Wanting Chinese investment is one thing; needing it is another. As the euro-zone crisis has deepened, one of the counter-intuitive outcomes thus far has been the increased investment by Chinese companies and the central government into European assets. The Rhodium Group, a New York-based research firm that tracks outbound Chinese investment into North America and Europe, published a study this month that showed how significant this increased investment has been.
According to Rhodium, outbound foreign direct investment (OFDI) from China into Europe increased 10 times from 2004 to 2011, from US$1 billion in 2004 to $10 billion in 2011. Chinese OFDI into Europe tripled in the past 12 months, precisely when the euro-zone crisis was at what most hope was the apex of the region's financial uncertainty and potential economic risk. What explains this massive increase in Chinese OFDI, and how have Europeans greeted these investments? After all, many Europeans are no less skeptical about China than their American counterparts.
China's increased investment in Europe certainly owes much to the historically attractive valuations the euro-zone crisis has made possible. One example of this was Geely's 2010 purchase of distressed Swedish automaker Volvo for $1.8 billion. Considering Volvo had lost more than $2.5 billion the previous two years, it was one of many companies eager to find a Chinese investor with deeper pockets and longer-term aspirations to move up the value chain. Similar examples have already taken place in European automotive-parts manufacturers, as have Chinese acquisitions of European clean-tech and construction companies.
As the Rhodium report notes, valuation is not the only reason Chinese firms seek out investment opportunities in Europe. "Chinese investors have the same diverse motives for coming to Europe as other foreign investors do: to sell products in the world's largest single market, expand their global production chains, and tap into a rich base of technology, brands and human talent." Valuations in Europe may have expedited Chinese OFDI, but they do not single-handedly explain the massive increase of Beijing's investments into the euro zone.
Many Chinese firms also anticipate changes to European regulatory schemes that may seek to protect infant or distressed industries in Europe by establishing local content guidelines, ones impossible to get around as long as Chinese firms must export into the euro zone.
This year, the sovereign wealth fund the China Investment Corp announced that $30 billion had been set aside specifically for investments into troubled European assets. Officials outside China, such as Singapore's Lee Kuan Yew, have urged China to act aggressively to bolster the euro zone by purchasing European bonds, German ones specifically, in the hopes China can support one of its most important export economies. The thinking goes that if China invests in Europe - Germany specifically - enough to ensure that Germany's borrowing costs stay low, Berlin can act more aggressively to stabilize the euro zone.
One of the more shocking insights from the Rhodium Group's report is not only the massive increase (by three times) of Chinese OFDI into Europe between 2010 and 2011, but that in 2011 it was more than twice the size of China's investment into the United States (about $4.5 billion into the US, versus slightly less than $10 billion into the euro zone). Even more interesting, after five consecutive years of Chinese OFDI into the United States increasing, 2011 marks the first year in half a decade that it decreased.
US attitudes toward Chinese investment are in some ways more complicated than European attitudes about the same. This is not to say that European attitudes will forever remain benign. Rhodium's report notes that four problems could present themselves with China's massive increased investments in Europe: "large inward FDI presence could expose Europe to China's wild macroeconomic swings ... Chinese firms [could] ship newly acquired assets back to China ... China's firms [could] operate and invest more freely in Europe than their EU rivals can in China ... Chinese firms accustomed to lax regulations at home will bring poor labor, environmental and other practices to Europe, and EU governments will be too eager to attract jobs and investments to robustly hold them to account".
Yet if necessity forces European countries and businesses to continue seeking Chinese investment, these risks may seem trivial when compared with the larger problems of not having any accessible capital regardless of the source.
Asia Times Online :: China loves a crises
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