How to get the eggs into the right basket

Increasingly important Chinese investment in Europe needs to be fine-tuned

Since China put forward the "going global" strategy at the end of the 1990s, its outward foreign direct investment has risen rapidly, and Europe is one place that has attracted a great deal of that investment.

According to The Economist, a ride in a London taxi from Canary Wharf to the Bank of England is very much a Chinese experience: London's black cabs are made by Manganese Bronze, partly owned by Geely, a Chinese carmaker that owns Volvo; China Investment Corporation 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 increasingly encircled by Chinese banks; and Bank of China, which has been in London since 1929, has recently moved into its new headquarters that overlook Britain's central bank. Down the road in King William Street, the builders are at work inside the future home of the Industrial and Commercial Bank of China.

With the spectacular growth of China's economy, it has now become an exporter of capital. China's Ministry of Commerce says that by the end of July outward foreign direct investment had reached $364.3 billion (280.8 billion euros). It was undertaken by more than 16,000 Chinese enterprises located in almost 180 countries and regions.

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

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

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 potential. It is politically stable and advanced in science and technology, so Europe has become one of the most favored destinations for China's outbound investment.

Martin Waller, a columnist for the British newspaper The Times, says 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".

Apart from those three motivations, China needs to diversify its huge foreign-exchange reserves. It is increasingly recognized that China should not put all its eggs in one basket by buying US debt. Among the many ways of diversifying, promoting overseas investment is one.

Chinese investment in Europe feeds the worries of many Europeans. A poll by the BBC World Service in March found rising concern about the eastward shift in economic power: most Germans, Italians and French view China's rise negatively. Americans and Canadians feel similarly. These proportions have risen since a similar survey in 2005.

In fact, China's investment in Europe benefits both sides. First of all, it can partially meet Europe's capital needs. In particular when the debt crisis has dealt a heavy blow to the European economy, China's investment can contribute to its efforts to spur economic growth.

Second, Chinese investment has created employment for the host countries. A Rhodium Group report concluded that the 428 greenfield projects in its 2000-11 dataset created an estimated 15,000 new jobs, not counting employment from smaller firms with investment values of less than $1 million.

Chinese investment can preserve jobs in at-risk firms on the brink of shutdown. The Rhodium Group report also reckons Geely's acquisition of Volvo in 2010 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 saved jobs by turning around ailing smaller firms. Based on mergers and acquisitions transactions in its 2000-11 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 Chinese investment through non-majority stakes is included, such as Gas de France or Songbird Estates, this figure would swell by several tens of thousands.

Third, Chinese investment can intensify competition in the European market and benefit consumers by lowering prices and creating product diversity. This is particularly true in telecommunications, in which Chinese companies such as Huawei and ZTE enjoy a technological advantage over others. According to The Economist, Huawei is involved in more than 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".

In response to the question of whether China's rise threatens 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."

Trade relations between China and the EU have grown rapidly. Last year two-way trade had reached $567 billion, or more than $1.5 billion a day. But trade has always been present. The EU always protects its market with anti-dumping tariffs against Chinese products.

To increase Chinese investment in Europe, concrete steps are needed. On the European side, people must banish their fears of China, realizing that Chinese investment in Europe benefits both sides.

On the Chinese side the following is needed:

1. A better understanding of Europe's investment environment and market conditions. It is only a little more than a decade since China implemented the "going global" strategy, so in many ways Chinese investors lack experience. However, Europe is not without risk, so Chinese firms need to gain a thorough understanding of the investment environment and market conditions of the host country.

It is wrong to assume every Chinese investment project in Europe should succeed, but it is crucial to know why it succeeds or fails.

2. Chinese investors adapting to local conditions. Every nation has its own legal system, cultural traditions and business norms. The investors need to understand that what is possible in China may be impossible in the host country. Moreover, Chinese investors need to be more involved in social responsibility in Europe.

3. Paying attention to the impact of the Treaty of Lisbon on China-EU bilateral investment treaties. This came into effect on Dec 1, 2009, two years after it was signed. It introduced two big changes in trade policy: It strengthened 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; and it increased the powers of the European Parliament in trade policy.

These two changes will have great implications for foreign investment in the EU. Before 2009 China had signed bilateral investment treaties with most of the EU members. These treaties 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 regarding these bilateral treaties.

4. Encourage private enterprises to go global. China's private enterprises have expanded greatly, and many have the capacity to invest in Europe and elsewhere.

In June China's National Development and Reform Commission, with 12 other governmental organizations, publicized a document setting out 18 measures to encourage more private enterprises to make outbound investment. These measures include more guidance and coordination from the government, more tax incentives, more financial help, easing customs procedures, more efficient government authorization, and more diplomatic protections against country risks.

The author is deputy director of the Institute of European Studies, Chinese Academy of Social Sciences. The views do not necessarily reflect those of China Daily.

(China Daily 10/26/2012 page11)