By Vivian Ni
Sept. 15 – Both Chinese and European newspapers have been reacting strongly to a land purchase plan in Iceland announced recently by Chinese industrialist Huang Nubo, but in different ways. While Chinese newspapers put up proud headlines highlighting the potential deal that would take up a staggering 0.3 percent of Iceland, European countries questioned whether the business plan is a purely commercial move or actually a strategic project that would give China a foothold in the North Atlantic.
European apprehension has been growing as the Chinese presence on the continent rapidly increases. Over the past few years, China is no longer satisfied with being a “strategic partner” of Europe, but a powerful actor on the land itself. It is taking over European companies, increasing European Treasury bond holdings, and even investing in various infrastructure projects in Europe’s periphery. Most importantly, it is believed that many of these investments have not only been motivated by economic interests, but also geopolitical and diplomatic interests. Just as a recent report published by the European Council on Foreign Affairs (ECFA) pointed out, when debt-ridden European countries rush to strike deals with China, there is a risk they may not reach the best ones for their long-term interests without a common regional policy towards China in place.
Concerns over China’s direct investment in Europe: security
Five years ago, China’s total direct investment into Europe only stood at US$1.3 billion, but the investment scale has expanded so rapidly that one single Chinese acquisition in Europe today can alone be bigger than this figure. According to the ECFA report, there have already been three Chinese acquisitions this year that have each exceeded US$1.3 billion, namely the acquisitions of: a Spanish oil company’s Brazilian holdings, a Hungarian chemical company and a major Norwegian silicon unit.
Greenfield investments, mergers and acquisitions, and trade as well as cooperation agreements relying on Chinese financing have become major contributors to the surge of Chinese direct investments. Interestingly, in Europeans’ eyes, the myriad Chinese investments often flow to areas that serve China’s geopolitical interest or need for natural resources and technological development.
Huang’s announced Iceland investment plan has made European opponents wonder why such a large amount of land – covering a wilderness of 300 square kilometers in northeast Iceland – is needed for a resort. What is really behind such skepticism is the strategic geographical location of Iceland: the country situated between Europe and North America is seen as a potential hub for the passage of Asian cargo if someday Arctic waters could be open to shipping due to climate change.
A considerable size of Chinese capital also flows to areas where Chinese companies still hold a comparative disadvantage, such as the automobile industry and the research and development (R&D) sector. Not only have Chinese investors taken over brands such as MG and Volvo, they also acquired a life-saving stake in Saab and established a strategic cooperation with Daimler. In addition, a EUR2.8 billion (US$3.9 billion) fund was created by China to boost small and medium-sized German companies’ partnership with Chinese firms as well as facilitate R&D and innovation.
While individual European businesses and governments may be happy to strike profitable deals with Chinese companies, critics worry a big picture is not being shown to what extent Chinese investments have penetrated the European economy. The actual figure of the Chinese investment scale is difficult to come by because around 80 percent of China’s external capital flows take place via offshore centers such as Hong Kong, the Cayman Islands and the Virgin Islands. Furthermore, the sizable state subsidies given to the Chinese state-owned enterprises (SOEs) have also increased Chinese companies’ strength compared to their European competitors and accelerated their investments.
Security concerns over certain Chinese investments – such as the Iceland deal – also originate from the opacity of some Chinese companies. The ECFA report gave the example that the Chinese telecommunications equipment company Huawei – which has a presence in the Netherlands, Sweden, Ireland and Russia – was said to have a “shadow party structure” inside the company while it is supposed to be a fully private company.
However, some Chinese businesspeople believe the Europeans are being overly stressed about the impact of Chinese investments in the continent. Saying he may pull out the investment plan altogether should security concerns escalate, Huang emphasized to Reuters the criticism against the Iceland project is “part of the West’s misinterpretation of China. Everything China does, no matter whether it’s done by the country or an individual, they would think of it as part of a ‘China threat.’”
Steve Tsang, professor of contemporary Chinese studies at Nottingham University, also voiced similar opinions. On the Iceland case, while believing it is proper for the Icelandic authorities to check carefully and do their due diligence, Tsang says there is no need to read too much into the capacity of Chinese to plan strategically over the very long term or to see Chinese businessmen as all agents of the Communist Party.
Concerns over China’s infrastructure investment in Europe: unfairness
Taking advantage of its low-cost goods as well as labor-force, China is investing heavily in Europe’s periphery. According to the ECFA report, the China Development Bank financed Serbia so it managed to acquire a bridge over the Danube; the SOE China Overseas Engineering Group Co., Ltd won the bid of the A2 highway in Poland at less than 50 percent of what the government had budgeted; and an Eastern European country is also seeking Chinese bids to build water-purification plants in order to comply with European regulations on water.
While it is widely believed such investment activities will soon flow to Europe’s core, European experts worry the Chinese companies are not competing on a level playing field. For example, compared to the local European workers, Chinese employees exported overseas to work on those projects may be paid less and situated in environments below European labor standards. Just as a Chinese official said, “we can do a project in one year on our terms. Otherwise, it takes the locals 10 years.”
In return, European companies are starting to feel it is unfair that they are mostly excluded from the Chinese market for public procurement, even though they boast advantages in many sectors from urbanization and public transport, to alternative energy and social system management. The lack of full openness in the Chinese market for public procurement has shut European companies out of well known mega-projects such as the Three Gorges Dam, Olympic stadiums and bullet trains and given foreign companies painful experiences where their bids are often rejected even when they are allowed to apply.
Concerns over China’s European debt holdings: opacity
Debt-ridden European countries are longing for China’s purchase of their public debt despite fears that the country has motivations of a “reverse colonization” of Europe. Nowadays the message “the Chinese are coming” can often help governments trapped in financial crisis press public refinancing needs and shore up creditworthiness.
As for China, it is reported that the country – whose US$3.2 trillion in foreign exchange reserves still have a heavy reliance on the U.S. dollar – is seeking more diversification and is increasing its holdings of the Euro. In June 2010, China purchased Greek bonds as a quid pro quo for a 35-year lease on Piraeus harbor and a deal to finance the purchase of Chinese ships; a month later, the country announced its plan to buy EUR1 billion (US$1.4 billion) of Spanish bonds.
China has also sent the message of bond purchases to other European countries. It made promises to Portugal and Ireland, and again to Spain in January 2011; Chinese Premier Wen Jiabao said China would buy “a certain amount” of Hungarian government bonds during his visit to Europe in June; and a delegation led by the chairman of China Investment Corp. flew to Rome last week for talks on the purchase of Italian bonds at the request of the Italian government.
However, while the European media repeat that China holds 25 percent of its reserves in Euros, the European Monetary Union has no clear idea of how much European debt China is holding. On one hand, China keeps the composition of foreign reserves by country a state secret and, on the other hand, unlike the United States, Europe publishes no aggregate or coordinated data on foreign purchases of public debt in the 27 countries.
Therefore, Europeans can only assume China increases its Euro holdings whenever its holdings of U.S. Treasury bonds decline. Recently, however, China is found out to have continued to buy U.S. debt but has done so through offshore or third markets, and experts worry the actual size of China’s Euro holdings may have been largely overestimated.
China and Europe: a love-hate relationship
In general, European countries still welcome Chinese investments, especially when the sizable exports bring people cheaper goods and massive capital injections provide indebted governments with a lifeline. However, many Europeans – who do not want to see their dependence on China grow – are now asking for a level playing field on which both sides can develop a greater degree of interdependence.
Therefore, while trying to maintain its advantage of being an open market that sees active economic exchange with China, Europe is also improving its regulatory system so that there is better transparency in its statistical revelation of foreign bond holdings and stronger supervision on investments into critical areas. In addition, a new legal instrument may also be released to increase Europe’s bargaining power on public procurement deals.
The reality is, though, that the achievement of such regulatory reform may not be easy at the moment, as many European governments are simply striving to survive the financial ruins. Just as a China-stationed European ambassador said and the ECFA report cited, “We hope that Europe won’t strike back before we get our deals done.”