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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

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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)

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.

547 241 290 518 -1032186 749 -385 62 364

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15000

-5000

0

5000

10000

15000

20000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

China (except Hong Kong) ODI in the EU (€mn)

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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

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

Post-crisis (2013 onwards)

China:New government with Xi and Li, further encouragement

with new initiatives

Chinese companies: continue to invest in the EU but with more

sophiscated strategy

EU: EU-China BIT , collective interests/ requesting same treatment in China market

Financial crisis (2009-2012)

China:Policy encouragement, "take advantage" of crisis in EU

Chinese companies : seizing the once-in-a life-time opportunity

EU memeber state compete to attract Chinese ODI

Pre- Crisis (2001-2008)

China: Joint WTO, Deregulation domestically,Catching up policy

Chinese companies : React to deregulation, WTO, test water

ODIs,small portion in EU

EU was not impressed by Chinese ODI

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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 from trade-facilitating investments

towards a broader range of activities, especially small and medium enterprises (SMEs) in investment

services. Chinese firms also started to invest in infrastructure, for instance, China’s largest shipping firm,

COSCO, invested heavily in European ports, including Naples, Piraeus and Antwerp. There were also

many examples of low profile infrastructure investments such as Link Global Logistics purchasing the

former military airport of Parchim in Germany.

From 2013, the EU gradually moved out of the crisis situation and Chinese companies looked for new

opportunities. They had also learned a number of lessons about how to deal with the EU regulatory

framework. In 2013 negotiations began on a Bilateral Investment Treaty (BIT) with the aim of providing

more security and stability for investors. It is likely, therefore, that we are moving to a ‘new normal’ as

regards Chinese ODI in Europe. Below we will analyse the post-crisis trend in more detail.

3 See Buckley, P.J. et al., 2007. The determinants of Chinese outward foreign direct investment. Journal of International

Business Studies, 38(4), pp.499–518. Available at: http://www.palgrave-journals.com/doifinder/10.1057/palgrave.jibs.8400277

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1.2 Post Crisis trend following the Chinese ODI rebound in 2014

Europe is still preferred.

Since 2013, Chinese companies have been increasingly looking to foreign markets to diversify their

investments and expand their markets. Europe is still a favourite destination for several reasons. Firstly,

European companies hold leading position in terms of intangible assets such as technology, knowhow,

and brand names, which Chinese companies lack. Acquiring these intangible assets will help Chinese

companies at home and abroad to move up the value chain and secure more domestic middle class

customers, who associate European brands with quality and safety. Secondly, European markets have

consistently opened the door to Chinese investors and Chinese investors face few barriers in the EU

market. (The US climate towards Chinese ODI is less welcoming. The Committee on Foreign

Investment in the United States (CFIUS), an interagency committee charged with reviewing transactions

by foreign investors that may raise U.S. national security considerations, has rejected a couple of

Chinese ODI deals. According to the unclassified annual report to Congress issued by CFIUS in

February 2015, China had the most notice filings in both 2012 and 2013). Thirdly, China maintains a

good bilateral relationship with the EU and the new BIT may offer even better access for Chinese

companies in the medium to long term. Fourthly, although the EU market offers a lower rate of return,

it is still the primary choice for many risk-averse Chinese investors.

More Member states and more sectors are accepting Chinese ODI.

In 2014, we see the EU member states still competing to receive Chinese ODI – see Error! Reference

source not found.. Furthermore, Chinese ODI in Europe has become much more diverse and now

extends to all major sectors (See Annex 2 Main sectors of Chinese ODI in EU in 2014).

Struggling economies such as Portugal and Italy saw Chinese ODI deals in strategic sectors such as

infrastructure and energy. For instance, a 21.3 percent stake of national grid Energias de Portugal has

been bought by China Three Gorges. In Italy, there was a total of €3 billion invested through multiple

deals in the energy sector including China State Grid’s purchase of a stake in CDP Reti, the country’s

national grid agency. Even France, which was the most reluctant European country to receive Chinese

ODI, has allowed China to invest in its infrastructure. In December 2014, the French government

announced the sale of a 49.9 percent stake in the Toulouse airport to a Chinese consortium, with Lyon

supposed to follow. France also has seen another two major deals. Club Med, a 65-year old leisure

company has been acquired for almost $1 billion by Shanghai-based Fosun Group. Dongfeng auto

acquired 14 percent of its Chinese JV partner French auto maker PSA Peugeot Citroën. The UK remains

the top host country for Chinese ODI (3 of the top 10 Chinese ODI are in the UK), especially in real

estate. London has seen a massive amount of Chinese ODI in this area with insurer Ping-An purchasing

Tower Place for £327 million. See also Annex 3 Top 10 Chinese ODI Deals in the EU by value 2014.

Merger and acquisition (M&A) provides the most value

The majority of Chinese firms have entered the EU market through Greenfield investment (69% of all

deals). However, the value of ODI in the EU market is dominated by M&A (86% of total value), as

these transactions are generally more capital-intensive than Greenfield investments. In 2014, the top 10

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Chinese ODI were all M&A deals, with 7 of them valued above $1billion (see Annex 3). In the first

quarter of 2015, 3 M&As with a value more than one $1billion have been announced including,

ChemChina’s acquisition of Italian tyre maker Pirelli for $7.7 billion (See Annex 5). In the last three

years the average value of Greenfield projects has been growing. Previously these consisted mostly of

offices and smaller administrative operations but Chinese firms have made investments of significantly

greater capital value, including R&D centres in Scandinavia, food processing facilities in France, real

estate developments in the UK and machinery production in Germany. Chinese companies have also

ramped up spending on the expansion of existing facilities in Europe including transportation

infrastructure, chemical plants, and warehouses.

While Bilateral Investment Treaty (BIT) negotiation is incremental at the EU level, at the member

states level BIT works in favour of China

As of March 2015 there have been four rounds of negotiations for BIT. The EU aims to negotiate a BIT

for all member states, which will include not only investment protection but also market access, the role

of Chinese SOEs and investor state dispute settlement (ISDS). A BIT with China, along with a European

policy towards foreign investment, will help regulate Chinese ODI in Europe. Moreover, it will help

European companies access the Chinese investment and public procurement markets and service sector.4

The negotiations are rather slow and incremental with few expecting a conclusion in the short term.

While the negotiations on an EU level BIT may progress slowly, member states continue to compete to

attract Chinese investment under their individual BITs with China (all of them except Ireland have

individual BITs with China). Many major deals were made in 2014, which were probably encouraged

by increased competition between member states. For example, London, Frankfurt, Luxembourg, and

Paris competed to become RMB offshore settlement centres, and they all obtained such status in 2014.

A number of high-profile cases featuring solar panels, telecoms, and wine focused attention on trade

and investment in 2014. After lengthy negotiations the EU and China reached a settlement on solar

panels in March (investigations opened in 2012 and the first settlement was made in July 2013); alleged

illegal Chinese subsidies to Huawei and ZTE in October; and an agreement was reached between the

European and Chinese wine industries that put an end to China's anti-dumping and anti-subsidy cases.

Although there was no EU-China High-Level Economic and Trade Dialogue meeting in 2014, the visit

of Chinese president Xi to the EU helped smooth a number of bumps.

2 Current China ODI Policy

An understanding of Chinese policies and support measures towards ODI and the roles of various

Chinese agencies that directly regulate and implement the policies are essential in order to understand

the trends and motivation of Chinese ODI in the EU.

4 See Godement, F. & Stanzel, A., 2015. THE EUROPEAN INTEREST IN AN INVESTMENT TREATY WITH CHINA,

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2.1 Policy and support measurements

Policy Goal. China’s policy to encourage ODI was official launched in its “go-out” strategy in 2000

and the implementation of various measures to support this strategy in the mid-2000s aimed to make

Chinese companies go global and grow more Chinese national champions into multi-national companies

(MNCs). After 14 years of “go-out”, the inward direct investment (IDI) and ODI in 2014 were almost

balanced. Now, with the leadership of Xi Jinping and Li Keqiang, we see a growing confidence in

Chinese policies. ODI in the EU offers the prospect of China gaining intangible assets in its march to

become the number one economy in the world. The “go-out” policy has been a key feature of the recent

five-year plan (2011-2015) and its main theme is “accelerating” ODI in a more “mature” direction, It is

also “closely intertwined with China’s industrial upgrading and successfully ‘catching-up’ in its

domestic economic growth”. In the current plan, besides the general “go-out” policy, certain industries

are specified in order to balance domestic industrial development.

Industry policy. The current guidelines (2011-2015) encourage both ODI and domestic development

in areas of strategic advantage to China: new energy; energy conservation and environmental protection;

biotechnology such as drugs and medical devices; new materials; new IT; aerospace and telecom

equipment manufacturing; clean energy vehicles. ODI in the preferred industries enjoys additional

preferential treatment. There have, however been a number of proposed investments in the gas and oil

sector that have not met with approval in the host countries. Overall the industrial policy has enhanced

the domestic ‘catching up’ strategy a good example being the telecommunication sector whose improved

performance has enabled it to increase ODI activities.5

Geographical and industrial targeting in the EU. In line with the go-out and industrial policies

Chinese government agencies support specific target regions and industries. They have been developing

“guidance catalogues” indicating promising sectors for investment by Chinese companies and offering

practical advice such as targeting technology upgrading in Western Europe and efficiency- improving

in Central and East Europe (CEE).

Deregulation and Financial Support. Policy makers have been constantly relaxing control of ODI and

streamlining the bureaucratic approval procedures for projects. Furthermore, financial policies were

approved to support Chinese ODI, especially in sectors fitting policy goals for sectors covering

“overseas agriculture, forestry and fishing cooperation, project contracting, outward labour services,

overseas high-tech research and development, and outward design and consultation.” Companies can

apply for funding subsidies for pre-operational fees; interest discounts for medium- and long-term loans;

and subsidies for operational fees. Two special funds were established under financial support policies:

one jointly set up by NDRC and Export Import Bank; the other set up jointly by the Ministry of Finance

(MOF) and MOFCOM. (See below section 3.2).

Post-Investment Evaluation: The government also established a post-investment evaluation system

to help investors to study and examine their investment. Under this system, Chinese companies are

5 See Boateng, A., Qian, W. & Tianle, Y., 2008. Cross-border M&As by Chinese firms: An analysis of strategic

motives and performance. International Business Review, 3(4), pp.19–29. Available at:

http://onlinelibrary.wiley.com/doi/10.1002/tie.20203

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obliged to file an annual report, providing key information about their project’s performance. Analysis

of this data allows the government agencies (MFTEC, MOFCOM) to further develop their support,

avoid risks and enhance the performance of Chinese ODI.

International Investment Environment Support. In order to create a favourable environment and to

avoid risks for Chinese companies investing overseas China has positively participated in international

organizations (WTO in 2001) and formed numerous BITs. Furthermore, China has been “creative” in

its investment diplomacy - see section 4.5 on the Cooperation between China and the Central and Eastern

European countries (China-CEE) since 2012 and the NSR initiative since 2013.

2.2 Main Government Agencies and Financial Agencies

Different institutions are involved in policy making and providing support to the Chinese ODI policy.

These include policy-making agencies, MOFCOM and the National Development and Reform

Commission (NDRC), national banks and insurance companies.

MOFCOM China’s “go global” policy is administered by the Department of Outward Investment and

Economic Cooperation of MOFCOM, whose remit includes outward investment, overseas processing

trade and R&D, etc. Treaties covering China’s ODI are negotiated by MOFCOM’s Department of Treaty

and Law. It also approves, monitors and manages enterprises engaged in ODI. The Department monitors

China’s ODI in terms of both quantity and quality: it is responsible for establishing and implementing a

statistical system on ODI and for formulating and implementing performance evaluations and annual

inspections of ODI. The Department of Outward Investment and Economic Cooperation is also charged

with guiding, organizing and coordinating the construction of overseas economic cooperation areas.

MOFCOM has played a major role, along with other ministries (such as the Ministry of Foreign Affairs)

in making the “guidelines” indicating the promising sectors and regions to invest in.

National Development and Reform Commission (NDRC). The NDRC is the other major agency

responsible for implementing China’s “go-out” policy. The NDRC is a super-ministry, which is a

member of the State Council. It is responsible for international capital flows, foreign capital utilisation

and outward investment, as well as strategic planning to bring about an overall balance between foreign

capital utilisation and overseas investment. The NDRC has powers to approve major projects on behalf

of the State Council.

Policy Banks. The most powerful tools in promoting ODI are financial incentives provided by the

government. Chinese ODI projects on the priority list can benefit from the government’s financial

support in the form of access to below-market rate loans, direct capital contribution, and subsidies

associated with the official aid programmes. The Export and Import Bank (Eximbank) and China

Development Bank (CDB) are major providers of these financial incentives. China recently (April, 2015)

reportedly allocated $62 billion of its foreign exchange reserves to these two state-owned “policy banks”

in order to support the New Silk Road project

Commercial Banks. The Industrial and Commercial Bank of China (ICBC) and the Bank of China

(BOC) are the largest banks in China. Major investors themselves, they greatly support ODI through

their rapidly expanding global network. In late 2000s, ICBC and BOC gained federal approval to

established branches overseas. They currently have subsidiaries all over Europe. They provide

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investment banking services and financial support to Chinese ODI. They are also to the forefront of the

liberalisation of the Chinese Currency RMB with four branches (London, Luxemburg, Frankfurt and

Paris) acting as RMB settlement centres in 2014.

China Export & Credit Insurance Corporation (Sinosure). Since 2001, Sinosure has been providing

insurance cover not only for exports but also for investments. This cover provides a risk guarantee

against economic losses resulting from war, currency exchange bans, requisitions and breach of contract

by host country governments. It includes both equity and liability insurance.

3 Motivation of Chinese ODI in the EU

The majority of Chinese companies are motivated to invest in the EU by the same rational as other

foreign investors. They want to be active in the world’s largest single market. They want to expand their

global production and sales chains, upgrade their position on the supply chains and benefit from the

advanced technology, brands and human talents offered by the EU. SOEs, however, often have an

additional agenda as implementer of the state’s ODI policies, investing in sectors of strategic importance

to China.

3.1 The Impact of the global economy and the economy of EU

As pointed out in section 2, we see different patterns and investor behaviour at the pre-crisis, crisis and

post-crisis stages. The global crisis and euro crisis provided Chinese companies with a major opportunity

to invest in the EU. Chinese companies have learned lessons and gained experience and will gradually

become mature investors in the EU. For instance, Chinese ODI in the EU real estate sector saw great

growth in 2014 and this trend is just beginning as the RMB remains strong and the euro declines.

Chinese investors looking to allocate capital abroad fall into two camps. The first group made up of

private companies investing according to their focus and institutions deploying capital to gain a higher

yield and spread the cost of debt. The second group consists of Chinese real estate developers that are

scouring major European cities for land and construction opportunities to serve a domestic Chinese

client base.

3.2 Pressure from the home market

China’s GDP continued to slow in 2014 (7.4%) and the new NPC foresees even lower growth for 2015

(7%) that will allow it to face other challenges such as its massive environment issues. Meanwhile, the

domestic market has been facing more and more challenges. The pitfalls of China’s global value chain

were not a major cause for concern in the past, as increasing productivity, surging demand and greater

economies of scale allowed firms to maintain profitability. However, this position is increasingly

unsustainable. Shifting costs for labour and other inputs and a stronger RMB have put pressure on low

value-added light manufacturing activities, forcing Chinese producers to move up the value chain into

higher value- added products. This domestic situation has put pressure on Chinese companies to upgrade

and diversify their investments.

Increasing sales under the old model will also get more complicated. Urbanization and a bigger middle-

class have matured the Chinese consumer; domestic demand gets more “picky”. Producing higher value-

added goods such as cars and luxury items requires a different approach to that of selling cheap shoes

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as competition from both domestic firms and foreign multinationals with strong brands and vast

experience is tough. Companies with vision have understood that ODI in the EU will help them over the

next years to branch out from midstream manufacturing and move into the more value added profitable

segments.

3.3 Strategic drivers of Chinese companies

General drivers: A common motivation of Chinese SOEs is strategic asset seeking. SOEs are still the

backbone of the Chinese economy and they carry out government ODI policies as an additional agenda.

For instance, one important mission of SOEs’ ODI is to secure the supply of strategic natural resources

for China, now the world’s second largest economy.

Diverse motives in Different Region

Rather than “divide and conquer” as some would claim, Chinese investors have different motives and

strategies in different part of the EU. For instance, in the UK, market-seeking is the most important

motive of Chinese investors, followed by services and R&D. Chinese group, Hony Capital bought Pizza

Express for £900m in July 2014. The main goal will be international market expansion of PizzaExpress,

especially in China, along with Hony Capital’s domestic enterprises. In countries such as Germany,

France and Italy, intangible asset seeking such as design and famous brands dominate the scene.

ChemChina’s recent acquisition of Pirelli with a deal value of €7.1bn was primarily for the company’s

technology and brand. While in the CEE, as a part of the NSR and 16+1 initiatives (explained in section

3.5 below), Chinese investors mainly seek infrastructure contracts, which sometimes can be troublesome.

China’s Covec construction firm, for example, won the bid to build two sections of Poland’s main east-

west highway in 2009 but the contract turned into a disaster because of Covec’s inexperience in the EU

(strict regulations, higher costs) and the Polish government in the end cancelled the contract in 2011.

3.4 The appreciation of the RMB and large USD reserve

With low yields on treasuries and a weak dollar, China sought to diversify into more profitable assets.

Whilst China still maintains tight restrictions on cross-border financial and portfolio investments and

the Renminbi lacks full convertibility, ODI are being facilitated by looser Chinese regulations, huge

dollar reserves and a desire for better returns.

In the crisis period, the dollar denominated foreign exchange reserves lost value with Quantitative

Easing (QE) in the US. China, therefore, with its huge dollar reserves wanted to diversify into more

profitable asset classes such as those in the EU. The economic rebalancing process also requires a

correction of China’s undervalued exchange rate, which is already under way. A stronger renminbi

makes overseas acquisitions cheaper for Chinese investors, another incentive to make the step abroad.

In 2014, with four new RMB settlement centres in the EU, Chinese investors got better value from their

ODI deals in the EU because of the hardening and liberalized RMB. The capital scarcity that used to

handcuff Chinese ODI in the past is no longer an issue for many investors. Many Chinese investors now

have the motive, capital and financial support to come to the EU by virtue of strong cash positions.

3.5 New policy incentives: New Silk Road and 16+1

Xi Jinping first revealed the initiative of New Silk Road in 2013 and since then it has become a

cornerstone of China’s public diplomacy. The initiative of establishing two logistics corridors—the Silk

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Road Economic Belt and the 21st Century Maritime Silk Road (one belt, one road)—has stimulated

numerous specific initiatives that has implications for China-EU relations, especially with regard to the

CEE countries along the NSR routes.

When there are regular trains between China and Europe, the Northern route of NSR could become a

new transport and logistics artery extending to Western Europe through CEE. Based on the Greek Port

of Piraeus and the railway connecting Belgrade and Budapest, the Southern route could be a China-

Europe land-sea express line too. Two agreements related to the construction of the Belgrade-Budapest

High-Speed Railway (HSR) were signed during the Belgrade Meeting in December 2014, marking a big

step forward in realizing the NSR initiative in the CEE part.

The NSR initiative has already stimulated Chinese ODI projects. Nearly $8.5 billion has been already

allocated from China’s $10 billion credit line for the CEE region. The China-CEE Investment Fund,

initially backed by $500 million from China’s Eximbank, had invested approximately $200 million by

the end of 2014. Furthermore, China entered the European nuclear energy market by agreeing to an

estimated €6.5 billion deal to finance and build two nuclear reactors in Romania. Another high-profile

agreement concerns a €687 million loan-and-construction deal between China and Montenegro to build

a highway from the Adriatic Port of Bar to the Serbian border. Lastly, the establishment of the China-

CEE Permanent Secretariat for Investment Promotion, based in Warsaw, suggests that considerably

more Chinese ODI may come to the CEE in the immediate future.

4 Implications of Chinese ODI in EU

The above analysis suggests that Chinese ODI in Europe still has room to grow. Chinese domestic

economic developments and the economic relationship between the EU and China support a positive

outlook on sustaining elevated levels of Chinese ODI in the coming years.

Domestically, with the continued growth of the Chinese economy (estimated 7% in 2015) and the rapid

internalization of Chinese companies, Chinese investors will grow “richer” and more mature. Chinese

ODI will therefore become every more diversified: more private investors; more capital involved in

Greenfield investment; more host countries and sectors targeted.

Relations between China and the EU (and its member states) are anticipated to remain stable in the

coming years. In March 2015, a number of EU member states, including the UK, Germany and France,

joined the China-led Asian Infrastructure Investment Bank (AIIB). The participation of European

countries was not only because of the economic benefits that would accrue but also to avoid Chinese

dominance in the organisation.

However, the EU also has various concerns with regard to increasing Chinese ODI in the EU.

4.1 Debate on an open or a closed door

There has been a debate in the EU as to the desirability of allowing Chinese investment in sensitive

sectors such as telecommunications infrastructure, nuclear energy. Some European leaders are strong

advocates of an “open-door policy” to Chinese investors. Manuel Valls, the French prime minister, said

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“France is more open than ever to China” during his visit to China in January 2015 when he and Li

Keqiang, also supervised the signing of a deal between EDF and Chinese nuclear operator CGN. British

Prime Minister David Cameron also said he was “not embarrassed that China was investing in British

nuclear power, or has shares in Heathrow airport or Thames water”, during his visit to Beijing at the end

of 2013.

There are, however, some opposing voices including in France, who argue it is counter-productive in

the long run. For instance, when China announced it was investing in a new Brittany dairy factory (in

order to export powder milk to China), local politicians said workers thought their production facilities

were being taken away by a foreign power. Many French trade unionists opposed the sale of Toulouse

airport to a non-European investor.

4.2 Competition among member states:

Some EU member states compete to attract Chinese ODI in order to revitalise their economies and this

trend is likely to continue in the coming years. Some worry that the financial crisis and the recent

development of CEE-China investment pose the risk of a race-to-the bottom game among these states

in their immigration policies towards China. Countries in southern Europe are tripping over themselves

in a competition to woo wealthy Chinese investors looking to buy property in exchange for a residence

visa. Greece, which rolled out a programme in 2013, offers renewable five-year residence visas to

foreigners who spend at least €250,000 on residential real estate. The Greek investment requirement

followed those of other Southern European countries (Portugal requires minimum €500,000 and Cyprus

€300,000) who offer similar immigration programmes involving real estate. And

In CEE, Budapest has also become increasingly popular among Chinese rich individuals. EU citizenship

can be fast-tracked under Hungary’s investment immigration bond programme, which is exclusively

designed for Chinese nationals (minimum purchase is €250,000 with an additional administration fee of

€40,000). These visa regimes were designed to attract businessmen who will not settle in the EU but use

these residence permits to gain easier access to the EU. In the long run, these immigration policies may

attract not only the “non resident” Chinese businessman but other Chinese immigrants and this could

create social problems for the EU as a whole.

Another danger would be that there might be a kind of pro-China lobby with a state, which relies on

Chinese ODI blocking any unanimous decision against China in the EU. For instance pro-China

lobbying was a factor in deciding the “peaceful” settlement of the solar panels and telecoms subsidy

cases in 2013-2014. Although Chinese investment is not yet important enough in most Member states

to make a big difference, its fast growth could be of greater importance in future.

4.3 Security issues.

The growing importance of Chinese ODI also poses a number of security concerns in the EU. Especially

troublesome to the EU. 1) Increasing Security Budget. In the newly announced Chinese national

budget (March 2015), funding for national security increased by 10%. This increase in defence spending

is hardly shocking for a major emerging power and China’s annual spending is still less than one-third

of that of the US. Even the security–minded Member states like the UK do not appear have a problem

with Chinese investment in advanced telecommunications or nuclear power but if the security budget of

China continues to grow rapidly in the near future, it will cause more concern the EU. 2) Different

13

Political Regime. China is an authoritarian state with different values and commercial norms to the EU

and the policy-driven, non-commercial motives of SOEs’ investment create special concerns in the

EU .3) Foreign policy. The Ukraine crisis has pushed Russia more towards China. There is a potential

China and Russia axis that could affect EU interests. 4) Red record. China has a troubled record on its

export controls and it also has a reputation as a major proliferator of sensitive technologies to rogue

regimes such as Iran, North Korea, and Pakistan. This raises the potential for discord over the

obligations of China SOEs in Europe. The EU level BIT will put some sectors “off limits” to Chinese

ODI, as member states legislation does already. 5) Espionage. China is considered a heightened threat

for economic and political espionage by the intelligence communities in Europe and US. 6

Despite China’s efforts to improve its image in the EU and the rest of the world, the country still remains

rather unpopular in most European countries. For example, according to a survey conducted in 2013,

only 28% of Italians (27% in 2007) and 28 %of Germans (34% in 2007) have favourable opinions of

China. 7 Italy and Germany are among Europe’s largest recipients of Chinese ODI. Germany where

there is decreasing popularity of China is China’s top European trading partner. Misunderstandings in

politics, culture and people remain high. China still faces huge obstacles in growing its attractiveness as

an international investor.

European leaders therefore tend to deal with Chinese ODI diplomatically in order to keep attracting it

and at the same time maintain their own popularity. European politicians still have a hard time in

explaining to their voters that China—a country with a poor human rights record and rule of law—is

actually a powerful and fair investor that will help revive their economy and that will continue to be an

active investor in the EU.

5 Policy Recommendations

5.1 Investment Diplomacy

China is no longer willing to limit itself to Western dominated international institutions. It is therefore

currently building a broad range of parallel alternative mechanisms that bypass the post-Cold War order.

The EU remains the biggest single market and “amicable” region that China plans to diverse its

investment to. The EU has its leverage in investment policy and it should continue using investment

diplomacy to attract higher quality Chinese ODI into the EU to revitalise its economy.

The ongoing BIT negotiation and the current debate on granting China market economy status are two

of the main strands in investment diplomacy. The cards that the EU has are not only important for

investment relations but also the overall EU-China relationship. This investment diplomacy also lends

itself to the prospect of better international coordination for the management of emerging market ODI.

By standardizing its internal approach, Europe maximizes its role in joint efforts to discuss competitive

neutrality, state capitalism and other concepts.

6 See Hanemaan, T. & Rosen, D.H., 2012. China Invests in Europe.

7 See the survey: Attitudes toward China. http://www.pewglobal.org/2013/07/18/chapter-3-attitudes-toward-china/

14

5.2 Keep the door open but enhance national security screening.

Europe has a long and well-deserved reputation for openness. This should remain towards Chinese ODI.

Risking investment protectionism by imposing additional barriers to Chinese ODI based on economic

security considerations is not the best strategy. A unified policy towards all FDI in the EU with

rationalized and systematized policy for handling the concerns that might arise over Chinese ODI is the

best strategy. Member states and European companies will embrace Chinese ODI if they are certain that

a thorough and EU-wide process to address concerns is in place, guided by the principles of openness

and non-discrimination.

At the same time, without interfering in member states national security independence, a common

European concept and legislative framework for investment review will be helpful to screen some of the

sensitive FDI in the EU (similar to the US CFIUS). Europe’s current fragmented approach to screening

foreign investment for security threats risks a race to the bottom. The current national based investment

review may fail to address pan-European security risks, or offer room for protectionism in the name of

security.

5.3 A better investment promotion regime.

An EU-China bilateral investment treaty will help to address market access problems facing EU

companies in China, but it will be of limited influence in attracting high quality Chinese ODI to the EU.

In the long run, a tailored and EU-wide investment policy that helps Chinese investors overcome the

hurdles they have in entering mature markets would be helpful in sustaining Chinese ODI flows. But

for now, it is difficult to see much enthusiasm in the member states, which have important vested

interests in the current, national-based system, for a bigger role for the EU. Perhaps a step-by-step, issue-

by-issue approach, in which the EU would try to reach a consensus on how to resolve individual trans-

national problems identified by Chinese investors, might be more promising.

Annexes

Annex 1 Chinese ODI in EU by country (2014)

Source: Baker & McKenzie / Rhodium Group

Annex 2 Main sectors of Chinese ODI in EU in 2014

COUNTRY VALUE

1. UNITED KINGDOM $5.1bn

2. ITALY $3.5bn

3. THE NETHERLANDS $2.3bn

4. PORTUGAL $2bn

5. GERMANY $1.6bn

15

Source: Baker & McKenzie / Rhodium Group

Annex 3. Top 10 Chinese ODI Deals in the EU by Value in 2014($millon)

DATE TYPE EUROPEAN

TARGET

CHINESE

ACQUIRE

VL OF

TRANAC

TION

TARGET

COUNTR

Y

INDUSTRY

11-14

M&A

CDP Reti

State Grid Corp.

2,792 Italy

Energy

10-14

M&A

Nidera NV

COFCO Corp.

2,000 NL

Agriculture

and Food

07-14

M&A

PizzaExpress

Hony Capital

1,483 UK

Agriculture

and Food

05-14

M&A

Caixa Seguros )

Fosun International

1,380 Portugal

Finance and

Business

Services

01-14

M&A

Chiswick Park

China Investment

Corp.

1,285

UK

Real Estate

02-14

M&A

Peugeot SA

Dongfeng Motor

1,100 French

Automotive

06-14

M&A

10 Upper Bank

Street building

China Life Insurance

740 UK

Real Estate

10-14

M&A

Hilite

International

GMBH

AVIC

629 Germany

Automotive

10-14

M&A

Espirito Santo

Saude

Fosun International

611 Portugal

Health and

Biotech

12-14

M&A

Ansaldo

Energua Spa

Shanghai Electric

532 Italy

Industrial

Equipment

Source: Baker & McKenzie / Rhodium Group

Annex 4 Chinese M&A in EU by country (2015 First quarter)

SECTOR VALUE

1. AGRICULTURE AND FOOD $4.1bn

2. ENERGY $3.7bn

3. REAL ESTATE $3bn

4. AUTOMOTIVE $2.2bn

5. FINANCE AND BUSINESS SERVICES $1.7bn

16

Source: Thomson One Banker

Annex 5 Top 5 M&A deals in EU (2015 First quarter)

Source: Thomson One Banker

TARGET NATION RANKING VALUE ($MIL)

ITALY 10,050

NETHERLANDS 3,072

UNITED KINGDOM 1,324

SWITZERLAND 1,188

GERMANY 113

SPAIN 106

DATE

ANNOUNCED

TYPE TARGET NAME TARGET

NATION

VALUE OF

TRANSACTION

INDUSTRY

03/22/2015 M&A Pirelli & C SpA Italy 7755 Automotive

03/31/2015 M&A Philips-LED

Components Bus

Netherlands

2900

Industrial

Equipment

02/10/2015 M&A Infront Sports & Media

AG

Switzerland

1189

Sports

03/17/2015 M&A Wanfeng MLTH

Holdings Co Ltd

United Kingdom

216

Automotive

02/05/2015 M&A Soil Machine Dynamics

Ltd

United Kingdom

177

Machinery