“Large multinational corporation signs agreement to invest billions of dollars in China petrochemical plant.” Yawn. It is not nearly as exciting as a trade war between the world’s two largest economies.
That is why a July 9 agreement concerning a $10bn investment by German chemicals giant BASF in a wholly owned facility in southern China received almost no press coverage, especially compared with the opening shot of US president Donald Trump’s trade war with China three days earlier.
The two events are, however, closely linked and reveal much about Beijing’s penny-wise, pound-foolish approach to market access reforms over recent years. Chinese companies have profited enormously when foreign investors have been forced to operate through joint-venture structures, but China would have benefited much more if such requirements had been eliminated a long time ago.
BASF’s new plant in Zhanjiang, Guangdong province is a case in point. Its approval just days after the first tranche of US tariffs on Chinese exports took effect on July 6 was no accident. The agreement was signed in Berlin by BASF chairman Martin Brudermüller and Guangdong vice-governor Lin Shaochun in the presence of German chancellor Angela Merkel and Chinese premier Li Keqiang.
As tension with the US built up, Chinese officials were eager to facilitate large European and Japanese investments. Their willingness to rush through preliminary approvals for BASF’s large project — one that will compete directly against Chinese state-owned enterprises — is one measure of official concern in Beijing about the trade war.
European multinationals, like their US counterparts, grew increasingly frustrated with market access and other investment barriers during President Xi Jinping’s first five years in office. EU investment in China plateaued at €10bn annually from 2013 to 2015 and then declined to €8bn in both 2016 and 2017. BASF’s $10bn Zhanjiang investment, even though it will be spread over a decade, could help reverse this trend.
The main reason BASF is willing to make such a large investment is the opportunity to take a 100 per cent stake in the project. When completed, BASF’s Zhanjiang plant will be its largest single investment — and its third-largest facility — worldwide, after similar petrochemical and cracker complexes in Ludwigshafen and Antwerp.
It will also be BASF’s largest such site in Asia. The company’s only two comparable facilities on the world’s largest continent — in Nanjing in China’s eastern Jiangsu province and in Kuantan, Malaysia — are, respectively, 50-50 and 60-40 joint ventures with local partners.
It is not hard to think of other sectors where an earlier easing of joint-venture requirements in China would have generated similarly generous investment dividends from European, US and Japanese multinationals.
One of the biggest mysteries about China’s automotive market, the world’s largest, is why Toyota sells so many fewer cars (1.1m last year) than Honda does (1.4m). Globally, in 2017 Toyota sold 10.2m vehicles — more than twice that of Honda.
Some Japanese officials believe that Toyota has not been nearly as aggressive as it could have been in China because of concerns about potential technology leakage to local partners, especially technology related to electric and fuel cell vehicles. Beijing’s recent announcement that it will allow foreign automakers to wholly own factories producing new-energy vehicles from next year could finally inspire Toyota to take as bold a leap in China as BASF did recently.
Of course, the surest way for Beijing to trigger large investment inflows from European and Japanese companies would be to look beyond sector-specific liberalisations and negotiate ambitious trade agreements with Brussels and Tokyo.
What better time than the present for the Chinese government to conclude its long-running negotiations with the EU over a comprehensive agreement on investment. A bold CAI that addressed, once and for all, European companies’ complaints about operating in China would send an emphatic signal to the Trump administration that Beijing will not be easily boxed in by any trilateral trade alliance between the US, EU and Japan. In reality, EU officials say that their CAI discussions with China are as desultory and sluggish as ever.
If the Chinese government wants a lot more mega investment deals like BASF’s in Guangdong, a renewed push for a comprehensive agreement with Europe is the best place to start.