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News : EU Economy Last Updated: Jun 16, 2015 - 1:36 PM

China to invest in Juncker's European investment fund
By Michael Hennigan, Finfacts founder and editor
Jun 16, 2015 - 8:43 AM

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The long awaited European Fund for Strategic Investments (EFSI), the key economic priority of Jean-Claude Juncker, European Commission president, has successfully passed the final stage of negotiations in the EU legislative procedure and is expected to be approved by the ECOFIN council of EU finance ministers on this Friday and in the European Parliament on 24 June. Meanwhile, China is reported today to be willing to pledge a multibillion-dollar investment in the new infrastructure fund at a summit in Brussels later this month, in Beijing's latest round of chequebook diplomacy to win greater influence.

The South China Morning Post reports today that the move follows major European Union governments' decision to join the Chinese-led Asian Infrastructure Investment Bank in defiance of Washington.

It says Beijing's pledge towards the European Fund for Strategic Investment is expected to come with a request for return investment in its "One Belt, One Road" infrastructure drive - building major energy and communications links across Central, West and South Asia to as far as Greece.

The newspaper says that EU and Chinese officials have said Chinese banks are looking mainly at telecommunications and technology projects.

Premier Li Keqiang, who will attend the Brussels summit, will agree with EU leaders the €315bn (HK$2.7 trillion) fund will "create opportunities for China to invest in the EU."

The EFSI seeks to raise €315bn in public and private investment via leveraging an initial endowment of €21bn with a multiplier of up to 1:15. The initial funds will be provided in the form of a €16bn guarantee from the EU, of which 50% or €8bn will be backed up with a standing EU guarantee fund, and €5bn from the European Investment Bank.

Deutsche Bank economists say in a note that six member states have so far announced contributions worth a total of €33.58bn to foster the investment initiative, though only indirectly through their national promotional banks. "For the desired 1:15 multiplier to fully materialise, it will be vital that both EU member states and the private sector participate.

The exact form of the national promotional banks’ contributions is still to be determined, but certain guiding principles for project-based financing and the participation in investment platforms have been made public. The EFSI
regulation provides that one-off sovereign contributions, including through national promotional banks, will be treated favourably in the context of the assessment of public finances under the Stability and Growth Pact.

The EIB and EIFSI have already started approving funding for projects that are to be covered by the EFSI guarantee and a first financial transaction has been conducted on 12 May. These actions have been mandated by a clause in the forthcoming regulation with regard to the ambitious timeline and the urgent need for action on investment. If they are found to fall into the profile of the EFSI, those projects will be included into the EFSI portfolio and will be given coverage under the guarantee fund retrospectively."

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