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Chinese Investment in Europe

Money Talks

While investment may speak louder than politics, the business communities from both China and Europe will have to adapt in order to fill the widening gaps in the eurozone

January 2012 Issue | by Li Jia

While Cannes is a city that sees its fair share of drama, it usually plays out on the silver screen. In early November, however, protesters replaced tourists and A-listers on the streets of the French seaside town, as G20 leaders gathered to find a solution to the mess in the global economy. The euro crisis, a plotline in which China found itself playing a lead role, dominated the action: “While different countries in Europe may have varying expectations of China, one thing they have in common is the hope that China will invest its sizeable foreign reserves in Europe,” said China’s State-run Xinhua news agency.

China, for its part, has sensed the risk the euro crisis poses to its own growth. Its trade surplus with the EU, its largest trading partner since 2004, has dwindled. Chinese President Hu Jintao noted in his dialogue with his French counterpart Nicolas Sarkozy in Cannes that there will be no global economic recovery without the recovery of the eurozone.

However, if and how China should give Europe a helping hand has become a sensitive issue. Europe is concerned that Chinese money could give China political leverage over bilateral relations, while the idea that some of China’s hard-won foreign exchange reserves might be spent rescuing rich Europeans is unpopular in China. As a result, both sides have been cautious towards having Chinese money come to the eurozone’s rescue.

However, that is not to say that the two major world economies and prolific trading partners have no interest in a joint effort. With both sides now preferring the word “investment” over “bailout,” the question is how best to bring them together.

Divided by Politics

So far, Europe’s handling of the crisis has failed to convince investors. Leadership changes and the approval of rescue and austerity plans have further shaken stock and bond markets in London and New York. “A European sovereign debt default may well sink the United States back into recession,” warned the Federal Reserve Bank of San Francisco in its report on November 14. The Chinese business community apparently has also felt the chill from across the Atlantic; Chinese exporters saw a slump in orders from Europe and the US over Christmas 2011 and the first few months of 2012.

At the World Economic Forum in September, Chinese Premier Wen Jiabao mentioned China’s willingness to help, as well as his expectation that the EU would grant China market economy status. Wen’s comments were immediately interpreted by foreign media as attaching an unpopular political condition to China’s helping hand. Reuters, for example, ran the rather fatalistic headline: “Politics Stymie China’s EU Aid Offer.” Francois Godement, senior policy fellow at the European Council on Foreign Relations, warned recently at the Yale Center for the Study of Globalization that the crisis in Europe could attract “potential heavy-handed pressure by a better organized player” like China.

If China plays a role in financing the Europe bailout package, then it should be defined as “an investment” with the expectation of reasonable returns, rather than a rescue mission, as Markus Ederer, the EU Ambassador to China, told NewsChina. It is widely believed that only about a quarter of China’s US$3.2 trillion foreign exchange reserves has gone to the euro.

While there is little doubt over China’s interest in the economic recovery of its largest trading partner, the idea of unconditional aid is not welcome in China. Professor Yu Yongding with China Academy of Social Sciences argued publicly that Chinese pensioners had the right to ask the government why the money would be used to protect much better-off European workers.

China’s State-run English-language newspaper China Daily quickly denied China’s “intention to play hardball.” Chinese President Hu Jintao told Sarkozy: “It is mainly up to Europe to resolve the European debt problem.” The most important thing for China, as Premier Wen reiterated in St. Petersburg on November 7, is “to keep [its] own house in order.”

Business Fills the Gap

Even without taking politics into account, an abrupt shift towards the euro in China’s foreign exchange reserve is not feasible, since such a massive withdrawal from the dollar could disturb the global foreign exchange market.

It is time for businesses to play a bigger role. Direct Chinese investment in Greek industries, said Theodore Georgakelos, Greek Ambassdor to China, is more desirable than bond purchase. Chinese capital flow to the EU only accounts for less than 4 percent of China’s total overseas investment, showing “huge potential” for further growth, said Markus Ederer at a forum in Hong Kong on November 15.

Similar to the US, European countries used to be very cautious about investment from the sovereignty fund and State-owned enterprises from China. “Now, we feel governments in European countries are showing more enthusiasm towards China’s State capital,” as Sun Yongfu, director-general of European Affairs at the Ministry of Commerce, told NewsChina.

The business community agrees. “Five years ago, a European entrepreneur could be reluctant to face a Chinese buyer, today they have to be more realistic,” said Christine Lambert-Goué, Asia managing partner with Invest Securities, a Paris-based investment bank specializing in the listing of Chinese companies on the NYSE-Euronext stock exchange. She thinks it is “a good time for Chinese buyers to get some really beautiful assets in Europe at a cheap price.”

However, it is too early to predict a surge of collaborations between Chinese investors and European companies. “In the current situation, we are very prudent in choosing the right assets in terms of either buying European bonds or State-owned enterprise investment in European companies,” said Sun at the Ministry of Commerce. As small and medium-sized enterprises (SMEs) form the backbone of both the Chinese and European economies, a match between them would appear perfect. But Chinese SMEs “are also cash strapped, so their priority now is definitely to focus on the domestic market, where there is strong growth,” said Lambert-Goué.

To make matters more complicated, high welfare costs in Europe are an unattractive prospect for Chinese SMEs, who mainly focus on the labour-intensive manufacturing sector. Legal framework is also a problem: “In Europe, you have to know both the EU rules and the rules of the target country, which makes things difficult for us,” said Wang Hailong, a spokesman for Ao Kang, a big Chinese shoe maker that bought the greater China brand ownership of Italian shoe maker Valleverde   last year. The European Commission represents the EU’s trade policy, but investment rules are subject to member country oversight.

Given the complicated situation, both Sun and Lambert-Goué think that acquiring a minority stake in strong European companies is a more realistic partnership commercially and politically. Increasing this stake step-by-step could be welcomed once trust has been built between the parties.

According to China’s Ministry of Commerce, China’s direct investment in EU countries has been decreasing since July 2011, after nearly 100 percent growth in 2010 and the first half of 2011, meaning that a solution is not likely to happen overnight. However, the current crisis at least presents more possibilities and incentives for the two sides than ever before. Whether or not the cautious partners can adapt to the situation is significant not only for their commercial future, but also for their relations as a whole, which, for the time being, are very much based on economics.

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