China Investment in Europe Triples

Chinese direct investment into Europe tripled in 2011 to $10 billion, according to a new study that estimates Chinese companies are in the early stages of a global shopping spree that could see them spend as much as $250 billion-$500 billion in the region by 2020.

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Although total Chinese outbound investment is still small compared to the size of its economy, most analysts believe the country is on the verge of ramping up its spending abroad, with crisis-hit Europe seen as one of the most attractive supermarkets.

“Europe is experiencing the start of a structural surge in outbound direct investment in advanced economies by Chinese firms,” says the new study, to be published on Thursday by Rhodium Group, an economic consultancy, in partnership with CICC, a Chinese investment bank.

The report predicts Chinese outbound direct investment will reach $1 trillion to $2 trillion between 2010 and 2020 and it expects around a quarter of that will go to Europe through mergers and acquisitions or greenfield investments.

Chinese companies are most interested in buying European technology, brands and high-end manufacturing.

Beijing has encouraged Chinese companies to increase their offshore investments to make them more competitive globally and also as a way of securing supplies of natural resources, technology and expertise for China.

The zou chu qu, or “going out” strategy as it is known in Chinese, is also aimed at diversifying the country’s $3.2 trillion in foreign exchange reserves away from low-yielding investments like U.S. Treasurys and into more tangible assets.

“Just as in the case of Japan at an earlier stage, China is trying to switch paper into hard assets and that process is accelerating,” a senior executive at one of the world’s largest private equity funds told the FT.

Separate studies by A Capital, a private equity firm that helps Chinese companies invest abroad, support Rhodium Group’s estimate.

“At current growth rates and without a change in Chinese government policy we expect an additional $800 billion in outbound Chinese direct investment in the five years from 2011 to 2016,” said Andre Loesekrug-Pietri, chairman of A Capital.

In the midst of the sovereign debt crisis, Europe was the number two destination for Chinese outbound direct investment in the first quarter of 2012, after South America, according to a report from A Capital due to be released on Thursday.

Chinese investment to Europe reached $1.7 billion in the first quarter and represented 83 percent of all outbound Chinese non-resources deals, the report found.

If resources deals, aimed mostly at South America and Africa, were included, then Chinese total outbound direct investment reached $21.4 billion in the first quarter.

Studies like the Rhodium Group’s are important to investors and governments alike because official statistics from most countries do not accurately capture China’s cross-border investment flows.

This is partly because Hong Kong and other countries and territories are often used as intermediary points for outbound investments and so disguise their true source.

“Our dataset shows a profound post-2008 surge [in Chinese outbound investment to Europe] which the official data sources are missing,” said Thilo Hanemann, research director at Rhodium Group and co-author of the new report. “The absolute values remain small compared to Europe’s total inward FDI stock, but the change in trend line is what matters.”

The report estimates that Chinese direct investment in Europe averaged less than $1 billion each year from 2004 to 2008 but then tripled to around $3 billion in both 2009 and 2010 before tripling again to almost $10 billion last year.