The state of relations between Europe and China on the issue of bilateral direct investments has recently become more and more delicate. Precisely since the end of 2017, which marked a milestone in Europe-China economic relations. For the first time ever, Chinese direct investment flows exceeded their German counterparts, traditionally the largest European investors in the Middle Kingdom. Even more significant than numbers, a single Chinese investment deal in Germany represented a turning point: a pillar of German industrial know-how, Kuka, one of the world’s leading manufacturers of industrial robots, was acquired by the Chinese Midea, a manufacturer of domestic appliances and air conditioners. Not incidentally, in September of the same year a set of guidelines were approved to introduce preliminary screening for inward investment in Europe, in strategic sectors such as ports, energy infrastructure or defence technology firms by State Owned Enterprises (SOEs) or state-controlled firms.
Lack of reciprocity in a number of Chinese sectors, the lack of transparency in foreign investors’ treatment in China, lack of information about the role of the Chinese government behind Chinese private investors, different rules and regulations for inward investors, are all major old-dated issues that contributed to create new momentum for reflection and discussion about the future stance of bilateral investment relations. Since 1999, when the Go Global strategy turned China into an important outbound investor (after being the largest recipient of foreign direct investments among developing countries for more than two decades), and increasingly so when China became a net foreign investor abroad in 2015, Europe has been a major destination for Chinese investing firms, especially the largest European economies where the great majority of their investments are concentrated.
Germany is the most important destination of Chinese investments. The United Kingdom follows with some distance with less than half of the investments directed to Germany but, at the same time, a number of M&A that is only slightly lower than Chinese M&A in Germany. The other European countries receiving a large number of investments form China are France, Netherlands, Italy and Spain. Chinese FDI in Europe are very concentrated not only in terms of destination countries, but also of target sectors. In particular, almost half of the Chinese investments is directed to only four industrial sectors: electronics, machinery and engines, communications and automotive. Moreover, the machinery and engines sector hosts the largest number of M&A, while Electronics and Communications sectors receive the largest amounts of greenfield-type FDI. The machinery & engines sector receives the largest shares of Chinese investments in Germany and the UK; in Italy and Spain the most targeted sector is electronics; finally, Communications is the top destination sector in France and in the Netherlands.
Speculations abound among business scholars and policymakers alike about which strategy is likely to inspire Chinese investors and whether the visible hand of the Chinese government, most likely than the invisible hand of the market, works behind the scenes to orchestrate those investment flows. The search for new markets and technology are clearly the major motivations behind Chinese investments in Europe, similarly to other foreign investments in the old continent. However, two elements make the Chinese nationality of investors very special and requires increased attention by recipient countries in Europe. First is the widespread role of the State behind investment decisions. The State might pursue other goals than profitability, such as market share, especially when the restructuring of the State owned and controlled enterprises (SOE) sector actually culminated into the creation of larger industrial conglomerates, with one firm being public and therefore often classified as privately owned in Chinese statistics. The entry of big groups with overcapacity on European and global markets has also biased competition. Moreover, top investors are also a rather concentrated group. Six investing companies have more than 10 deals, which increases the market power of investors.
Second, it has been agreed that foreign investors into the EU should offer the same home conditions to their EU counterparts abroad, which has never been and is still not the case in China. But there is a notable exception to this, e.g. the agreement reached by German chemical company BASF, in July this year, to build an integrated chemical complex in Guangdong, worth up to $10 billion by 2030. The news is that BASF would own the site without a local partner, which makes the deal an unprecedented case that runs counter to the traditional practice of forcing joint ventures with local partners with the aim of maximising knowledge acquisition and technological learning. If this case help to better understand the concept and contents of Made in China 2025 plan (aimed at making China the global leader in 10 high tech sectors by 2025), the lesson would be that a would-be technology leader cannot run the risk of disruption due to lack of control of supply chains. Together with an increase in the domestic content, the plan could also accommodate more foreign producers, more synergies and partners at home. This paves the way for a more constructive attitude in bilateral relations than the quest for naive unconditionality or plain reciprocity.
A further element was added to the debate about Europe-China investment relations in 2013, when China - which became that year the third largest foreign investor in the world - launched the Belt and Road Initiative to promote and finance massive investments in infrastructure and transport projects worldwide. Europe now hosts quite a number of Chinese stakes in its ports, 13 city ports, most notably in the Greek port of Piraeus near Athens, fully controlled by Chinese COSCO since 2016. Being one of China’s main destinations for exports, Europe is at the heart of the 21st Century Maritime Silk Road, a network of sea lanes aimed at improving connectivity across Eurasia, but also encompassing part of the Middle East and North Africa. Elsewhere in the Chinese controlled ports of Djibouti, Sri Lanka and Pakistan, investments have been followed by naval deployments, and Chinese warships already paid a visit in Greece. What makes for an acceptable naval presence to secure trade and how to prevent that from turning into a potential military threat? We need a way to handle a constructive dialogue on how much Chinese presence in Europe is deemed acceptable. A dialogue among European political leaders. And a dialogue with Chinese political leaders.