Xiong Hou on the European Debt Crisis and European Investment in China

Xiong Hou is Associate Professor of the Institute of European Studies, Chinese Academy of Social Sciences.

Q: Why does China care about the European Debt Crisis?

A: Europe is very far away from China, but China does care about what is going on in Europe. Since the beginning of European debt crisis, China shows big concern on the debt crisis. From my perspective, there are two reasons.
One is that the European Debt Crisis may cause a big economic loss to China. European Debt Crisis has a significant negative impact on EU’s internal demand. As EU is China’s No. 1 export market, the decrease of EU’s demand is very bad for China’s export. So China has to carefully watch the EU’s situation, and accordingly adjusts its trade policy.

The other is that EU has political importance to China in the world politics. Thanks for EU’s sheer economic size, EU is an important player in the world, which has systematic impact on the balance of the world powers. The European Debt Crisis may gradually weaken the EU’s strength, which is not good to the balance of the world powers. So China has to prepare for this.

Q: How could China help the EU to deal with the European Debt Crisis?

A: As China does not want to see EU’s economy affected by the crisis, it would like to offer help to EU. Restricted by its own limited economic strength and the pressure from the public, China can not directly inject money to the crisis countries’ government. But China finds other pragmatic way to offer help. Firstly, China is confident that the EU will successfully deal with the crisis. The Chinese leaders spoke out this many times in public and emphasize China will keep buying government bonds issued by the EU’s member states. Secondly China increases importation from EU, especially from the crisis countries. We could see a sharply upward curve on the amount of China’s import from Greece and Portugal. Thirdly China is willing to expand its investment in EU so as to create more employment in Europe. 
   
Q: The debt crisis has created an opportunity for China to make more investment in Europe. How can China seize this opportunity?

A: Under the pressure of paying the huge debt, some EU member states plan to sell some state-owned enterprises.  This effort creates opportunities for the Chinese investors.  China seems to be interested in Europe’s technology, infrastructure, clean energy, banking, etc. The assets on sale may be very cheap, but it does not mean that all the deals will be profitable. Before jumping into the water Chinese investors have to find some European consultation firms to collect adequate information and evaluate risks very carefully.  

Q: In the past several months growth of FDI from EU to China has declined. Does it mean that China is not attractive for EU's investors?

A: The drop of the FDI from EU to China is mainly caused by the European Debt Crisis. It does not mean China is not attractive for EU. Through our recent investigation, the EU’s enterprises perform well in China and have full confidence in the Chinese market.

Seen from the macro business climate, profit margin and operating situations, the European enterprises have achieved a strong performance and showed full confidence in the Chinese market. Most of the EU enterprises in China have a profit margin equal to the average global profit margin of their parent companies.

No enterprise under our survey deems itself as poorly performed. The number of the enterprises that are optimistic about the future is increasing dramatically.

The majority of EU enterprises will maintain or enlarge the current investment scale rather than reduce or withdraw their investments. Thanks to the big market and a huge profit margin that China provides, the EU enterprises have expressed their willingness to continue investing in China. This illustrates explicitly the EU enterprises’ confidence in the Chinese market.

However, only 30% of the enterprises surveyed indicate their intention to increase investment. The rest will maintain the current investment scale unchanged.

Q: China is still attractive to the EU’s investors. Then, what are the major challenges for them? 

A: Firstly, in order to transform and upgrade their local economic structures, some areas in China are redirecting their policy priority from simply attracting any type of FDI to choosing some types of FDI in a selective way. With the rising costs of labour, land, energy and resource and environment protection, strengthening employee rights protection, as well as cancellation of preferential policies, foreign enterprises have to operate at a higher cost, a fact and trend that they must acknowledge. This is not the result of a deteriorating investment environment in China, but a natural outcome of the transformation and upgrading of China’s economic structure.

Secondly, China’s labour training policy has adversely affected the EU enterprises’ operation. China’s current education system is unable to produce the kind of talents for their needs. The EU enterprises have to spend a long time on training those newly recruited graduates before they become competent for their jobs. It is therefore of urgent need to adapt the Chinese education system to the the labour market.

Thirdly, in some cases, China’s public services have substantially affected the EU enterprises’ business. Some EU’s businessman argued that inconsistent policy implementation hampers the creation of fair competition. Furthermore, the contents of China’s policies and regulations are sometimes too ambiguous with divergent explanations provided by different persons working in the different government departments. Despite the fact that the same rules of game applied to both the domestic and foreign enterprises, the differential enforcement towards different enterprises have negatively influenced fair competition.

Fourthly, the EU enterprises are too slow to localize themselves and suffer from a lack of operational flexibility. EU enterprises have much higher requirements for the highest-level executives than the Japanese or South Korean counterparts, making it extremely difficult for the Chinese employees to be promoted to top management. The slow pace in localization and frequent change of senior managers has led to a disconnection between the enterprises’ strategic planning and its implementation, leading to losses of investment opportunities.

（Contact Xiong Hou：xionghou@cass.org.cn）