EIU: Chinese investment in the new member states of the EU is still on a very small scale, but looks set to rise, with both Chinese and central-east European governments keen that it should do so. The motivation is clear-cut: securing market access, technology transfer and optimisation of supply networks. The search for good projects is on, but there are reasons for caution on both sides.
Chinese outward foreign investment is driven by two sets of factors. First, financial: with US$3.2trn of hard currency reserves, China has an incentive to push foreign investment of all kinds, in order to improve returns on assets, and as a hedge against currency fluctuations. The bulk of Chinese reserves are kept in the form of government and quasi-government debt, but the China Investment Corporation held US$410bn of assets at the beginning of 2011, to be used for financial and direct investment, and with a policy of increasing the weight of direct investment. Finally, private individuals in China hold some US$9.6trn of investible wealth, about 20% of which is invested abroad.
Second, the real economy: as an emerging economy with a high growth rate but a limited domestic resource base, China has a strong incentive to invest in raw material and energy production in other countries of the world—usually in developing countries, but also Russia. Market access considerations may also provide good reasons to make direct investments, particularly in developed countries with big domestic markets. Direct investments in mid- and high-tech sectors in the developed economies are largely driven by a desire to use foreign direct investment (FDI) as a channel of technology transfer back to China, as in the cases of the Geely acquisition of Swedish Volvo Cars, and the recent acquisition of Norwegian Elkem by the China National Chemical Corporation. But in supply-network-based industries like automotive, Chinese FDI can sometimes operate as a channel to bring components made in low-wage China for assembly in higher-wage countries. This is essentially exactly what European, US and Japanese car firms do when they source components from emerging countries. Finally, there are a few cases where the Chinese investing company is a world technological leader, opening up scope for technology transfer from the Chinese company to the subsidiary.
Europe as a target for Chinese investment
In 2010 the stock of Chinese FDI in the EU totalled €6.7bn (US$8.6bn)—just 3% of the world total, and only around 9% of the value of FDI from the EU in China. But FDI flows from China increased from just €100 m in 2009 (there were net repatriations in 2008) to €700m in 2010, 10% of total Chinese outward FDI flows in that year. Provisional estimates suggest that it increased sharply again in 2011. So while Chinese FDI in the EU is still a relatively small investment flow, it is increasing fast. One other striking feature of Chinese FDI in Europe is that, while it is dominated by big corporates, a small but growing proportion of the total assets involved belong to small, (Chinese) family firms.
Chinese investment in central-east Europe
Most of the factors cited above (apart from technology transfer back to China) also drive Chinese FDI in the central-east European EU member states (CEE). Most obviously, investment in CEE gives Chinese firms untrammelled access to the EU market. But we should not overemphasise this factor—China is also showing a great deal of interest in investment opportunities in western Balkan countries with no immediate prospect of EU membership, including Serbia, Montenegro, Bosnia and Hercegovina and Macedonia. The most striking examples of Chinese FDI as a channel for transfer of Chinese technology to the region are the Chinese telecoms company Huawei’s investments in Hungary and Romania. With the development of the Huawei European Design Centre in Romania, a pattern of two-way technology transfer could be established here in the future. The Great Wall Motors car-assembly plant which went into production in Lovech in Bulgaria earlier this year is a classic example of ‘reverse outsourcing’, with most of the components coming from China.
However, just as Chinese FDI in the EU as a whole is a small item within the global investment picture, so Chinese FDI in the new member-states of the EU is a very small item within the EU picture. The proportion of Chinese FDI accounted for by small, family firms, usually working in low-tech sectors, is higher in CEE than in the EU as a whole. Hungary is the only CEE country with a stock of more than €1bn of Chinese FDI (largely on account of the €1.1bn takeover of an isocyanate producer, BorsodChem, by Wanhua in 2011).
During 2012 China has signed a number of new investment agreements with Hungary. And in Romania negotiations continue on possible Chinese investment in the Cernavoda nuclear plant.
In Poland, cumulative Chinese FDI stands at a modest US$250m (€195m). There is plenty of political will on both sides to make these figures grow. On the occasion of his visit to Poland in April 2012, the Chinese prime minister, Wen Jiabao, announced the setting up of a US$10bn credit line for joint investments in the areas of infrastructure and technology, and a US$500m investment fund for CEE. The Polish side has responded positively, and in October 2012 more than 30 Chinese companies participated in a China-Poland Trade and Investment Co-operation Forum in Warsaw.
There have been some disappointments
Against these bright prospects must be weighed a number of disappointments in relation to Chinese involvement in the CEE economies. In Poland, the picture is clouded by the disaster of the A2 highway. The tender for construction of the new road was awarded to a Chinese construction firm, COVEC. The firm fell down badly on the job, and the road had to be completed by Polish firms. The Chinese side has been accused of dragging its feet on investment projects in Hungary, and has notably failed to step in to save Malev, the Hungarian national airline, from bankruptcy. These stories reflect two important points. Chinese capabilities are not limitless. And China is being as cautious in CEE as it has been in relation to other investment destinations. However, there are good, practical reasons why Chinese investment in CEE should expand and prosper. If negotiations on an investment accord between the EU and China start ‘as soon as possible’, as agreed between the two sides at their September 2012 summit, China can look forward to an easier passage through the formalities of investment in CEE. But the same will be true for the other EU countries as well. The key to the future of Chinese investment in the new member states is good projects, and these still appear to be at a premium.