Chinese Investment in Europe to Surge

Jamil Anderlini in Beijing

In the wake of a handful of high-profile Chinese investments in companies like Volvo and a constant barrage of headlines declaring China’s economic rise, some Europeans might have the impression they are already being bought up by Beijing.

Chinese Yuan note
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This impression is reinforced by a proposal that would see China give a small chunk of its $3,200 billion foreign exchange reserves to the International Monetary Fund to bail out European banks or backstop sovereign debt in the eurozone.

But while the country’s huge reserves make it an important participant in international debt markets, they do not represent a piggy bank that China Inc can raid to snap up big swathes of European industry.

In fact, China’s total stock of direct non-financial investment in the 27 European Union member states, while growing quickly, is still miniscule at around $15 billion, according to a new study from Rhodium Group, an economic consultancy.

That represents less than 0.2 per cent of all foreign investment stock in Europe.

To put it in perspective, total Chinese investment in hard assets in Europe in recent decades is equivalent to the average weekly increase of its foreign exchange reserves in the first half of 2011.

The vast bulk of those reserves is managed under a strict mandate that does not allow it to be spent on direct investments abroad. However, Beijing is encouraging its cash-rich state enterprises to expand beyond China’s borders and the country’s outbound investment is expected to surge in the coming years.

According to government figures, China’s global stock of outbound direct investment reached $330 billion at the end of June, up from less than $30 billion in 2002 but that still only accounted for about 1.6 per cent of the global total from all countries.

Given Beijing’s ambitions and the size of China’s economy, the Rhodium Group estimates that Chinese companies could invest as much as $1,000 billion abroad between now and 2020, with much of it going to developed economies.

“China’s investment interest is moving from natural resources toward developed economy assets such as brands, technology and distribution channels so places like Europe will receive a greater portion of that $1,000 billion,” said Thilo Hanneman, research director at the Rhodium Group.

Chinese direct investment in Europe in the first half of this year hit almost $3.3 billion, exceeding the total for all of last year. If some large proposed deals in the energy, gas and PC sectors are completed, the total for this year could be as high as $8 billion.

The EU and Beijing are considering opening negotiations on an investment treaty that would make it easier for Chinese companies to invest in Europe and would help counter possible protectionist sentiment in Europe.

While European officials insist the continent is open to all foreign investment Chinese officials complain that their companies are treated unfairly and regarded as a threat while investors from the U.S. are welcomed.

Analysts say the biggest obstacles to more direct investment in Europe are Chinese companies’ lack of experience in international deal-making and their inability to adapt to the legal and political environment they encounter there.

“So far we have seen very few successful stories of Chinese companies operating in Europe,” said Tao Jingzhou, managing partner for Asia at Dechert law firm. “It is a struggle because of much higher costs and a very different legal structure, especially when it comes to labour laws.”