China's Eye Turns to Southern Europe

China's Eye Turns to Southern Europe
Photo Credit: 財訊雙週刊

What you need to know

Even though the Chinese economy is growing less than in the previous years, China continues to increase its investment abroad in order to cover the needs of its new economic model.

It is known that China is going through a crucial period, transitioning from a middle-income country to a high-income country. This kind of transition requires companies to take a great leap forward in their competitive capabilities and become the trigger for this economic transformation. Some of these capabilities can be developed domestically, increasing R&D investment, but others have to be developed internationally. As a result, the transformation model of the Chinese economy is pushing its companies to invest abroad and look for the fastest way to develop some of these competitive capabilities. This fact brings us to three key points.

First, Chinese outbound direct investment continues to grow. Actually, it has reached a new record year after year starting from 2010. In 2015, China was the third largest investor in the world, reaching about US$128,000 million, only behind the U.S. and Japan. In 2016, according to the available information, Chinese investment abroad jumped to almost US$170,000 million. Even though the Chinese economy is growing less than double digits, in 2016 the growth was 6.7%, China continues to increase its investment abroad.

Second, the European Union continues to be a favored destination for Chinese companies. In 2015, the last year with official data, China’s investment in the European Union exceeded US$ 30,000 million for the first time. According to the information available for 2016, this year will close with a new record, almost US$35,000 million.

Third, Southern European countries have become more attractive to Chinese companies than before. If we take a look at the cumulative investment from 2010 to 2015 in the European Union, we can see how the "Big Three" (the UK, France, and Germany) made up almost 44% of the total investment but the countries in southern Europe (Italy, Portugal, Spain and Greece) represented almost 28.3% of total investment of Chinese companies in the E.U.

China has shown greater interest in channeling funds into Southern European countries than other international investors. While 12.8% of total foreign investment in Europe is concentrated in the southern European countries, this proportion climbs to the aforementioned 28.3% if Chinese investment alone is considered.

Of the four southern European countries, Italy attracts the most complex Chinese investment, encompassing an extensive range of transactions and economic sectors. It is also the European Union country into which China funneled the bulk of its investments in 2015. Spain was the last major European economy to receive Chinese funds, although at present investments are progressing at a fast pace, exceeding US 2 billion at the end of 2015 in terms of cumulative investments since 2010, more than double the 2014 year-end figure. In Portugal, transactions conducted as of 2015 have entered a new phase, which shows the consolidation of the intense inbound investment and it positions this country in the sixth slot with respect to Europe as a whole. Moreover, Chinese investors are showing increasing interest in both the public and private sectors. Finally, Chinese investments in Greece have been concentrated in a transaction with considerable strategic implications: COSCO Shipping Group’s investment in the Port of Piraeus.

The sharp increase in Chinese investment in Southern European countries can essentially be attributed to two factors, one of which is applicable to all of Europe whilst the other sets these economies apart. The first factor is the aforementioned upturn in Chinese investment across the continent as a whole, which is aimed at gaining a foothold in the largest consumer market in the world and seeking out assets that can help its companies compete at a global level. The factor that is unique to Southern Europe, however, is the opportunity presented to foreign investors in light of the economic crisis, the brunt of which has been borne by Southern European countries. Of particular interest to Chinese investors was the drop in asset prices, including the value of companies, properties, offices, industrial land and labor scenario has afforded Chinese investors a greater knowledge of the potential of these countries, enabling them to identify new business opportunities.

Trends in Chinese investment worldwide, which we have already discussed, bring us to 5 conclusions. First, now more than ever Chinese companies need to acquire technology, knowledge and specialization, factors that are heavily present on the European scene as well as in the U.S. Second, Europe is still the most attractive region for Chinese investment. In 2017 a huge investment could be accomplished in a European country with the acquisition of the Swiss company Syngenta, a giant in the chemical and agricultural sector. The buyer would be the state-owned China National Chemical Corporation, known as ChemChina. This operation has been priced at US$43,000 million. If it is completed, the Syngenta’s purchase would be China’s biggest foreign deal ever.

Third, Southern European countries are the second most appealing group of European countries for Chinese firms. In 2016, two important operations have taken place in these countries, one in Spain with the acquisition of Urbaser for US$1,500 million and another in Greece, the COSCO Shipping Group’s investment in the Port of Piraeus.

Fourth, in terms of company profile, in 2016 investment made by privately-owned enterprises achieved almost 45% of the total amount of the investment in Europe and continues to grow. Last but not least, Chinese companies, now more than ever, are looking for a global leadership in many sectors. If we take a look at the 2016 Fortune Global 500 list, we can realize that one in five companies is Chinese and we expect to see more in the near future. So, global leadership is becoming one of the main goals for Chinese companies.

To conclude, even though the Chinese economy is growing less than in the previous years, China continues to increase its investment abroad in order to cover the needs of its new economic model. We will continue to see M&A as well as Greenfield investments, especially in Europe and the U.S., with important worldwide implications.

This article was originally published in CPI Analysis. The News Lens has been authorized to republish this article.

TNL Editor: Edward White