ANALYSES

Chinese investors can’t get enough of Europe

Presse
10 mai 2016
When it comes to foreign direct investment, Europe has become a preferred playing ground for China in the West. For several years now, Europe has attracted both state-run and private Chinese enterprises looking for investment opportunities, despite the historical, geographic, legal, linguistic, societal and cultural complexities of investing in the European Union.

Unlike trade and tourism, investment is about long-term commitment, and Chinese companies are looking for a stable, legally secure environment. Whereas during the first decade of the 21st century there was little significant Chinese investment in Europe, the figures since 2010 show a real investment surge.

According to a report published jointly by the law firm Baker and McKenzie and the New York-based Rhodium Group, the total stock of Chinese investments in Europe went from US$6 billion (about S$8 billion) in 2010 to US$55 billion in 2014. Between 2014 and 2015, annual investment rose from US$18 billion to US$23 billion. Bruegel, a Brussels-based economic think-tank, estimates the distribution of Chinese outbound foreign direct investment (FDI) flows as follows: 19 per cent of total Chinese FDI took place in Europe (stock: US$13.9 billion) and 13 per cent in North America (stock: US$11.4 billion), which has also become an important recipient.

Chinese FDI in Europe increased by 44 per cent last year and could jump dramatically this year, especially as top investor ChemChina is expected to acquire Syngenta, a huge Switzerland-based agri-business group (a US$62 billion deal - albeit not in a EU member state).

Last year, the same ChemChina purchased one of the world's most famous tyre manufacturers, Italy's Pirelli, for US$7.7 billion.

Another major Chinese investor in Europe is Dalian Wanda, which acquired Britain's yacht maker Sunseekers for £500 million (S$982 million), and is involved in massive property developments in Britain and France.

There are many reasons why Europe has become more attractive to Chinese investors.

First, the debt crisis in 2008 was a key moment, when the Chinese government started buying Eurobonds as well as investing in infrastructure companies - one good example being the Greek port of Piraeus Harbour. It is now run almost entirely by China since Cosco, China Ocean Shipping Company, in April acquired a 67 per cent stake in Pier I from the Greek Port Authority.

Second, de-industrialisation has been taking place in Europe, helped by a low euro currency. Countries like Italy, Portugal, even France and the United Kingdom, have presented opportunities to Chinese companies in fields such as automobile, food, energy, transport, luxury brands, entertainment and travel.

Third, one could argue that relations between China and Europe are much less competitive than the tussle for big-power dominance that shapes the US-China relationship.

Fourth, while these FDIs are due in part to some individual business decisions, they also stem from the political decision by Beijing to deploy capital outside its borders from the late 1990s ("going out" policy). In the case of Africa or Asia, the outward FDI policy went in search of natural resources; in the case of European countries, the focus is on acquiring brands and technology and expanding China's footprint via its state- owned enterprises, assisted by state-run development banks, commercial banks and sovereign funds.

The rise of Chinese transactions also had a lot to do with bilateral relations between China and individual European countries. The top recipients of Chinese FDI (the UK, France, Germany, Italy and Portugal) all have their own set of relationships with China. Sixteen countries now meet China on a yearly basis under a mechanism called "16+1".

There is no doubt the Chinese government has been good at playing one country against the other, and using FDI as a tool. Once, European countries were fighting for a share of the Chinese consumer market; today, they are competing for a share of Chinese capital.

Unlike the United States, where the Committee on Foreign Invest- ment in the US looks at national security issues in certain areas and transactions, European countries do not have such a mechanism.

PROBLEMS WITH CHINESE INVESTMENTS

The European wave of Chinese investments has not been without problems.

Human resources have been a complex issue to Chinese investors: Just like Japanese companies in the 1980s, they have found it hard to relinquish power to European managers. In many cases, European employees have a "cosmetic" role (although there are rare cases of senior European managers, for example at Lenovo).

Job creation is limited: Due to the lack of transparency, it is very hard to determine how many Europeans are actually employed by Chinese companies (our estimate: around 40,000).

Many Chinese investments in Europe are state-driven: These companies have good banking relationships and easy access to cheap credit to spend overseas as a way to diversify away from their dwindling earnings at home. It is their strategy to move away from yuan-based assets.

In Europe, there is a debate between national governments and civil societies over the long-term benefits of welcoming Chinese investments. It does not help that China's image is not always positive: For example, Germany and Italy - the two top recipient countries of Chinese FDI - still have negative perceptions of China, with only 34 per cent having positive perceptions in Germany.

Finally, many complain in Europe (and through the Beijing-based EU Chamber of Commerce in China) about the lack of reciprocity in China itself in a large number of sectors such as finance, telecom, media, logistics and healthcare.

There is hope in the EU that progress on a Bilateral Investment Treaty - if signed this year or next - would improve the situation. But the shift in China's growth model should lead to a steady outflow of capital that will probably result in China surpassing Japan as the largest net creditor.

 

Co-written with Alain Sepulchre. The writers are co-authors of the newly released book China's Offensive In Europe (Brookings Institution Press, 2016).
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