Wanting Chinese investment is one thing;
needing it is another. As the euro-zone crisis has
deepened, one of the counter-intuitive outcomes
thus far has been the increased investment by
Chinese companies and the central government into
European assets. The Rhodium Group, a New
York-based research firm that tracks outbound
Chinese investment into North America and Europe,
published a study this month that showed how
significant this increased investment has been.
According to Rhodium, outbound foreign
direct investment (OFDI) from China into Europe
increased 10 times from 2004 to 2011, from US$1
billion in 2004 to $10 billion in 2011. Chinese
OFDI into Europe tripled in the past 12 months,
precisely when the euro-zone crisis was at what
most hope was the apex of the region's financial
uncertainty and potential economic risk. What
explains this massive increase in Chinese OFDI,
and how have Europeans
greeted these
investments? After all, many Europeans are no less
skeptical about China than their American
counterparts.
China's increased investment
in Europe certainly owes much to the historically
attractive valuations the euro-zone crisis has
made possible. One example of this was Geely's
2010 purchase of distressed Swedish automaker
Volvo for $1.8 billion. Considering Volvo had lost
more than $2.5 billion the previous two years, it
was one of many companies eager to find a Chinese
investor with deeper pockets and longer-term
aspirations to move up the value chain. Similar
examples have already taken place in European
automotive-parts manufacturers, as have Chinese
acquisitions of European clean-tech and
construction companies.
As the Rhodium
report notes, valuation is not the only reason
Chinese firms seek out investment opportunities in
Europe. "Chinese investors have the same diverse
motives for coming to Europe as other foreign
investors do: to sell products in the world's
largest single market, expand their global
production chains, and tap into a rich base of
technology, brands and human talent." Valuations
in Europe may have expedited Chinese OFDI, but
they do not single-handedly explain the massive
increase of Beijing's investments into the euro
zone.
While much of what drives China's
OFDI continues to be the country's pursuit of
natural resources, its investments in Europe also
shed light on how seriously Chinese businesses
take the "go out" mandate given to them by their
leaders in Beijing. China's national champions are
eager to move up the supply chain, offering
higher-value goods instead of the low-priced,
high-labor-content manufactured items that have
characterized the country's economy to date. Many
Chinese firms also anticipate changes to European
regulatory schemes that may seek to protect infant
or distressed industries in Europe by establishing
local content guidelines, ones impossible to get
around as long as Chinese firms must export into
the euro zone.
This year, the sovereign
wealth fund the China Investment Corp announced
that $30 billion had been set aside specifically
for investments into troubled European assets.
Officials outside China, such as Singapore's Lee
Kuan Yew, have urged China to act aggressively to
bolster the euro zone by purchasing European
bonds, German ones specifically, in the hopes
China can support one of its most important export
economies. The thinking goes that if China invests
in Europe - Germany specifically - enough to
ensure that Germany's borrowing costs stay low,
Berlin can act more aggressively to stabilize the
euro zone.
Whether China's state-sponsored
investment strategy will be adequate to accomplish
this is one question. Whether Germany has the
political will or the national interest in taking
this all on remains the much more pressing and
pivotal question that remains to be answered.
One of the more shocking insights from the
Rhodium Group's report is not only the massive
increase (by three times) of Chinese OFDI into
Europe between 2010 and 2011, but that in 2011 it
was more than twice the size of China's investment
into the United States (about $4.5 billion into
the US, versus slightly less than $10 billion into
the euro zone). Even more interesting, after five
consecutive years of Chinese OFDI into the United
States increasing, 2011 marks the first year in
half a decade that it decreased.
US
attitudes toward Chinese investment are in some
ways more complicated than European attitudes
about the same. This is not to say that European
attitudes will forever remain benign. Rhodium's
report notes that four problems could present
themselves with China's massive increased
investments in Europe: "large inward FDI presence
could expose Europe to China's wild macroeconomic
swings ... Chinese firms [could] ship newly
acquired assets back to China ... China's firms
[could] operate and invest more freely in Europe
than their EU rivals can in China ... Chinese
firms accustomed to lax regulations at home will
bring poor labor, environmental and other
practices to Europe, and EU governments will be
too eager to attract jobs and investments to
robustly hold them to account".
Yet if
necessity forces European countries and businesses
to continue seeking Chinese investment, these
risks may seem trivial when compared with the
larger problems of not having any accessible
capital regardless of the source.
The US
has not yet reached a point where it needs Chinese
capital as badly as the euro zone does.
Consequently, attitudes toward inbound investment
from China tend to be more politically loaded,
subject to ambiguous concerns about "national
security" that in effect shut down a coherent
conversation on the great good Chinese investment
might do if it were properly directed. Americans
still remember their frustrations over feeling
that their country had slipped to second-class
status when Japanese investment into the US
massively increased in the early to mid-1980s. The
Jimmy Carter-era economic malaise carried over
into feelings of insecurity over "needing"
Japanese investment, let alone structuring
government policies to pursue foreign investment.
Today, pushback against Chinese
investments into the US has become commonplace,
first noted in China National Offshore Oil Corp's
infamous failed bid to purchase Unocal in 2005,
and now any time Huawei or another Chinese
telecommunication equipment company attempts to
purchase US assets. Unlike Japan, China is viewed
with suspicion because its political values poorly
align with those the United States holds dear.
Where Japan was seen clearly by most Americans as
a strategic economic competitor but not a
national-security or ideological threat, the same
thing could not be said of China.
The idea
that the US needs Chinese investments angers many
Americans who resent needing outside money in the
first place, and who remain frustrated over China
as the predominant country who has stepped up to
absorb America's chronic need to issue debt.
Unfortunately, the US government's need
for the Chinese government to continue purchasing
Treasuries gets wrapped up into more balanced and
necessary conversations about how to attract
Chinese money into sectors of the US economy that
could benefit from additional investments -
specifically, those that are under-capitalized, or
could benefit by leveraging domestic manufacturing
and personnel capabilities in conjunction with
Chinese firms that need to move forward in what
remains their most important export market, the
United States.
It also comes as no
surprise because of suspicions that today,
America's pursuit of Chinese investment comes in
spurts: Congressional hearings wrestle with the
implications to Chinese holdings of US Treasuries
(notwithstanding the more pressing question of why
the US needs to issue so much debt in the first
place), at the same time governors from around the
country head to China in an effort to court
investments for their economically distressed
states.
The US and China perversely share
one of the main criticisms leveled against China's
policymaking and enforcement regimes: the broad
differences that exist between what the central
government promulgates and what local governments
implement. In China this frustration most commonly
presents itself over formal policies. In the
United States, the disconnect between political
rhetoric from Capital Hill and official state-led
trade delegations provokes no less confusion for
Chinese companies and policy institutions than the
similar disconnect between Beijing and its
municipalities does for American operators.
Where the euro-zone crisis has increased
the opportunities for deeper engagement with
China's government and businesses, sparking
massive increases in China's OFDI into Europe,
would a similar structural financial crisis have
the same effect in the United States? Or would it
further sour US attitudes, offering up cheap anger
over China's investments as a tonic for much more
painful and expensive changes the United States
should have pursued that would have made China's
investment dollars unnecessary?
Unlike
Europe, the US may lack the self-awareness to see
the many ways Chinese investments could reinforce
and reinvigorate parts of the national economy
that badly need assistance, precisely as China's
"go out" strategy makes exactly these sort of
investments more likely than ever.
Benjamin A Shobert is the
managing director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis
for companies looking to enter emerging economies.
He is the author of the upcoming book Blame
China and can be followed at
www.CrossTheRubiconBlog.com.
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