Chinese Investment in Europe：Progress and Prospects （Jiang Shixue）

Since China put forward the so-called “going global strategy” at the end of the 1990s, its outward foreign direct investment (OFDI) has increased rapidly. As a matter of fact, Europe is one of the places that have attracted a great amount of Chinese OFDI.

Chinese investment in Europe is a win-win game. In order to encourage more Chinese investors to go to Europe, both sides need to take effective measures. On the European side, the mentality of “fear of China” or “China threat” must be eliminated. On the Chinese side, it is important to better understand Europe’s investment environment and market conditions, “do as the Romans do”, pay attention to the impact of the Treaty of Lisbon on the existing China-EU bilateral investment treaties, encourage the private enterprises to invest in Europe, and summarize the successful experience and unsuccessful lessons. 

The “going global strategy”

China’s “going global strategy” was first put forward by Jiang Zemin, then General Secretary of the Central Committee of the Communist Party of China (CPC), at the end of the 1990s. During May 8-22, 1996, Jiang Zemin visited six African countries. When he was inspecting Tangshan City of Hebei Province on July 26, he reflected on his African tour and said that it was necessary to study the possibility of encouraging the state-owned enterprises to go global by making OFDI. Speaking to some of the participants of a conference on how to attract foreign investment on December 24, 1997, Jiang Zemin said that, apart from inviting foreign capital, China should also encourage the large enterprises to invest in other countries so as to open up the world market and acquire resources of other countries. He also pointed out that China should invest in not only the developed countries, but also the developing world.  According to the Chinese leader, attracting foreign capital and making OFDI should be the two basic components of China’s open-door policies and none of them should be neglected.[1]

The “going global strategy” was further reaffirmed in an important document titled “Suggestions for making the tenth five-year plan of national economic and social development” in October 2000. In the document the Central Committee of the CPC encouraged Chinese enterprises to invest abroad by utilizing their comparative advantage. It also said that Chinese enterprises should invest in foreign countries’ manufactured processing activities and resource sectors, and incentives should be provided towards this end.  Moreover, as the document suggested, regulation and coordination for OFDI must be in place immediately.

Soon after the CPC’s document was released, different government organizations such as the National Development and Reform Commission, Ministry of Commerce, Ministry of Finance, State Administration of Foreign Exchanges, the Export-Import Bank of China, among others, started to make policies and regulations for the implementation of the “going global strategy”.

Rapid growth

According to the British magazine, The Economist, a ride in a London taxi from Canary Wharf to the Bank of England also sounds like an a Chinese experience: London’s black cabs are made by Manganese Bronze, which is partly owned by Geely, a Chinese carmaker that also owns Volvo; China Investment Corporation (CIC) has the third-largest stake in Songbird Estates, which controls Canary Wharf Group; CIC may soon become an investor in the Citigroup building, a landmark skyscraper in London; the Bank of England is not yet Chinese-owned but it is increasingly encircled by Chinese banks; Bank of China, which has been in London since 1929, has recently moved into its new headquarters that overlook the central bank of the UK. Down the road, in King William Street, the builders are at work inside the future home of ICBC, a Chinese commercial bank.[2]

Indeed, wherever there is sunshine, there is Chinese investment. With the spectacular growth of its economy, China now has become an exporter of capital. China’s Ministry of Commerce spokesman reported that, by the end of July 2012, the total stock of OFDI had reached $364.3 billion.[3] It was undertaken by more than Chinese 16000 enterprises located in almost 180 countries and regions around the world.

China’s OFDI in Europe has also been growing rapidly. According to China’s official data, by the end of 2010, the total stock of Chinese OFDI in Europe had increased to $15.7 billion, accounting for 5% of China’ total OFDI, lower than the percentages of Asia (72%) and Latin America (14%), but higher than Africa (4.1%), Oceania (2.7%) and North America (2.5%).

Also according to China’s Ministry of Commerce, by 2010, its stock in 27 EU members had totaled $12.5 billion, or 42% of Chinese investment in the developed economies, much higher than in Australia (26.5%), the United States (16.4%), Canada (8.8%) and Japan (3.7%).

Rhodium Group, a research consultancy and advisory company based in New York City, revealed in its report published in mid-2012 that, for the period 2000-2011, it recorded 573 transactions worth $21 billion, and before 2004, there were fewer than 10 deals per year, with an average annual investment value below $100 million. From this modest beginning, the report said, a significant upward trend had developed. The period 2004-2008 saw the annual average number of acquisitions and greenfield investments grow to 50, with investment value averaging around $800 million per year. For 2009-2010, the number of deals increased to 100, and annual inflows hit $3 billion. For 2011, it recorded 54 greenfield investments and 37 acquisitions with a total investment volume of almost $10 billion, a threefold increase over the previous two years.[4]

Chinese OFDI in Europe is mainly found in such areas as leasing and commercial service, manufacturing activities and financial sectors, accounting for 47%, 25% and 12%, respectively, of the total investment in 2010. The major destinations are Luxembourg, the Netherlands, Ireland and Germany.

Motivations

Europe is not well endowed with natural resources, but its investment environment is favorable. Most of the countries there are developed, with high per capita GDP and huge market potentials. It is politically stable and advanced in science and technology. Therefore, Europe has become one of the major favorable destinations of China’s OFDI.

According to Martin Waller, a columnist for the British newspaper The Times, “There are…three often overlapping reasons why the Chinese should be interested in European companies. They can be summarized as infrastructure, industrial technology and brands.”[5]

Apart from the three motivations, there is also the need for China to diversify its huge foreign exchanges reserves. It is increasingly recognized that China should not put all the eggs in the one basket of purchasing American debts. Among the different ways of diversification, promoting OFDI is an effective way towards this end.

A Win-win Game

Chinese investment in Europe feeds the worries of many Europeans. A poll conducted for the BBC World Service in March found rising concern about the eastward shift in economic power: a majority of Germans, Italians and French people view China’s rise negatively. Americans and Canadians feel similarly. These proportions have gone up since a similar survey in 2005.[6]

When a Chinese businessman wanted to invest in a tourism project in Iceland, according to the British newspaper Financial Times, “opponents have questioned why such a large amount of land – equal to about 0.3 per cent of Iceland’s total area – is needed to build a hotel. They warned that the project could provide cover for China’s geopolitical interests in the Atlantic island nation and NATO member.”[7]

According to The Economist, Huawei, one of China’s largest telecoms-equipment-maker, inspires fear, not just among its competitors. “The company is said to be too close for comfort to the People’s Liberation Army. Westerners fret that the networks the firm is building are used by Chinese spooks to eavesdrop during peacetime and could be shut down suddenly during wartime. They see the firm as a potent weapon in China’s burgeoning cyber-arsenal,” writes the British magazine.[8]

As a matter of fact, China’s OFDI in Europe is a win-win game and beneficial for both sides. First of all, it can partially meet Europe’s capital needs. Particularly, when the debt crisis has dealt a heavy blow to the European economy, China’s OFDI can contribute to its efforts to spur economic growth.

Sometimes, China’s OFDI would increase competition for European assets, resulting in higher prices. For instance, China Three Gorges Corporation outbid other interested firms by offering a 53% premium to the firm’s share price, well beyond what other bidders were willing to pay. It was said that China’s participation in the auction brought the Portuguese government total revenue of $3.5 billion, much more than originally expected.[9]

Second, Chinese investment has created employment for the host countries. Rhodium Group’s report concluded that the 428 greenfield projects in its 2000-2011 dataset created an estimated 15,000 new jobs, not counting employment at smaller firms with less than $1 million investment values.[10]

Chinese investment can preserve jobs in at-risk firms on the brink of shutdown. Also according to the Rhodium Group’s report, Geely’s 2010 acquisition of Volvo not only saved 16,000 local jobs, but also sparked an ambitious $11 billion job-creating investment program in Sweden and the rest of Europe.

 Moreover, Chinese investment has also saved jobs by turning around ailing smaller firms. For example, German machinery maker Waldrich Coburg’s staff soared from 500 to 800 after it was bought by Beijing No. 1 Machine Tools in 2005, the Rhodium Group’s report said. Based on M&A transactions in its 2000-2011 database, Rhodium estimated that majority-owned subsidiaries of Chinese firms support at least 30,000 additional jobs across Europe. This brought the total employment figure from majority-owned subsidiaries to more than 45,000. If the Chinese investment through non-majority stakes is added, like Gas de France or Songbird Estates, this figure would swell by several tens of thousands.[11]

Third, Chinese OFDI can intensify competition in the European market and benefit consumers by lowering prices and creating product diversity. This is particularly true in the telecommunication sector where Chinese companies such as Huawei and ZTE have technological advantage over others. According to The Economist, Huawei is involved in over half of the superfast 4G telecoms networks in Europe, and it has become a strong competitor in mobile phones. The British magazine agrees that “…banning Huawei from bidding for commercial contracts is wrongheaded, for two reasons. One is that the economic benefit of competition from China in general and Huawei in particular is huge. It boosts growth and thus wellbeing.” [12]

In response to the question: “Does China’s rise threaten the EU”, Olusegun Obasanjo, former President of Nigeria, said, “I think there’s no cause for panic. I believe that Europe should do what Europe can do best, without unduly panicking about China. Let me put it this way: any Nigerian or any African who wants to buy a very precise industrial machine will not go to China. He will come to Europe. But, if he wants to buy equipment for poultry or pigs or something like that, he will probably go to China. So that should not worry you. And I don’t believe that we should unduly worry about that.”[13]

Towards the future

Trade relations between China and the EU have moved forward rapidly.  In 2011 two-way trade had reached $567 billion, or more than $1.5 billion a day. This is certainly not a small number. But trade frictions have come forward frequently. The EU always protects its market with anti-dumping tariffs against Chinese products. Therefore, making more Chinese OFDI can maintain the momentum of the development of the economic relations between the two sides and also facilitate the promotion of China-EU’s comprehensive strategic partnership established in 2003.

In order to increase Chinese OFDI in Europe, both Europe and China need to take measures. On the European side, people must eliminate the mentality of “fear of China” or “China threat”. They should understand that China’s OFDI in Europe is beneficial to both sides.

On the Chinese side, it is imperative to pay attention to the following points:

1. Try to better understand Europe’s investment environment and market conditions. On the one hand, it is only a little more than one decade since China implemented the “going global strategy”. Therefore, Chinese investors do not have enough experiences on many aspects. On the other, Europe is not a place without “country risks”.[14] Consequently, Chinese firms need to gain a thorough understanding of the investment environment and market conditions of the host country.

It is not correct to assume that every Chinese investment project in Europe should be successful, but it is highly necessary to know why it is successful and unsuccessful.

2. “Do as the Romans do”. Every nation has its own legal system, cultural traditions and business norms. Chinese investors must adapt themselves with the local conditions. They need to understand well that what is possible in China might be impossible in the host country. Moreover, Chinese investors need to undertake more social responsibility in Europe.

3. Pay attention to the impact of the Treaty of Lisbon on China-EU bilateral investment treaties (BITs). The Treaty of Lisbon entered into effect on December 1, 2009, some two years after it was signed on 13 December 2007. The treaty introduces two major changes in trade policy. On the one hand, it strengthens the EU’s role by confirming that all key aspects of trade policy, including issues related to foreign direct investment, are areas of exclusive EU competence. On the other, it increases the powers of the European Parliament in trade policy.

These two major changes will have great implications for foreign investment in the EU. Before 2009, China had signed BITs with most of the EU members.[15] These BITs should not be terminated or superseded automatically under either international or EU law. However, they may have to be modified in accordance with the requirements of EU law. So China needs to pay attention to what the EU will do towards these BITs and what actions of exclusive EU competence will come forward.

4. Encourage the private enterprises to “go global”. China’s private enterprises have expanded to an increasingly large size, and many of them have the capacity to make OFDI in Europe and other places around the world.

On June 29, 2012, the National Development and Reform Commission, along with other twelve governmental organizations including the Ministry of Foreign Affairs, Ministry of Industry and Information Technology, Ministry of Finance, Ministry of Commerce and the People’s Bank of China, publicized a document stipulating eighteen measures to encourage more private enterprises to make OFDI. These measures include more guidance and coordination from the government, more tax incentives, more financial assistance, more facilitation of customs procedures, more efficient government authorization, more diplomatic protections against country risks, etc.

Of course, effective actions must be taken immediately by the authority to ensure that all the eighteen measures can be implemented properly and immediately. Moreover, before they know thoroughly what lies ahead, the private investors should not swarm to Europe and other places around the world like gold rushers.

Concluding remarks

EU leaders have always encouraged China to make more investment in Europe. For instance, at the EU-China Business Summit on October 6, 2010, in Brussels, José Manuel Durão Barroso, President of the European Commission, said, “Innovation, I want to underline it because it is the cornerstone of our Europe 2020 Strategy and it is also very important in relationship with our Chinese partners. Innovation is the key for the sort of growth that we need and we want in Europe: smart, sustainable and inclusive growth…This not only brings huge commercial opportunities but also great potential for mutually beneficial cooperation…The European Union’s economy is very open and we welcome more Chinese investment.”[16] He also expressed his mind that the EU will advance work towards a bilateral investment agreement, as agreed at the EU-China summit in February 2012. “Chinese investment in Europe and European in China are ever more important.  We must create the right conditions for future development, encourage and increase investment flows and create legal certainty for our investors,” said President Barroso.[17]

China has held the same position. Speaking at a seminar on China-EU relations in Xiamen on August 16, 2012, China’s Vice Foreign Minister Song Tao once again promised that the Chinese government will continue to support Europe in its efforts to overcome the sovereign debt problem. He said, “Right now, many European countries are working energetically to attract investment, promote growth and boost employment. We will encourage our enterprises to invest and set up factories in Europe. And we hope that the European side will uphold the principle of fairness and create conditions for Chinese investment. China is ready to negotiate an investment protection agreement with Europe to provide safeguards and facilitation for mutual investment.”[18]

Based on the two sides’ determination to strengthen bilateral economic ties as well as the prediction that China’s economy will maintain its high growth rate for the foreseeable future, it can be concluded Chinese investment in Europe will continue to expand.