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Janus Faces of Chinese Investments

Janus Faces of Chinese Investments published on

Last year was the next in row marked by rapidly growing Chinese investments in European Union member countries. Mercator Institute for China Studies (Merics) and Rhodium Group in the joint report, published in February, estimate that Chinese investments in 2015 reached 20 bln EUR. It’s 20% year-on-year growth. Beginning of this year has brought new wave of planned acquisitions topped by valued at 43 bln usd take over of Swiss Syngenta by the state-owned Chem-China. Chinese officials announced that this was just the beginning of the coming overseas buying spree. Recent acquisitions and bids made by Anbang confirm those promises.

Analysts expect that inclusion of One Belt One Road initiative and Chinese outbound investments in the new Five-Year Plan will trigger yet bigger wave of Chinese capital flows, both private and state owned, seeking investment opportunities abroad. Chinese official announced, that total amount of outbound investments in the next 5 years will reach 1 trln usd. They also declare, that Chinese companies will increase their activities in Europe and China will participate in the implementation of the Juncker plan.

European Union faces challenges of proper reception of the coming inflows of Chinese investments, which can bring enormous benefits but are also accompanied by significant threats and risks for EU member countries. Merics and Rhodium Group made an attempt to analyse the opportunities and threats in their report published in June last year (including data from period 2000-2014) and in already mentioned February’s update (data from 2015)

Authors of the report consider Chinese investments as essentially beneficial for the economies of EU members and they highlight positive impact of the capital inflows on the Europe’s economic “restart” and revival of the troubled European manufacturing industry. They think, that Chinese investors will facilitate access to Chinese market for the acquired European enterprises. Acquired companies will benefit from the established distribution networks and market positions of the new owners. Volvo is the flagship example of the beneficial take over. More innovative and technologically advanced Chinese companies, such as Huawei, highlighted in Hanemann and Huotari’s report, are to contribute significantly to the development of the European technology and innovative solutions.

The current difficulties of Chinese economy and the the past records of Chinese investments however make the picture of the prospect benefits more nuanced and shrouded in uncertainty. It must be noted, that Chinese investors strongly prefer acquisitions over greenfield investments. The sheer number of greenfield investments exceeds the acquisitions with ratio 726 to 321 (data for period 2000-2014), but in terms of value they are annually far below 10% of the total investments value. Chinese investors still spend much more on buying European companies than on establishing new enterprises. Hanemann and Huotari highlight the opportunities that come with acquisitions, however for the rapid revival of the European economy and manufacturing sector this modus operand is much less beneficial than greenfield investments.

In the industries, such as automotive, machinery manufacturing telecommunication technologies, IT, finance and business services, where Chinese companies take over European enterprises access of the companies from EU member countries to Chinese domestic market is still very limited due to formal and informal barriers.

Prospect export opportunities for the acquired companies are therefore significantly limited. Highly overestimated are also reported by authors benefits of the technology and innovations injections made by Chinese investors in the EU economy. Huawei, made by the authors the flagship example, establishes R&D centres in Germany but it mainly benefits from the knowledge and expertise brought by the local engineers. Know how transfer from China is modest. Much more Chinese companies acquire European enterprises to obtain the advanced technology and know how. Examples from Europe Pirelli, KrausMaffei, Putzmeister and recently Norwegian Opera, in US attempts to take over control over Micron Technology and Western Digital confirm this trend.

Long list of threats and challenges listed by the authors make call for cautious and conservative approach towards Chinese investments. Economic difficulties in China, where domestic market is still controlled and managed by the communist party combined with other microeconomic factors have huge impact on stability and size of the future investments. Inflows and outflows of capital can create the vicious “upturn-downturn cycle”. Sharp and rapid increases in assets value followed by the steep declines could be especially dangerous for smaller countries. This scenario could roll out in the real estate industry. The record of Chinese “resource investments” in African countries indicates how dangerous ups and downs in capital inflows and outflows can be.

Very serious issue in EU-China relations is also asymmetry between the free access of Chinese investors to European markets and restricted access of the EU enterprises to many lucrative industries in China. Fully or partially restricted is the access to media and broadcasting, land and sea transport, telecommunication services, legal services, energy distribution, banking, finance, insurance services. China is the most closed for foreign investments of all G20 members, leaving far behind India. The Regulatory Restrictiveness Index for China is two times higher than for Russia. Chinese companies can freely invest in Europe while in China the rule “only for our investors” is often applied. As a result European companies will have to compete with Chinese investors in the domestic markets being fully or partially deprived of opportunities to rip benefits from the growing Chinese market.

In the period 2000-2014 31 bln Euro of the 46 bln totally invested by Chinese entities in EU, came from the state-owned enterprises. In 2014 SOEs had 62 pc. share and in last year it reached 70 pc. Level. Chinese SOEs are controlled by the Communist Party of China and their main purposes is not always to be highly competitive and profitable but firs of all to serve the CCP and to accomplish the tasks assigned by the party officials. Serving CCP can, as the authors of the report also admit, bring serious security risks for the EU members. Currently each country applies its own rules for assessing investments in terms of national security threat. Assessments are conducted without any coordination or information exchange with relevant institutions in other countries, in spite of the fact, that decision made by authorities in one country will have consequences for other EU members.

European entrepreneurs still have serious reasons to be worried about competing with Chinese companies, that do operate in market conditions. Chinese authorities still support operations of state-owned companies abroad not only with verbal encouragement and legal deregulation but also with subsidies provided in various forms. Also the private companies, but to a lesser extent, can benefit from subsidies if they make investments in industries supported by the state policies.

The key issue in EU-China relations is the absence of consistent and well defined policy of the EU as the block of states. The consequence is that for 15 years since China joined the WTO Beijing has not been successfully forced to obey the rules of international trade. EU member states have competed with each other for the favours granted by red emperors from Beijing, have undermined the action of European Commission imposing the anti-dumping duties and countervailing measures against illegal subsidies. They also have supported Chinese actions harmful for other EU members and did not support the initiatives targeting threats coming from the Middle Kingdom. Chinese companies, especially state-owned, can now afford buying European enterprises using the huge forex reserves that were accumulated mainly from the trade balance surplus that China has enjoyed for years. Last year the trade deficit of EU with China has exceeded 180 bln Euro, in 2014 it amounted to 135 bln Euro. Any of these values exceeds significantly the total amount of all Chinese direct investments in EU in the past 15 years. The irresistible conclusion comes to mind about the wisdom of Chinese leaders who made European enterprises to finance their own takeovers by Chinese competitors and yet are so enthusiastic and grateful for being bought off.

Sharpening and deepening discords between EU members and raising competition for Chinese money are beneficial for Beijing. China wins over the Brussel’s weakness combined with the disputes between EU countries. In order to reap benefits from of Chinese investments and to diminish threats and negative aspects the unified and consistent policy of the whole European Union is absolutely necessary. System of monitoring threats to stability in the specific industries shall be established, efficient actions promoting EU countries as land of investment opportunities should be undertaken and system of measures supporting smaller countries’ effort to attract Chinese investments should be established. All those require close cooperation between EU members.

The much deeper and wider integration of UE policy on China is needed to negotiate and actually implement beneficial terms of BIT (Bilateral Investment Agreement/Treaty), that will secure for European enterprises the same rights as their Chinese counterparts enjoy. Forcing Beijing to guarantee truly free access to Chinese market for EU companies and to stop providing illegal subsidies to domestic enterprises needs the trust of EU members in European Commission and support to the Brussels’s actions and efforts. Serious challenge is also the unification of rules for the security risk assessment of foreign investment across the EU members.

Creating the unified EU policy on China cannot be postponed or rejected on basis of protecting the sovereignty of member states. Either EU countries start speaking with one voice to China as a bloc of countries or they will squander many benefits coming with the new wave of Chinese investment, similarly to the multiple lost benefits lost after China’s WTO entrance.