a problem. Of course, when it comes to Artificial Intelligence or semiconductors, things might look different and be more challenging than in the past.”
Holtorf also detects plenty of continued interest in investments in China, for understandable reasons. Although the pace of China’s economy slowed to just 3% growth in 2022 and its population fell for the first time since 1961, it remains one of the most powerful engines of global growth. With 1.4 billion people and a giant middle class, it also represents a colossal source of demand for European products and services – from handbags to electric cars, from pharmaceuticals to food or fine wine.
“There's also of course still interest in investing in China. It’s the second largest economy in the world and a strongly growing market.”
One notable trend is a desire from European companies to follow up on Chinese investments in projects or manufacturing plants which were originally launched 10 or 15 years ago. Consumer goods companies, carmakers and drugmakers are all still looking to expand and tap into robust demand.
Holtorf’s sanguine assessment does not overlook the obvious challenges that have emerged in the investment climate between East and West. But the broader story is more nuanced than simply a growing regulatory clampdown imposed from above. In some ways, the climate for foreign investment in China has improved in the past five years, he says.
One example is intellectual property and the formerly lax standards that China applied in policing the widespread theft of Western technology and expertise, which have now been tightened up.
“From my personal experience, it used to be really a severe problem but it has got a lot better. The Chinese legal environment for intellectual property has improved a lot over the years.”
Although there is still room for improvement, this is one area where China has bolstered oversight and scrutiny in a way that has often benefited western companies.
That’s one reason why Pinsent Masons, which has steadily expanded its Chinese operation, remains upbeat about the future.
“We opened the first office in the 1980s in Hong Kong and then in the 1990s in Guangzhou. Now we have offices in Hong Kong, Beijing and Shanghai. We are very confident that our business will continue to grow.”
It’s an expansion that also reflects the growing sophistication of Chinese companies seeking to invest overseas – and their willingness to turn to high-level professional advice, whether in legal, management consulting, accountancy or public relations.
“Chinese investors became much more sophisticated over the last few years than in the early 2000s - for legal advisors and also for media and communications advisors. They often have a much stronger position now in negotiating deals. And that is good because sometimes it's easier to negotiate with a sophisticated partner than somebody who doesn't have a lot of experience.”
Either way, Holtorf believes investments between China and Europe will continue for a simple reason – because ultimately the potential rewards outweigh the risks.
While politics can always complicate matters, both the European and Chinese economies are simply too big to diverge completely – and the opportunities are huge.
“If you do an investment in a foreign country, there's always a risk because you are not exactly familiar with the market, the people, the general environment. But of course, you're doing it, because there's also a reward – and companies want to be rewarded for their business, for their services, for their products.”
For more information on navigating the complex background of Sino-Western relations, reach out to us now at [email protected].