Chinese investment in Europe Streaks of red

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Capital and companies from China are sidling into Europe
Jun 30th 2011 | from the print edition
A RIDE in a London taxi from Canary Wharf, a financial district, to the Bank of England sounds like an inimitably British experience. It is also a Chinese one.

London’s black cabs are made by Manganese Bronze, which is part-owned by Geely, a Shanghai-based carmaker that also owns Volvo, a Swedish company. China Investment Corporation (CIC), a sovereign-wealth fund, has the third-largest stake in Songbird Estates, which controls Canary Wharf Group, the property firm behind the towers that dominate the city’s eastern skyline. CIC may soon become an investor in the Citigroup building, another landmark skyscraper, which is for sale.

The Bank of England is not yet Chinese-owned but it is increasingly encircled by Chinese banks, which have bought or leased about 300,000 square feet (28,000 square metres) of office space since the financial crisis. Bank of China, which has been in London since 1929, has recently moved into plush new headquarters that overlook the central bank. Down the road, in King William Street, the builders are at work inside the future home of ICBC, another state-owned giant.

Such visible signs of Chinese encroachment will feed the worries of many Europeans. A poll conducted for the BBC World Service in March found rising concern about the eastward shift in economic power: a majority of Germans, Italians and French people view China’s rise negatively (see chart 1). Americans and Canadians feel similarly. These proportions have gone up since a similar survey in 2005.

Europe’s political elites have fewer qualms. A buyers’ strike in sovereign-debt markets has left several struggling euro-zone countries wondering whether China might be the answer to their prayers. On a red-carpeted tour of European capitals this week, Wen Jiabao, China’s prime minister, said that the country would continue to purchase euro-denominated government bonds. Delegations have shuttled back and forth between Beijing and Athens, Lisbon and Madrid to pledge eternal friendship and see whether the Chinese might be tempted to put some money their way.

White knights wanted

It is not just governments that are desperate for Chinese capital. Saab, a struggling Swedish carmaker, is trying to sell stakes to two Chinese firms to secure its future. Victor Meijers, a Dutchman who is the only foreign global partner in DeHeng Law Offices, one of China’s big law firms, says that he gets several inquiries a month from struggling European firms looking for a Chinese white knight.

In truth, China is neither Europe’s saviour nor its destroyer. But Europe is likely to feel the force of China’s outward expansion earlier than America. Europe may be seen as a geopolitical irrelevance but the Chinese feel more welcome there than in America, where a Chinese oil firm was prevented from buying Unocal in 2005—an event that still colours perceptions. European firms arguably have a greater need for cash than American ones. And China’s huge holdings of Treasuries give it an incentive to diversify into other markets.

In analysing China’s economic forays into Europe, it helps to divide them into three categories (even if some of these distinctions are fuzzier in China than elsewhere). First, there are financial investments by the state, through bodies such as CIC and the State Administration of Foreign Exchange (SAFE), which looks after the country’s vast foreign reserves. Second, there is private investment by wealthy individuals and, gradually, private-equity firms. Third, there is the advance of corporate China.

Start with the official flows. The data on what China invests in are sketchy but two things at least are clear: China has a stated desire to diversify away from dollar assets and the euro zone is the natural alternative. Simon Derrick, a currency analyst at BNY Mellon, an American bank, reckons that around a quarter of China’s $3 trillion-plus of reserves are now in euro-denominated assets. Given the recent pace of accumulation—around $200 billion a quarter—that would suggest that $150 billion-200 billion of Chinese reserves have found their way to the euro zone since last summer. (Another few billion will have gone into sterling-denominated assets.)

Inflows on that scale would help to explain why the euro has continued to do better than many expected given the zone’s sovereign-debt crisis. But they may also signal weakness to come. China’s desire to slow the rate at which it builds reserves may slacken demand for euro-denominated assets. “That could mean radically different values for the euro,” says Mr Derrick.

How much official Chinese money has found its way into peripheral euro-zone countries is a matter of guesswork. Stephen Jen of SLJ Macro Partners, a hedge fund, thinks that the Chinese may have been buying as much sovereign debt from struggling states as the European Central Bank (ECB) has. Their motives may be partly political: Mr Jen tartly observes that the Europeans have had nothing to say on the value of the yuan recently. But there is commercial logic, too: Spanish bonds, say, promise a nice return if you think the debt crisis will go no further.

There is a limit to the largesse. Exuberant Spanish announcements that the Chinese were about to pump money into the country’s troubled savings banks were quickly slapped down. Hopes for a flood of Chinese capital into Greece have not yet materialised. The most prominent deal is a concession for COSCO Pacific, a state-owned shipping and ports giant, to run a terminal at the port of Piraeus and perhaps to build another. But far from being an opportunistic asset grab, it was arranged in 2007 at boom-time prices. In government-bond markets, China’s support for wobblier states may well dwindle as 2013 gets nearer: then a new euro-zone sovereign-debt fund will be able to promote the claims of European governments on some countries above those of other creditors.


Although China’s foreign-exchange reserves have largely gone into government and quasi-government debt, not all of them have. An analysis by The Economist of SAFE’s holdings of FTSE 100 companies shows that it holds stakes worth around £11.6 billion ($18.6 billion), sprinkled across two-thirds of the index. That translates to a little under 1% of the total value of the index, with energy, non-cyclical consumer stocks and basic materials to the fore (see chart 2). The Chinese are far less visible in other European markets, although they may be buying shares via third parties.

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CIC transit gloria

Officials want to diversify further into real assets, including companies. CIC will reportedly be handed another $100 billion-200 billion of reserves to invest, for example, and some of that money will find its way to Europe. But the pace is likely to be measured. Investments by the state can be politically sensitive. Many of CIC’s bets are made via third-party managers. Where it does hold direct stakes, it has so far shown little inclination to interfere in the running of companies.

CIC’s approach to property investment, for instance, has been to ally itself with experienced partners, through Canary Wharf Group, on long-term projects in the continent’s most developed market. Via the group the Chinese also have an interest in an office development in London known as the Walkie-Talkie, which will not open until 2014 and will then need time to be let. Other sovereign-wealth funds might talk about a three-to-five-year play, says a property consultant, but “CIC wouldn’t tell you [their timetable] and if they did, the answer would be that they’ll hold it for ever.”

For its partners CIC’s attractions are obvious. As well as that big pot of money, it may bring in the Chinese occupiers of tomorrow. Property consultants already report rising numbers of inquiries from Chinese companies about office space. Insiders think CIC will eventually invest in accommodation for students, which may be filled by Chinese youngsters attending British universities.

If the flow of state capital to Europe is relatively advanced, the arrival of private mainland capital is a younger phenomenon. A recent survey by Bain & Company, a consultancy, and China Merchants Bank estimated that the investible wealth of Chinese individuals was 62 trillion yuan ($9.6 trillion) and that the number of people with investible assets worth more than 10m yuan would come close to 600,000 this year. They are increasingly ready to put some of their money abroad. According to Johnson Chng of Bain, rich Chinese have doubled the proportion of their portfolios invested abroad from 10% in 2009 to 20% this year.

Most of that goes to Hong Kong and Singapore, but some of it finds its way to Europe. Exchange controls exist but with so much liquidity sloshing around China at the moment, approval has become easier to get. Property, the asset of choice for Chinese investors, is again the focus and London is again the prime target in Europe, thanks to the weakness of sterling, a friendly tax regime and, often, plans to give children a British education.

The mainland Chinese are the fastest-growing group among foreign buyers of the dearest new property in central London, says James Thomas of Jones Lang LaSalle, a property consultancy. Roadshows to promote developments in London that would previously have stopped at Hong Kong and Singapore are now taking in the mainland, with Chinese banks and Western law firms joining in to offer prospective buyers tips on financing and tax.

Some are after commercial investments. Siqi Zhang, who runs the London arm of Celestial Globe, a small property consultancy aimed at mainland buyers, reports lots of interest in restaurants, hotels and bars that can throw off cash as part of an investment portfolio.

The flow of private capital is not just driven by individual wealth, however. Perhaps the most sensitive area of China’s march is in the corporate arena, as Chinese firms and their financiers look abroad.

The importance of developed Western economies in this process should not be exaggerated. China has largely concentrated to date on Asian, African and Latin American investments that secure energy supplies and natural resources. Europe is a market where Chinese goods end up, not where they are put together. That said, the biggest Chinese deal announced in Europe this year has been the $2.2 billion purchase by China National Chemical Corporation of Elkem, a Norwegian manufacturer of polysilicon, which is a key component of solar panels. And Iceland, handily close to the oil-rich Arctic, is said to be surprisingly popular with visitors from China. But the data on China’s outbound foreign direct investment show that Europe accounts for a mere 3.5% of the country’s stock of such assets (see chart 3). Single deals can still make a big difference to the numbers.

Follow the money, if you can

Then again, the data do not tell the whole story. Money from the mainland and from Hong Kong is often intermingled. It does not cost a lot to open representative offices, which can then quickly be expanded. The numbers can also hide the extent of Chinese influence. Geely owns only 20% of Manganese Bronze, but it has the larger stake in a joint venture between the two that produces the taxi for international markets, it is the British firm’s chief creditor and it is the linchpin of Manganese’s strategic plans.

Walid Sarkis of Bain Capital, a private-equity firm, says that the tilting of economic power eastward is in any case naturally turning European firms into Chinese and Asian ones. Revenues and growth increasingly depend on these parts of the world. Managers of portfolio companies are thinking about moving headquarters east and listing in places like Hong Kong. “The process of rebasing is happening really fast,” says Mr Sarkis.

The trend of growing outbound Chinese investment is unmistakable. Christian Milelli of the University of Paris West, who has helped compile a database of Chinese investment flows to Europe, says that deals have continued unabated despite the financial crisis, whereas those of Indian companies have contracted.

Behind the scenes, there is an awful lot of activity. Investment bankers routinely propose deals to Chinese firms (if only to scare other bidders into life); five years ago they would not have. “There is a huge amount of looking going on by Chinese companies,” says Simon Wilde of Macquarie Capital’s European power and utilities practice. It is not all about acquisitions: talks are apparently under way for Chinese firms to run big power and infrastructure projects in eastern Europe.

Much of this prospecting can be hard to spot since it is often conducted through individual fixers with knowledge of the West and good connections in China. Mr Wen’s visit this week was in full view of the cameras but when deals are made, there is often little fanfare. “It’s different to the Americans, where the chief executive will fly in to take a picture with the local bishop,” says an Irish executive.

Investments happen for all sorts of reasons. Chinese banks want to offer services to Chinese companies as they expand internationally, for instance, and to European firms seeking a bank to work with in China. They also have lots to learn in a place like London about foreign-exchange trading and derivatives, especially as the yuan internationalises.

Expansion is frequently driven by the needs of the highly competitive Chinese market as much as the lure of the European one. “CIC and SAFE make financial investments based on returns on capital,” says Z.Z. Qiu, who is chairman of Barclays Capital for greater China. “Corporate deals are more strategic and about synergies.”

Technology and brands are the things that can make the biggest difference back home. Take Geely’s deals in Europe. The Volvo purchase gives it a premium brand to compete with Western carmakers in China at the same time as it aims its own brands at the mass market. Its tie-up with Manganese Bronze has yielded few hard financial benefits, says John Russell, Manganese’s boss, but lots of broader advantages such as access to engineering know-how and a brand with plenty of heritage.

It is a similar story with the purchase by Zoomlion, a Chinese manufacturer of construction equipment, of CIFA, an Italian rival, in 2008. “CIFA’s core European markets dived during the recession,” says Josh Lerner of Harvard Business School, who has written a case study on the deal. But CIFA has given Zoomlion access to better manufacturing technology and a premium brand to sell in China.

Germany has become a natural hunting-ground for industrial companies looking to move up the engineering value chain. Carmaking is again a focus. So is clean tech: Goldwind, a Chinese wind-turbine manufacturer, bought a German designer called Vensys in 2008 so it could develop bigger turbines for its domestic market. Not every European firm can assume it has technological allure, however. “I couldn’t sell BT [a British telecoms firm] to China,” says James Wang, a Chinese violinist-turned-dealmaker in London whose firm, Eli Capital, guided Geely’s transactions in Europe. “It’s too old-fashioned.”

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Deals can help to open up the Chinese market. In June 2010 Fosun, a Chinese conglomerate with pretensions to become a global investment giant, bought 7.1% (later raised to 9.3%) of Club Med, a French leisure company hoping to serve Chinese holidaymakers. Club Med’s first Chinese resort followed in December. In May Fosun also bought 9.5% of Folli Follie, a Greek retailer whose brands include Links of London and which thinks the deal will accelerate its expansion in China. CIFA’s partnership with Zoomlion has given it access to the Chinese firm’s distribution networks in Africa and the Middle East.

Transactions like these are opportunities not just for the companies involved but also for private equity. Fosun is acting, in effect, as a private-equity firm, and has set up investment ventures with both Carlyle and Prudential Financial. The Zoomlion-CIFA deal was 40% financed by a consortium of funds led by Hony Capital, a Chinese firm, and including Goldman Sachs. Mr Lerner reckons that within five to ten years Chinese private-equity firms will have joined the industry’s global elite.

As well as providing financial firepower and a network for sourcing deals, private-equity firms can shroud the identity of publicity-shy investors. They are also well equipped to structure the fiddlier bits of deals and to guide the integration of partners from different cultures. Getting that sort of thing right is undoubtedly hard for Chinese firms with limited experience of international deals—witness the bafflement of one firm at foreigners’ habit of taking time off for holidays. Europeans, of course, have plenty of experience of cross-cultural deals. According to one Briton, the Chinese are no worse than the neighbours. “The French are way more difficult than the Chinese,” he says.