What do a number of Italian football clubs, Greek ports, German enterprises, and prime UK real estate have in common? They were all the targets of Chinese investment in the last few years.
The dramatic influx of investment flowing from China has emerged as a major trend across Europe’s post-crisis, growth-craving economies, albeit one that is causing both excitement and fear. Although European leaders have issued numerous public statements regarding their desire to partner with China and Chinese companies, concern continues to grow in some European capitals amid fears that Chinese shopping may drain Europe’s strategic industries by cherry picking “crown jewel” technologies and brands at a financial-crisis induced discount. These concerns are amplified by a lack of reciprocity, as Chinese investments are of often made in sectors restricted to foreign investors in China.
Although negotiations regarding China’s growing appetite for European technology have been ongoing, at last month’s EU summit the newly-elected French President Emmanuel Macron called to curb this trend and hand more power to EU institutions to control Chinese takeovers. Seeking support for what he has called a ‘protectionist agenda’, Macron’s proposal was backed by Germany and Italy. EU Commission President Jean-Claude Juncker is reportedly working on a new rulebook to deal with Chinese takeovers which could be presented in September. Germany’s cabinet recently issued a new directive allowing ministers to scrutinize deals which affect critical infrastructure. However, EU-wide measures will face opposition from certain Member States, such as Spain, Greece and Portugal, reluctant to hinder a steady flow of Chinese yuan into their economies.
Concerns regarding Chinese investment are not just held by European leaders as the majority of EU citizens also express concern when it comes to Chinese companies. APCO Insight, our internal research team, conducted a survey across opinion leaders from 12 European markets. The research, which was conducted from December 2016 to February 2017 in the UK, Germany, France, Italy, Spain, Netherlands, Sweden, Belgium, Poland, Czech Republic, Hungary and Finland, found that citizens express very unfavorable impressions of companies from China. Thirty-eight (38) percent of European interviewees held an unfavorable perception of Chinese companies, compared to just 5.4% who had negative perceptions of companies from Germany and 7.5% who felt unfavourable about companies from the UK.
Clearly, Chinese firms face some significant barriers to their European investment goals. However, when examining the inflow of investment, it is important to remember that Chinese investors are not all pursuing European targets for the same reason. But who are these Chinese investors and why are they investing in Europe? Understanding the different types of Chinese investors requires a closer look at their motives, which can be categorized into three broad categories:
“Get my money out of China”
China now has the second-highest number of millionaires in the world and many high-net-worth individuals are diversifying to include European assets. Despite tightening capital outflow restrictions, in 2016, China saw an estimated $725 billion in net capital outflows. That is more than China’s balance of trade surplus over the same period. Many high net-worth individuals aiming to diversify their investments are putting their money in Europe. The Chinese stock market has recently been unstable, Chinese banks provide limited returns on saving and the real estate market is increasingly looking like a bubble. First tier cities such as Beijing, Shanghai and Shenzhen are among the most unaffordable housing markets in the world (along with Hong Kong) on an income to housing price ratio. When considering the 70-year maximum property purchase lease, it’s not surprising that those able to diversify their assets are looking at European investment options. Many high net-worth individuals also plan to migrate overseas and large investments may facilitate access to foreign residency.
In Europe, for China
The majority of Chinese firms investing in Europe are actually looking to increase their competitive standing in China with European technology and brands. The acquisition of Volvo by Chinese carmaker Geely, for example, was done with its domestic market in mind. Geely’s purchase enabled it to bolster its image and upgrade its car manufacturing capabilities in China. China’s massive football fan base also drove the Chinese acquisition of AC Milan, FC Inter and Parma to name a few. Europe’s brands and technologies have enormous potential to act as catalyzers of innovation and to upgrade capacity in traditional sectors creating value and opportunities.
However, not all acquisitions are market driven. The Chinese government has an aggressive industrial upgrading agenda and at the center is the Made in China 2025 (MIC 2025) initiative, which sets ambitious market share targets across key industries. The acquisition of overseas technologies is key to meeting these targets. A remarkable example of this politically-driven trend is the prolific series of investments by state-owned ChemChina, which has acquired some of Europe’s largest companies; from Syngenta, the Swiss global agribusiness, to Pirelli, the Italian tire maker and KraussMaffei, the German chemical-process equipment maker.
The near takeover of the German chip manufacturer Aixtron by Fujian Grand Chip drew worldwide attention once it was clear Chinese government funds were behind the deal. Countries with many small and medium high-tech enterprises such as Italy and Germany are particularly vulnerable to China’s technology shopping spree, often unable to say “no” to above-market offers.
In Europe, for Europe
Fewer in number, but on the increase, are Chinese companies seeking to acquire European firms to secure access to the European market. In 2016 Chinese firms have entered European markets including gaming, aircraft leasing, travel websites and fashion. Meanwhile, larger Chinese conglomerates have long been taking steps to compete and become leaders in global competitive markets. Success in mature markets such as the EU and the United States is the final step for Chinese companies, and champions such as ZTE or Lenovo are proving to be true multinationals – investing and creating value around the world.
As China becomes more connected with the global economy, investments between the EU and China will only increase and create massive economic value for both ends of Eurasia. In some cases, however, politically driven Chinese investments could harm the competitiveness of European businesses and create market distortions. They could yet lead European countries embracing tougher protectionist policies. Legislators need to keep in mind the different motives behind Chinese investments as they assess proposed deals. In addition, Chinese firms should develop engagement strategies to help address any negative perception they may face.
For more on this topic
Watch this video of our colleague Amy Wendholt discussing the three things to know about Chinese Outbound Investment.
Written with the assistance of Alexander Polglase.