China's Ministry of Commerce (MOFCOM) has recently publicized the findings of an investigation concerning the European Union's execution of its foreign subsidies regulation (FSR), identifying potential trade hurdles for Chinese businesses active in the European market.

The FSR, which was formally implemented on July 12, 2023, compels companies to disclose subsidies obtained from non-EU governments to the European Commission.

This measure covers both mergers and acquisitions, as well as public procurement.

The European Commission's inaugural probe into public procurement practices under the FSR scrutinized the involvement of CRRC Qingdao Sifang Locomotive Co. Ltd., a Chinese firm, in a Bulgarian tender designed for acquiring electric trains, valued at an estimated 610 million euros ($625 million).

Similarly, another Chinese entity, Shanghai Electric, retracted its bid in a Romanian solar park project following an investigation.

These cases underscore the heightened scrutiny and subsequent challenges faced by Chinese enterprises amid the stringent enforcement of the FSR.

Nuctech, a Chinese company specializing in security inspection equipment, became the first entity embroiled in litigation under this regulation.

The European Commission conducted an unexpected inspection at Nuctech’s office, further demanding information stored outside the EU's jurisdiction.

Despite Nuctech's attempt to contest this demand, the EU General Court rejected the company's plea.

The enforcement of the FSR has prompted the China Chamber of Commerce for Import and Export of Machinery and Electronic Products to seek redress from MOFCOM under China's trade barriers legislation.

MOFCOM's assessment concluded that ambiguous definitions within the FSR, particularly around what constitutes a 'foreign subsidy,' create significant reporting challenges, risking substantial penalties for non-compliance.

In its findings, MOFCOM, echoing sentiments shared by legal experts in the region, emphasized that complying with the FSR mandates extensive disclosure concerning the operations of parent companies and subsidiaries within constrained timelines.

This, the ministry argues, heightens the vulnerability of Chinese firms to penalties for perceived inadequate cooperation during investigations.

Moreover, MOFCOM highlighted concerns over the potential reputational damage inflicted by such investigations and inspections, which might erode client bases and disrupt supply chains for Chinese businesses operating within the EU. The financial toll, as calculated by MOFCOM, estimates losses at approximately 7.6 billion Chinese yuan (over $1 billion), with additional undermined projects valued at over 8 billion yuan.

The complexities surrounding FSR compliance are compounded by undefined concepts such as ‘market distortions’ and ‘balancing tests,’ posing particular challenges for firms originating from regions with prominent state-owned enterprise presence, including China and certain Gulf countries.

MOFCOM's investigation aims to swiftly address these trade impediments and articulate potential resolutions.

By signaling these challenges to the EU, MOFCOM underscores the importance of establishing a fair groundwork for Chinese enterprises in the European market.

The ministry suggests that bilateral dialogue, multilateral dispute mechanisms, or other remedial avenues such as the World Trade Organization, could be pursued to alleviate these concerns.

As the European Commission endeavors to rigorously enforce the FSR, encouraging dialogue between EU regulators and Chinese enterprises becomes crucial to sustain a balanced and favorable business environment within Europe.