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Chinese ODI in Europe: Trends and Implications for the EU

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Chinese ODI in Europe: Trends and Implications for the EU Chinese ODI in Europe: Trends and Implications for the EU Contents Introduction ............................................................................................................................................. 2 1 Overview of Chinese ODI in the EU ............................................................................................... 2 1.1 The Growth of Chinese ODI in the EU ................................................................................... 2 1.2 Post Crisis trend following the Chinese ODI rebound in 2014 ............................................... 5 2 Current China ODI Policy ............................................................................................................... 6 2.1 Policy and support measurements ........................................................................................... 7 2.2 Main Government Agencies and Financial Agencies ............................................................. 8 3 Motivation of Chinese ODI in the EU ............................................................................................. 9 3.1 The Impact of the global economy and the economy of EU. .................................................. 9 3.2 Pressure from the home market: .............................................................................................. 9 3.3 Strategic drivers of Chinese companies ................................................................................ 10 3.4 The appreciation of the RMB and large USD reserve ........................................................... 10 3.5 New policy incentives: New Silk Road and 16+1 ................................................................. 10 4 Implications of Chinese ODI in EU .............................................................................................. 11 4.1 Debate on an open or a closed door ....................................................................................... 11 4.2 Competition among member states: ...................................................................................... 12 4.3 Security issues. ...................................................................................................................... 12 5 Policy Recommendations .............................................................................................................. 13 5.1 Investment Diplomacy .......................................................................................................... 13 5.2 Keep the door open but enhance national security screening. ............................................... 14 5.3 A better investment promotion regime. ................................................................................. 14 Annexes ................................................................................................................................................. 14 1 Introduction China is steadily increasing its stock of Overseas Direct Investment (ODI) in Europe (from €6.1 to €27 billion between 2010 and 2014), a trend that is generally encouraged by governments in Europe affected by the financial crisis. But this trend is a far cry from the assertion that ‘China is buying up Europe 1 . Chinese ODI is characterised by caution and prudence. It accelerated fast during 2009-12, slipped back in 2013, but has since bounced back to reach a record level with 153 separate investments worth $18bn (€15bn). See figure 1. While these deals and numbers are impressive, when put in perspective, they are still very small given the size of the Chinese economy. Chinese ODI in the EU in 2013 was just €7bn, less than 1.1% of total ODI (€327bn) in the EU. Although Chinese ODI in the EU in 2014 increased to €15bn, it is still far from significant. Compared to the global of ODI China made in 2014 ($102.89bn), Europe accounted only for 17.6 % ($18bn). This report analyses the trends and motivation of Chinese ODI in the EU, both from a company and government perspective. It also analyses the support Chinese companies receive for ODI projects. It suggests that the continent’s attractiveness to Chinese investors is likely to continue and grow in importance. The report also offers some policy recommendations for the EU. 1 Overview of Chinese ODI in the EU 1.1 The Growth of Chinese ODI in the EU Europe began to receive significant Chinese ODI from 2001, when China started to deregulate its overseas investment and to encourage its national champions to “go-out”2. This domestic policy change triggered a Chinese ODI wave in the 2000s (see Figure 1). Figure 1 China‘s ODI in EU (2001-2014) China (except Hong Kong) ODI in the EU (€mn) 20000 15000 15000 10000 7657 6890 5000 4318 2186 0 547 241 290 518 -103 749 -385 62 364 -5000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: EUROSTAT and MOFCOM 1 See Godement, F., Parello-plesner, J. & Richard, A., 2011. The Scramble for Europe. Search, pp.5–6. Available at: http://www.ecfr.eu/page/-/ECFR37_Scramble_For_Europe_AW_v4.pdf. 2 The “go-out” policy is the major ODI policy, which started a series of deregulations of ODI in the early 2000s. 2 It is important to note that the country level data in Figure 1 was a combination of Chinese official data- MOFCOM (2014) and EUROSTAT (2001-2013), and the deal level data used in this paper were from Rhodium and Thomason one banker (T1) database. Any data alone cannot give a full picture of the trend. Official Chinese statistics do not include investments channelled through financial market platforms like Hong Kong (e.g. the Three Gorges acquisition of power generation in Portugal), and they exaggerate investments in European financial centres like Luxembourg. Eurostat figures are affected by late reporting by some Member states (and no reporting at all by Luxembourg until 2017). Deal level data from Rhodium and T1 give a more accurate picture, but only of the biggest investment deals. Investment flows are also much more erratic/variable than trade, so it’s difficult to evaluate trends with only the deal number or volume (e.g. the €7.5 billion deal involving Pirelli this year would instantly put Italy at or near the top of Member states league table in Annex 4). Chinese ODI in the EU can be roughly divided into three stages: pre-crisis stage, crisis stage and post-crisis stage, based on the different manner in which Chinese investors reacted to the economic circumstances (see Figure 2). Figure 2. Three stages: pre-crisis, crisis and post-crisis Pre- Crisis (2001-2008) Chinese companies : React to China: Joint WTO, Deregulation EU was not impressed by deregulation, WTO, test water domestically,Catching up policy Chinese ODI ODIs,small portion in EU Financial crisis (2009-2012) China:Policy encouragement, Chinese companies : seizing the EU memeber state compete to "take advantage" of crisis in EU once-in-a life-time opportunity attract Chinese ODI Post-crisis (2013 onwards) China:New government with Xi Chinese companies: continue to EU: EU-China BIT , collective and Li, further encouragement invest in the EU but with more interests/ requesting same with new initiatives sophiscated strategy treatment in China market The first stage (2001-2008) was the testing stage for Chinese companies and triggered by domestic deregulation and China’s accession to the WTO. It was also facilitated by various forms of financial support. The first stage of Chinese ODI in the EU was very much focussed on acquisition in the resource rich countries. FDI investment in developed economies was relatively low and investments in the EU were mainly focused on technology upgrade and trade facilitation, with investments in business services and finance slower to gain traction. These sectors soon expanded, however, as Chinese trade and ODI 3 increased and they provided valuable support in market development and increasing existing trade. Research has shown that the level of bilateral trade is an important determinant of the geographical pattern of Chinese ODI3 A number of the early attempts at ODI by Chinese companies ended in failure such as the TCL Thomsen venture into television manufacture. Chinese investors, as new players in the European market, rarely invested in the services sectors such as finance, media and entertainment. Furthermore, infrastructure sectors, such as telecommunications equipment in the EU were generally not open to Chinese investors. During this stage, Chinese ODI in the EU grew little from a low baseline (see figure 1). It remained insignificant (less than 1% of global ODI in the EU) and EU policy makers paid it little attention. The second stage (2009-2012) started when the financial crisis hit the EU. The crisis largely affected Greece, Spain, Portugal and Ireland. (In contrast China was not much affected by the financial crisis and maintained its high growth rates). As shown in figure 1, from 2009 to 2012, Chinese companies completed many major ODI projects in the EU, as European companies needed quick liquidity. Many member states viewed Chinese ODI as a potential economic saviour and competed to attract investment. The Chinese government also encouraged and facilitated Chinese companies’ ODI ambitions in Europe, e.g. Geely’s acquisition of Volvo. Geely paid Ford $1.8 billion cash, and raised $900 million to keep Volvo running. To finance this deal, Geely secured multiple loans from the Bank of China, the China Construction Bank, and the Export-Import Bank of China, During this stage, Chinese ODI showed a clear evolution away
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