European Affairs

China Invests in Europe: A Strategic Buying Spree     Print Email
By Jacqueline Grapin, Founder and Co-Chair of the Board of The European Institute

jacquelinegrapin2015cChinese investments in Europe doubled in 2014, to a record $18 billion. Six million people travelled between the EU countries and China. Bilateral cooperation moved to a new level when President XI Jinping proposed building a “China-EU partnership.” Already over 70 percent of the initiatives of the 2020 Strategic Agenda for Cooperation discussed between Beijing and Brussels have been launched.

China may now become the largest non-EU contributor to the “Junker Plan,” the investment initiative launched by the President of the European Commission with the goal of raising 315 billion euros for stimulating growth and employment. China is expected to contribute five to ten billion euros to the European Fund for Strategic Investments. A working group including experts from the China’s Silk Road Fund, the Commission and the European Investment Bank has been set up to explore opportunities for co-financing.

In European countries, hit by the financial crisis imported from the U.S., increased capital has been needed. Since 2011, global foreign and direct investment flows to Greece, Italy, Portugal and Spain have more than halved, and the number of FDI projects in central and Eastern Europe have declined by 12 %. Chinese investments have been welcome. Meanwhile in Western Europe, where the asset prices and the euro have come down, the number of new FDI projects increased by 19 % between 2009 and 20013.

For the entire period of 2000-2014, the top recipients of Chinese capital were energy ($17 billion), automotive ($ 7.7 billion), agriculture $6.9 billion), real estate ($6.4 billion), industrial equipment (5.3 billion) and information and communications technology ($3.5 billion). Chinese State owned firms also seized opportunities to buy European mining companies, energy assets and utilities. In 2011, Chinese firms spent a combined $11 billion on fossil fuel, renewable energy and utility assets in Europe. But as energy assets collapsed, other sectors became more prominent.

China has moved away from investments in energy and raw materials in developing countries and towards energy distribution, infrastructure, mergers and acquisitions for brand names, high technology and market shares in advanced economies. According to Baker McKenzie, foreign direct investments from China into Europe, which barely existed until 2004 hit 3 billion dollars in 2009, before tripling again in 2010 to more than 10 billion. Fifty-five billion dollars has been invested since 2009.

Chinese investments in Europe have become much more diverse and extend into all parts of Europe, including Hungary, Serbia, Italy. Household names such as Pizza Express in the UK and Peugeot Citroën in France received major Chinese investment in 2014. More importantly, China, already a major stakeholder in the Toulouse airport in France, has expressed interest in buying a 75 % share in the Ljubljana airport. The Chinese State Administration of Foreign Exchange invested in Italian state controlled energy companies ENI and ENEL as well as in Fiat Chrysler, Telecom Italia and Prysmian Group. Aeronautics and the nuclear industry are on top of the priority list.

The first major opportunity for European public to see that the policy of China had changed was the acquisition by COSCO, a Chinese state owned enterprise, of a container terminal in the Greek port of Piraeus. China intends to continue developing its Silk Road from the Greek ports through the Balkans to the core European economies. Cosco has been accused by Greek unions of paying less than normal European salaries and not respecting European rights. But COSCO has tripled business in the container port and is part of a consortium applying to buy the remaining 67 % held by the Greek state. The new Syriza government indicated that the privatization of the port would not be approved. However, China has leverage as it is now present in major areas of shipping and tourism in Greece. Greece signed a $ 3.2 billion deal in shipbuilding that will be financed by the China Development Bank.

In recent years, Europeans have been impressed by Chinese investments in prestigious castles, vineyards and well situated famous hotels in France. Chinese investors are now thought to be the most important foreign buyers of real estate in Paris, and recent trophy acquisitions such as Club Med (for 4.3 billion dollars) and the Louvre Hotels Group (for 1.5 billion dollars) are among visible examples of the new Chinese appetite. In July 2015, China’s largest state investment fund acquired 10 shopping centers in France and Belgium for about 1.3 billion dollars. Investing in distribution secures markets in Europe for Chinese products.

The magnitude of these acquisitions is probably underestimated, since Luxembourg remains the first official destination of Chinese FDI in Europe. And while the new Chinese foreign investment law (published in January 2015) obligates the offshore shareholders of shell companies that own foreign investment firms in China to declare their identity or be treated as a foreign firm, Chinese investments abroad are not obligated to declare their origin the same way. As a result, it is easier for anonymous operators to invest outside of China rather than in China. With such a dual system, China has little interest in cooperating on the transparency of capital flows outside of China.

Initiatives by Portugal, Cyprus, Greece, and Hungary to grant so called “golden visas” with preferential treatment to foreign individuals investing significant amounts in their countries also attract numerous wealthy Chinese individuals. With half a million dollars invested in Portugal or $250 000 in Greece, a Chinese citizen gets a European visa accepted in several European countries and they also have the possibility of bringing family members to a politically safe environment.


Strategic significance of Chinese investments in the EU

As large as they have become, investments from private individuals are not as significant as operations initiated by Chinese companies close to the Chinese government. Such operations target sectors important for strategic reasons.

Chinese investment in Germany has soared, concentrated in machinery, alternative energy sources, car parts and equipment. The Chinese Sany Group bought the largest German mechanical engineering company Putsmeister for around $ 470 million. The Chinese Telecommunications firm Huawei now employs 1,700 people in Germany. It has its European headquarter in Düsseldorf and plans to invest billions in France and the UK. Huawei, which has links to the People’s Liberation Army, has been banned from bidding for government contracts in the U.S.

Chinese high-tech companies also invest massively in France. Today it is the EU, not the U.S. that is Beijing’s most important technology partner, and some major Chinese investments in Europe are considered controversial even when approved by governments. This is particularly the case of major Chinese investments in the nuclear industry. Two government controlled Chinese groups, China General Nuclear (CGN) and China National Nuclear Corporation (CNNC), already involved in the construction of nuclear plants in China in cooperation with Electricité de France have been invited by EDF to finance 33.5 % of the two new EPRs to be built at Hinkley Point in the UK. Because of its financial difficulties, EDF needs additional capital. China wants access to parts of the nuclear technology allowing it to also build the new generation of EPR reactors and export nuclear plants around the world, including in Europe.

Meanwhile Areva, leader of the French nuclear industry has experienced financial difficulties and the French government is not ready to provide the 3 billion euros considered necessary for its survival. Philippe Varin, Chairman of the Board of AREVA who earlier engineered the Chinese investment in PSA Peugeot Citroën when he was its President, is now in contact with CGN and CNNC. His argument is that 40 % of the nuclear plants to be built in the coming years will be located in China and AREVA cannot do without this market.

In the nuclear industry China is no more the beginner it was when EDF started working with Beijing at the beginning of the 80’s. It is now recognized that China will soon be part of the group of countries exporting nuclear plants.


Prospects for a Europe-China Bilateral Investment Treaty

The fact that the euro lost some 25 % of its value vis-à-vis the Chinese Renminbi in less than a year, combined with drop in the prices of European assets, reinforces Chinese interest in investments in the Eurozone. Parking its surpluses in Europe could be among the smartest investments that Chinese decision makers can make at a time when few alternatives are as attractive. The dynamic of Chinese investments in Europe is therefore likely to continue.

The European Union has expressed an interest for a Bilateral Investment Treaty (BIT) with China, hoping that it would regulate Chinese investments in Europe and secure European investments in China. China, not wanting to include market access in the discussion, resisted at first. But negotiations were launched on the occasion of the 16th EU-China summit in November 2013. Fraser Cameron, Director of the EU-Asia center in Brussels, indicated that “while Beijing wants to bolster its soft power in Europe and gain European support on issues such as the reform of the IMF and the Word Bank, China is also looking for large-scale projects to invest in that represent good business opportunities, in particular high-speed trains and nuclear power plants.”

As mentioned in a European Council on Foreign Relations policy brief from February 2015, “China seems to need an FTA mainly to protect what it already has, while the EU needs a BIT to get what it does not have – that is, access to China’s investment, service, financial services and procurement markets. While European companies continue to face significant barriers to access in China, European markets are already less restrictive than U.S. and Canadian ones. U.S. legislation such as the Buy American Act explicitly restricts foreign public procurement in cases where national security or the control of strategic resources are in question. The only EU member state that has such protective legislation in place is the UK, where the acquisition of media and cases involving national security can be referred to the Competition Commission.”

Obviously “competition between member states affects their ability to conduct effective BIT negotiations, as it diminishes the EU’s leverage, and because China can plan on bilateral relations whenever discussions at the EU level stall,” said the ECFR-- a situation that the U.S. has traditionally exploited when negotiating with the EU. In this case however, the Europeans should agree among themselves that openness to Chinese investment and capital should be on the condition of improved market access and treatment by China.