China loves a crisis

Por • 22 sep, 2012 • Sección: Internacionales

By Benjamin A Shober

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 Europeansgreeted 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

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