Chinese state-owned companies are expanding their influence in Europe, investing more than $12.6 billion (€9.6 billion) in the Continent last year, according to a study by the Hong Kong-based private equity firm A Capital. The amount represented an increase of about one-fifth in comparison to 2011, and was all together larger than investments in North America and Asia combined. About 86 percent of the investments were in the service and industrial sectors.
The study by A Capital is the most comprehensive investigation yet into Chinese investment in Europe. The private equity firm itself counts the Chinese government among its investors, in the form of the China Investment Corporation (CIC).
The crisis in Europe offered an attractive opportunity for investors to snap up medium-sized industrials with experienced staff, advanced technology and products that provide them with an advantage in the Chinese market. Examples are the industrial machinery and automotive industries, where Chinese investors spent a combined $6 billion, compared to less than $3 billion in the US. In light of a recession at home, European firms such as Volvo, Putzmeister or Ferretti welcomed Chinese partners injecting capital and helping them leverage their products in fast-growing Asian markets.
Europe also attracted more investment in utilities and transportation infrastructure, as governments were forced to privatize assets and attract foreign capital. State-owned enterprises and sovereign investment vehicles seized the opportunity and invested more than $5 billion in EU transportation infrastructure and utilities through 2012, including a stake by China’s sovereign wealth fund in London’s Heathrow Airport.
The Chinese leadership is setting these key sectors as a top priority in their newest five-year plan. The State Council is supporting companies' expansions abroad with cheap credit and tax breaks, with 93 percent of Chinese investments in Europe coming from state-owned corporations.
As the Chinese economy matures and firms become more experienced at doing business abroad, Chinese interest in advanced economy assets will continue to be strong in coming years. Europe has attracted more Chinese capital in past two years, but this was as a cyclical deviation rather than a structural phenomenon.
Chinese direct investment in the United States and Europe has grown fast since 2008. In the past two years, Europe has attracted twice as much investment as the US as Chinese investors seized commercial opportunities arising from the European crisis. However, policy and politics have become important factors for investment in sectors like infrastructure and high tech, and they will become even more critical for future deal making.
In Europe, Chinese firms spent more than $7 billion on firms in the oil and gas industry, including local exploration and production joint ventures (Sinopec-Talisman), local refining assets (Petrochina-INEOS) and EU-headquartered firms with global upstream assets (Sinopec-Emerald Energy).
Reservations about the opaque interests of Chinese state companies are greater in the United States, where the government Committee on Foreign Investment in the United States (CFIUS) essentially blocked the sale of US aircraft manufacturer Hawker Beechcraft to a Chinese buyer for national security reasons. In 2008, the committee blocked the now-defunct electronics maker 3Com from being partially sold to Chinese state corporation Huawei.
The Canadian government recently gave its blessing to the sale of oil and gas company Nexen to the Chinese state firm Cnooc, after a long period of deliberation. However officials said in the future they would allow such investments only in exceptional cases.
In contrast, Europe has been a largely welcoming place for Chinese buyers. State fund CIC acquired a 10-percent stake in London's Heathrow Airport late last year, and a 7-percent stake in the French satellite provider Eutelsat. And Portugal's government negotiated its largest-ever privatization in late 2011, agreeing to sell its 21-percent stake in the massive power company Energias de Portugal to China's Three Gorges. The sale was Lisbon's first privatization mandated under its bailout program earlier that year.
The political response will be critical for future deal-making in both economies. National security reviews and politicization of deals are already impacting investment patterns.
Looking forward, political risk for Chinese buyers can be expected to further increase: governments will have to handle a much larger number of Chinese transactions than in the past; they will have to adapt their review criteria and mechanisms to technological change and new security assessments; and they will have to find ways to address new challenges such as competitive advantages of state-owned enterprises or reciprocity in market access.
In addition, it is likely that other bilateral tensions — such as the recent debates over state-sponsored cyber espionage or accounting frauds – will spill over into the cross-border investment arena, which will further increase the risk of politicization outside of the formal government screening process.
By Guylain Gustave Moke
Researcher at De MontFort University