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A New Record Year for Chinese Outbound Investment in Europe

Chinese direct investment in Europe is continuing to grow rapidly. At the beginning of the year, a new wave of Chinese capital swept into Europe. In the past few weeks alone, a series of Chinese takeovers were made public that ranged from buying up Swiss agrochemical company Syngenta to acquiring North German waste-incineration specialist Energy from Waste. Syngenta’s takeover by ChemChina, a state-owned enterprise, is the largest foreign investment ever made by a Chinese company and is set to cost the firm $43 billion. Last year, Chinese takeovers in the EU-28 reached a record volume of approximately €20 billion, equivalent to an increase of 44 per cent compared to 2014. China has now become one of the main drivers behind global capital flows, growing into one of the three biggest foreign investors in the world. This development has increased the competition for Chinese investment among EU states and could weaken the European Union’s negotiating power with the PRC regarding strategic issues, as Thilo Hanemann and Mikko Huotari found in their analysis of the latest trends in Chinese direct investment in Germany and the rest of the EU. 


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China’s foreign investments are growing rapidly

Forecasts have it that China is going to invest hundreds of billions of dollars abroad over the next five years. Europe has become one of the main destinations for outbound FDI as Chinese investors have increasingly moved away from developing and emerging economies, focusing on high-income industrial nations instead. The enormous rise in Chinese investment in Europe – 44 per cent more than in the previous year – is largely due to Italian tyre maker Pirelli being taken over by ChemChina (for €7 billion). On average, China has invested €10 billion a year in Europe over the last five years. In the five years prior to this period, it was ‘only’ a billion euros per annum. In the authors’ opinion, this underlines the fact that Europe is not just experiencing a temporary trend here. However, while Chinese FDI has been growing, the level of European investment in China has actually been stagnating – or even dropping. Ultimately, this situation is likely to create a considerable imbalance. In their survey, Hanemann and Huotari say this makes it all the more pressing to do away with one-sided investment barriers. This could be achieved by means of the Bilateral Investment Agreement, which China and the EU have been negotiating for the last two years, for example.

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Downward pressure in the Chinese economy is boosting FDI

Restructuring the Chinese economy at a time when growth is dwindling is having a direct effect on sectors that are of interest to Chinese investors. Looking at the foreign investments made last year, a considerable mixture of fields is apparent, ranging from technology and advanced services to brands and consumer goods. The largest proportion of investments seen in 2015 was made in the automotive sector, followed by real estate, hospitality, information and communication technology, and financial services. What is noticeable here is that Chinese investments are particularly increasing in areas that are not freely accessible to foreign investors in the PRC, such as the finance sector. This ought to strengthen the resolve of the EU’s member states to demand equal conditions for access to China’s markets, the authors of the survey say.

Competition for Chinese investment intensifies within the EU

In 2015, again, the majority of Chinese investment in Europe was undertaken in Britain, France and Germany. Over the last five years, the figure has amounted to an average of four to eight billion euros a year in these countries. In the last two years, however, certain countries in Southern and Eastern Europe have started to catch up, just like the Benelux countries have. This development has fuelled diplomatic efforts to promote high-level exchanges with China to boost flows of capital. The same thing applies to the ‘16+1’ format that links China with Central and Eastern European countries. The race for Chinese investment has been increasing the amount of friction felt within Europe on key policy issues such as the pending decision as to whether China should be entitled to the status of a market economy from the end of 2016 or whether the EU should negotiate a free-trade agreement with the PRC. 

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Germany continues to be an attractive location for Chinese investment

Of all the member states in the European Union, Germany is the one that has seen the steadiest inflow of Chinese capital over the last five years. In 2015, the overall amount came to €1.2 billion, dropping slightly from €1.4 billion in 2014. Despite this slight dip, Germany does not seem to have lost any of its attraction to Chinese investors over the years. The automotive industry and machinery/plant engineering alone attracted 400 million euros’ worth of Chinese FDI last year. The biggest deals of all included the acquisition of two automotive suppliers, WEGU Holding and Quin, and Weichai’s second increase of its stake in KION, a producer of forklift trucks and warehouse technology. In fact, Germany seems to be growing increasingly attractive to financial investors from China. In 2015, the sovereign wealth fund China Investment Corporation (CIC) acquired a share in Germany’s largest motorway service station operator, Tank & Rast, and the Fosun Group invested in KTG Agrar. Three record investment projects concerning KraussMaffei, the mechanical engineering firm, the private bank Hauck & Aufhaeuser and environmental engineering company EEW Energy from Waste are currently being finalised. Hanemann and Huotari expect Germany will also benefit from this wave of Chinese investment in the future, particularly in view of the support provided by the Chinese Government and the creation of more financing vehicles such as the new ‘Industry 4.0’ fund.

Only few barriers for future investment flows

Recently, the Chinese leadership has strengthened its capital flow controls because of the considerable amount of turbulence felt on the country’s stock markets and financial markets in a bid to stem the enormous outflow of capital. Some of these controls could also apply to Chinese companies that wish to make investments abroad. At the same time, however, the pressure is rising for Chinese businesses to internationalise. If Premier Li Keqiang’s announcement proves to be true that China is going to invest $1 trillion of OFDI globally over the next five years, then it would make China the second-largest exporter of FDI in the world, only one step behind the United States. The Chinese leadership has a knack of making foreign investments by Chinese companies look as if they are of mutual benefit; promises of Chinese investment and flows of capital have long been vehicles of Chinese foreign policy. 

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