EU Capitals Seek to Weaken Investment Screening Rules Targeting China’s Influence

In the Hungarian version of the policy text, finalized through line-by-line negotiations among the EU’s 27 member states and unveiled last week, a previously included list of critical sectors was removed, according to three diplomats privy to the confidential discussions. This change would limit the range of transactions that, under the proposed rules, would need to be reported to other EU member states and the European Commission.

“This represents more of a risk for Europe than a benefit to China — particularly in a time when threats arise not just from China,” said Francesca Ghiretti, an expert in EU-China relations and foreign direct investment (FDI) screening at Rand Europe, whose research has extensively covered these topics.

Noteworthy is the fact that these changes occurred during Hungary’s presidency of the EU Council, a country known for its strong pro-China stance within the bloc. Hungary has enthusiastically welcomed Chinese investments in sectors such as electric vehicle manufacturing and the production of batteries essential to powering them.

A Shifting Focus

In its initial proposal, the European Commission included an annex that outlined specific sectors where foreign direct investment would require scrutiny. These included fields like artificial intelligence, semiconductors, quantum technologies, energy technologies, space, drones, and critical medicines. Mandatory screening was also suggested for cases where the foreign investor posed a potential security threat, such as being owned by a third country or falling under EU sanctions.

However, removing this annex would grant EU nations more discretion in deciding which sensitive technologies and investments need to be reviewed. For many national governments, this is a significant point, as they are wary of the Commission overstepping its authority and encroaching on their national sovereignty in such matters.

Hungary’s compromise text, which reflects changes made during its presidency of the EU Council, notably excludes semiconductors from the list of critical sectors. | Thomas Samson/AFP via Getty Images

Francesca Ghiretti, however, argued that instead of narrowing the scope of screening, EU member states should prioritize enhancing the efficiency of the process. A streamlined system, she explained, would pose less of a barrier to investors while still safeguarding Europe’s strategic interests.