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Due to the magnitude of the euro-zone economic crisis, the main focus of China-EU relations in recent months has narrowed down to whether China will rescue the euro zone by buying euro debt with its sizeable foreign reserves. This is yet another indicator of how China-EU relations lack longterm strategic focus and are often subjected to the ebb and flow of current events.
The bailout plan from the euro-zone summit at the end of 2011 increased the European Financial Stability Fund (EFSF) to over 1 trillion euros ($1.3 trillion) and launched Special Purpose Investment Vehicles (SPVs), which issue bonds that are guaranteed by the EFSF. The funds raised by SPVs are then used to buy bonds in distressed European countries to maintain their prices. European leaders have expressed on several occasions their hope that China would purchase these SPV bonds.
While China has pledged confidence in the euro-zone recovery, it has refrained from making firm commitments to purchasing more euro bonds, and it is not hard to see why. In the last few months, Standard & Poor’s and Fitch have downgraded the credit ratings of several euro- zone countries, including France, Italy and Spain. More startling is the inability of euro-zone leaders to unite behind a common approach to tackle the crisis. Japan, one of the largest holders of euro bonds, which bought more than 20 percent of bonds sold by the euro zone in January last year, purchased another 1.1 billion euros ($1.5 billion) of 10-year EFSF bonds issued in June, and purchased 10 percent of the bonds sold by EFSF at the end of 2011. Japan has promised to buy more bonds only on the condition that the EU takes more concrete measures to address the crisis.
While China appears to be apprehensive
of the risky euro bonds, it is stepping up on investments in Europe. According to the Chinese Ministry of Commerce, China’s investment in the EU increased by 94.1 percent year on year to $4.28 billion, compared with a growth of 1.8 percent in China’s total outbound direct investment in 2011.
Paradigm shifts
China’s state-owned shipping company COSCO now holds a 35-year lease for the Port of Piraeus, the largest port in Greece. A China Investment Corp. subsidiary acquired 8.7 percent of UK company Thames Water, and Chinese company Sany Group announced that it will buy 90 percent of Putzmeister, Germany’s largest concrete pump manufacturer. These are among the latest high-profile investment deals by Chinese firms that have received much media attention.
Despite Premier Wen Jiabao’s assurance that China does not intend to “buy out Europe” and the fact that China has yet to link the purchase of euro bonds to outstanding issues like market economy status and the arms embargo, there continues to be speculation by many analysts that China is likely to do so. There remain reservations on Chinese investment in a debt-ridden Europe.
Two paradigm shifts are necessary in order for China and the EU to work toward a fruitful economic relationship. First, the EU needs to embrace the long-term trend of China’s transformation from an investment destination to both a source of investment and an investment destination. Second, the EU needs to overcome the stigma attached to Chinese investment. The laws of economics dictate that investors seek profit and it would be far-fetched to expect Chinese investment, or investment from any country for that matter, to be altruistic. Opportunistic purchase of distressed assets by corporations and funds were also observed in the Asian financial crisis in 1997-98 and the aftermath of the subprime crisis in the United States.
The United States remains the largest investor in Europe and total U.S. investment in the EU is three times higher than in all of Asia. U.S. private equity giant Blackstone was the largest real estate investor in Europe in 2011, with 2.6 billion euros ($3.4 billion) of investments. Yet U.S. investment does not receive the same negative media scrutiny that Chinese investment does. Part of the reason is because many of these large Chinese companies are state-owned enterprises, or sovereign wealth funds, and thus there are concerns of an additional political agenda. Sovereign wealth funds made up a pool of funds totaling approximately $20 trillion in 2011, and with the world economy confronting one of its largest economic crises, it is perhaps unrealistic to suppose that these funds would not play a role in injecting money into cash-strapped economies.
The rise in Chinese investments is a logical extension of China’s economic growth, and its investment in Europe reflects its aspiration to compete in new markets. China surpassed the UK and Japan as the fifth largest investing country in the world in 2010, compared to its 12th place in 2008. And China is not alone in this surge of outbound investment. Widening the lens to developing countries, according to the UN Conference on Trade and Development, foreign direct investment (FDI) flows from developing countries reached $316 billion in 2010, 23 percent more than in 2009, while FDI outflows from developed countries increased by 10 percent over the same period.
Rather than debate whether the financial crisis marks the demise of the Western capitalist model, and whether Asia’s rise is potentially threatening, a more constructive angle would be to identify opportunities in this new sustained trend for equal partnerships between developed and emerging economies.
Mutual advantage
Amidst the discussion on whether China could or should rescue the euro zone, the point seems to be missed that this is an excellent opportunity for fostering cooperation on equal grounds and an important juncture to recalibrate the economic relationship between China and the EU. Much has been said about the EU being China’s largest trading partner and export market, but there is certainly room to improve both the quality and diversity of trade between China and the EU.
The purchase of euro bonds is merely one of several ways to promote euro-zone recovery. Chinese investments in infrastructure and factories inject much-needed cash directly into the EU economy, rather than via banks, which aids economic growth and the creation of jobs. The crisis could serve as a catalyst for China and the EU to reexamine how they might better match their needs and also work on improving market access. The EU needs to start reimagining the role of China, not just as an investment destination or a low-end manufacturer, but an investor with wide-ranging economic interests.
Although Chinese companies are cashrich, they need to build up their brands, improve their technology and management expertise and expand their reach in old and new markets. The EU needs the injection of large amounts of cash, the restoration of investor confidence, and access to overseas markets, particularly in the services sector. China and the EU both have the capacity to fulfill the needs of the other and creative ways should be explored to foster partnerships. Rather than focusing solely on the crisis at hand, it is more important to view the crisis in the larger context of long-term economic relations and how China and the EU might work together to create sustained momentum for economic growth.
The bailout plan from the euro-zone summit at the end of 2011 increased the European Financial Stability Fund (EFSF) to over 1 trillion euros ($1.3 trillion) and launched Special Purpose Investment Vehicles (SPVs), which issue bonds that are guaranteed by the EFSF. The funds raised by SPVs are then used to buy bonds in distressed European countries to maintain their prices. European leaders have expressed on several occasions their hope that China would purchase these SPV bonds.
While China has pledged confidence in the euro-zone recovery, it has refrained from making firm commitments to purchasing more euro bonds, and it is not hard to see why. In the last few months, Standard & Poor’s and Fitch have downgraded the credit ratings of several euro- zone countries, including France, Italy and Spain. More startling is the inability of euro-zone leaders to unite behind a common approach to tackle the crisis. Japan, one of the largest holders of euro bonds, which bought more than 20 percent of bonds sold by the euro zone in January last year, purchased another 1.1 billion euros ($1.5 billion) of 10-year EFSF bonds issued in June, and purchased 10 percent of the bonds sold by EFSF at the end of 2011. Japan has promised to buy more bonds only on the condition that the EU takes more concrete measures to address the crisis.
While China appears to be apprehensive
of the risky euro bonds, it is stepping up on investments in Europe. According to the Chinese Ministry of Commerce, China’s investment in the EU increased by 94.1 percent year on year to $4.28 billion, compared with a growth of 1.8 percent in China’s total outbound direct investment in 2011.
Paradigm shifts
China’s state-owned shipping company COSCO now holds a 35-year lease for the Port of Piraeus, the largest port in Greece. A China Investment Corp. subsidiary acquired 8.7 percent of UK company Thames Water, and Chinese company Sany Group announced that it will buy 90 percent of Putzmeister, Germany’s largest concrete pump manufacturer. These are among the latest high-profile investment deals by Chinese firms that have received much media attention.
Despite Premier Wen Jiabao’s assurance that China does not intend to “buy out Europe” and the fact that China has yet to link the purchase of euro bonds to outstanding issues like market economy status and the arms embargo, there continues to be speculation by many analysts that China is likely to do so. There remain reservations on Chinese investment in a debt-ridden Europe.
Two paradigm shifts are necessary in order for China and the EU to work toward a fruitful economic relationship. First, the EU needs to embrace the long-term trend of China’s transformation from an investment destination to both a source of investment and an investment destination. Second, the EU needs to overcome the stigma attached to Chinese investment. The laws of economics dictate that investors seek profit and it would be far-fetched to expect Chinese investment, or investment from any country for that matter, to be altruistic. Opportunistic purchase of distressed assets by corporations and funds were also observed in the Asian financial crisis in 1997-98 and the aftermath of the subprime crisis in the United States.
The United States remains the largest investor in Europe and total U.S. investment in the EU is three times higher than in all of Asia. U.S. private equity giant Blackstone was the largest real estate investor in Europe in 2011, with 2.6 billion euros ($3.4 billion) of investments. Yet U.S. investment does not receive the same negative media scrutiny that Chinese investment does. Part of the reason is because many of these large Chinese companies are state-owned enterprises, or sovereign wealth funds, and thus there are concerns of an additional political agenda. Sovereign wealth funds made up a pool of funds totaling approximately $20 trillion in 2011, and with the world economy confronting one of its largest economic crises, it is perhaps unrealistic to suppose that these funds would not play a role in injecting money into cash-strapped economies.
The rise in Chinese investments is a logical extension of China’s economic growth, and its investment in Europe reflects its aspiration to compete in new markets. China surpassed the UK and Japan as the fifth largest investing country in the world in 2010, compared to its 12th place in 2008. And China is not alone in this surge of outbound investment. Widening the lens to developing countries, according to the UN Conference on Trade and Development, foreign direct investment (FDI) flows from developing countries reached $316 billion in 2010, 23 percent more than in 2009, while FDI outflows from developed countries increased by 10 percent over the same period.
Rather than debate whether the financial crisis marks the demise of the Western capitalist model, and whether Asia’s rise is potentially threatening, a more constructive angle would be to identify opportunities in this new sustained trend for equal partnerships between developed and emerging economies.
Mutual advantage
Amidst the discussion on whether China could or should rescue the euro zone, the point seems to be missed that this is an excellent opportunity for fostering cooperation on equal grounds and an important juncture to recalibrate the economic relationship between China and the EU. Much has been said about the EU being China’s largest trading partner and export market, but there is certainly room to improve both the quality and diversity of trade between China and the EU.
The purchase of euro bonds is merely one of several ways to promote euro-zone recovery. Chinese investments in infrastructure and factories inject much-needed cash directly into the EU economy, rather than via banks, which aids economic growth and the creation of jobs. The crisis could serve as a catalyst for China and the EU to reexamine how they might better match their needs and also work on improving market access. The EU needs to start reimagining the role of China, not just as an investment destination or a low-end manufacturer, but an investor with wide-ranging economic interests.
Although Chinese companies are cashrich, they need to build up their brands, improve their technology and management expertise and expand their reach in old and new markets. The EU needs the injection of large amounts of cash, the restoration of investor confidence, and access to overseas markets, particularly in the services sector. China and the EU both have the capacity to fulfill the needs of the other and creative ways should be explored to foster partnerships. Rather than focusing solely on the crisis at hand, it is more important to view the crisis in the larger context of long-term economic relations and how China and the EU might work together to create sustained momentum for economic growth.