Chinese investment in Europe has soared from €6.1bn (£4.8bn) in 2010 to nearly €27bn in 2012, according to figures from Deutsche Bank. This is expected to increase steadily in the next decade.
While the total annual Chinese investment in Europe has fallen from the peak years following the debt crisis, the UK became the prime European destination for Chinese money in 2012. China has shifted investment from resource-rich countries in Africa, Asia and Latin America to partnerships in developed countries.
Italy has seen a surge of investment; half of the $7bn (£4.3bn) of Chinese investment there was made in the first half of 2014, according to Deutsche Bank. European utilities are a popular target, since they offer Chinese state-owned investors safe, long-term investments that provide steady, predictable returns.
In July, China’s state-owned utilities company State Grid bought a 35 per cent stake in CDP Reti, a subsidiary of Italy’s state financing agency that controls Italy’s electricity grid and gas distribution. China also acquired stakes in Fiat Chrysler Automobiles, Telecom Italia and energy groups Enel and Eni earlier this year.
According to Deutsche Bank, Portugal, which saw a rise in 2011 and 2014 of foreign direct investment (FDI) from China, has sold large minority stakes in utilities and infrastructure operators to Chinese companies, whose investment has accounted for 45 per cent of the €9.2bn Portugal has raised from state sell-offs in the past three years. China is now Portugal’s most important source of FDI.
The Portuguese government, along with those of Cyprus, Greece, Hungary and Spain, is actively encouraging Chinese entrepreneurs into their countries by offering so-called ‘golden visas’, whereby Chinese homebuyers are offered residency permits in return for buying local property.
In the UK, Chinese companies own stakes in Heathrow and Manchester airports, North Sea oil and Thames Water. They are also likely to participate in the Hinkley Point C nuclear power plant.
Some politicians have expressed concern about giving Chinese companies access to sensitive energy and telecommunications infrastructure, such as the equipment supplied by Chinese telecoms group Huawei to BT and other telecoms firms.
So, do strategists and economists see the growing investment being made by China in Europe as a threat or an opportunity? Can investors follow Chinese money and invest in companies that might benefit?
Maarten-Jan Bakkum, ING Investment Management’s senior emerging market strategist, says the Chinese authorities have been encouraging their companies to invest more abroad in order to diversify businesses and investment portfolios, but also to secure strategic access to vital infrastructure and raw materials.
He says Chinese investments in Europe have so far remained relatively modest – compared to Chinese investments in Africa and Latin America – and, as such, have not really been a threat.
“Investors should keep in mind that maximising investment returns is not the main objective of Chinese companies when they invest abroad,” he explains.
“Trying to benefit from Chinese investment decisions in Europe, by following or anticipating them, is a risky strategy.”
James McCann, Standard Life Investments’ OECD economist, emphasises that the amount of FDI from China to Europe actually remains small at present.
“China contributes just 0.7 per cent of total FDI in Europe [the EU] – a fraction of that carried out by neighbouring Switzerland, for example. Accordingly, we should not overemphasise the importance of this driver for the European economy.”
He says the clear increase in the flows from China into Europe between 2010 and 2012 may, in part, reflect the effect of the eurozone crisis, as falling asset prices and disruptions in the local credit channels increased the attractiveness of European assets and FDI to outside investors.
“However, preliminary data suggest that investment flows slowed in 2013, probably because the Chinese economy itself has weakened. We should, therefore, be careful around interpreting the strength of the increase between 2010 and 2012.”
So, do economists dismiss the danger of Europe becoming overreliant on Chinese FDI – and do they see the Chinese as long-term or short-term investors?
Mr Bakkum thinks Chinese FDI into Europe has been too modest to think about overdependence. In general, he says, Chinese investments are strategic, rather than aimed at short-term capital gains.
Mr McCann agrees. “In aggregate, the EU is running a current account surplus that makes it less vulnerable to cross-border flows or changes in foreign investor appetite for its assets. Furthermore, FDI tends to be less prone to sudden reversals than other capital inflows,” he says.
If Chinese investment is not deemed a threat, could it assist European countries’ economic growth?
Mr Bakkum says good investments can help, particularly in hard-hit countries in southern Europe. Chinese FDI can play a role in reinvigorating economies where governments lack the resources. So far, however, he says Chinese investments have not been large enough to make a decisive difference.
Mr McCann believes FDI can be positive if it is channelled into new infrastructure or other investment projects.
“These should boost demand in the short term, while also improving potential growth further ahead. Again, we must be cautious around the size and scope of any investment boost. In 2012, the flow of FDI from China amounted to just 0.06 per cent of EU GDP.”
