On April 23, EU authorities raided the Warsaw and Rotterdam offices of Nuctech, a Chinese manufacturer of airport scanning machines, in an anti-subsidy investigation. In the sort of raids usually reserved for busting cartels, officers seized IT equipment and mobile phones. They also “scrutinized office documents and demanded access to pertinent data”, according the China Chamber of Commerce to the EU. The “competition officers” – from Brussels, Poland and the Netherlands – were looking for evidence of financial subsidies that Nuctech may have received from the Chinese government.
The raids, first reported by the South China Morning Post, sent shock waves through the EU. They suggest that the European Commission has moved to a new stage in cracking down on what it views as one of the biggest risks to the Eurozone economy: foreign subsidies from Beijing, which it believes are causing industrial overcapacity that could see Europe flooded with cheap Chinese imports.
But the raids stunned even the competition lawyers advising Chinese companies. “This action surprised even me – a dawn raid in Europe to find out more information about subsidies granted in China makes no sense,” said Andreas Reindl, Managing Partner at Brussels law firm Van Bael & Bellis, which specializes in competition law. Reindl, who published “The EU Foreign Subsidies Regulation” together with his colleague Isabelle Van Damme in January – a manual about the regulation under which the inspections occurred – described the raids as “political gamesmanship”, adding that the target – Nuctech – is probably “also perplexed and doesn’t know anything about the FSR”. But if Chinese businesses want to continue working in Europe, they need to learn about it fast. Since January, the EU has used the regulation four times to target Chinese companies.
The FSR is designed to root out “market-distorting” handouts by forcing non-European entities to be as transparent about the subsidies they receive from their governments as EU firms, which are subject to stringent state aid disclosure rules. It can be triggered during procurement processes, as well as merger and acquisition (M&A) activity. Or – as with Nuctech – the Commission can decide to investigate any business operating in the EU that it suspects has received state subsidies and is disadvantaging local competitors. While the Commission did not name Nuctech in its statement about “unannounced inspections”, it said that officials had “indications that the company may have received foreign subsidies that could distort the internal market”. Nuctech – a partially state-owned offshoot of Tsinghua University that was previously run by Hu Haifeng, son of China’s former President Hu Jintao – has been frozen out of some Western markets over security concerns. The company said it was “cooperating with the European Commission and is committed to defending its reputation as a fully independent and self-supporting economic operator”.
Michel Struys, Brussels-based Partner at the law firm Hogan Lovells, said every Chinese company in the EU should be prepared to receive a knock on the door, given the trigger-happy nature in which the EU is using the FSR. “Chinese companies have been put on the back foot, but the best form of defense is attack, and that is to be prepared. A lack of preparation is the real problem here,” said Struys, who has advised some of the companies already targeted under the new law.
Even before last week's events, businesses were worried. Before Nuctech, regulators went after European subsidiaries of solar firms Longi and Shanghai Electric, as well as CRRC Corp, the state-owned rolling stock company. The Foreign Subsidies Regulation (FSR) requires levels of openness that many Chinese businesses are not ready for. EU authorities can command Chinese firms operating in the EU to hand over their books for forensic scrutiny, with little time to get them in order. The local subsidiary of rail company CRRC withdrew from a bidding process in Bulgaria after balking at the requirements of complying with a procurement investigation. EU Industry Commissioner Thierry Breton responded on X that the inquiry had “already yielded results”, suggesting this was what he had intended to happen.
In an interview with the South China Morning Post, Fang Dongkui, Secretary General of the China Chamber of Commerce to the EU, listed a number of complaints about the FSR. The Commission’s definition of “foreign financial contributions” was “overly broad and non-exhaustive”, he said. According to Fang, Brussels is “scrutinizing subsidies received by Chinese parent companies that were passed through to their European entities”, which the Chamber thinks should be treated as separate entities. Perhaps most concerning for Chinese businesses is the danger that adhering to this law contravene other laws in China. Feng said that “in specific instances, the Commission had requested confidential bidding information, including pricing details, contracts or documents containing business secrets that allegedly could be related to subsidies”. These actions are “posing a risk to Chinese companies of breaching relevant tender regulations or Chinese laws”, he said.
The FSR has added to strains in the EU-China trading relationship. Brussels has 34 open trade investigations against Beijing, while two-thirds of its active trade defense measures – currently numbering 184 – are against China. As many Chinese companies receive state subsidies, the FSR could be used to ban them from the EU market, the South China Morning Post reports.
Responding to the latest EU move, the Director of the Trade Remedy and Investigation Bureau at China’s Ministry of Commerce (MOFCOM), said the probe disrupts fair market competition and significantly undermines the confidence of all foreign companies operating in Europe, signaling a deterioration in the EU’s business environment and sending a starkly negative message to all foreign entities operating in the European market. China will closely watch any further actions by the European side and take all necessary measures to resolutely protect the legitimate rights and interests of Chinese companies, the official stressed in a statement, the China Daily adds.
