China's overseas investments are set to triple by 2020 while Ireland received only €99m from €46bn in direct investments in European Union (EU) countries in the period 2000-2014, according to new research.
China’s policy liberalisation and adjustments to its growth model will turn the country from a nobody to a driving force in global cross-border investment in the coming decade according to a report from the Mercator Institute for China Studies (MERICS) in Berlin and Rhodium Group (RHG) in New York. Projections see China tripling its global assets, including investment of foreign currency reserves, from currently $6.4tn to almost $20tn by 2020, making it the world's leading overseas investor.
The foreign direct investment (FDI) component called Outbound Foreign Direct Investment (OFDI) by the Chinese, will grow from $744bn to as much as $2tn by 2020.
The report says that while growth over the past decade was already impressive, China’s OFDI stock to GDP ratio currently stands at only 7%. This is still below the average of middle income economies (10%) and well below that of the most advanced economies such as the United States (38%), Japan (20%), and Germany (47%). "In other words, China’s OFDI boom is only beginning and will likely continue in light of more liberal OFDI policies and changing commercial realities in the Chinese marketplace which are forcing firms to expand beyond China’s borders."
The authors say that the shift in China’s global investment position will require political leaders around the globe to adjust their economic policy configuration towards China both to reap the benefits of this next stage of global integration as well as minimizing potential new risks. This is particularly true for the countries of the European Union, whose economies are now intimately linked up with China following three decades of trade integration and significant investment of European businesses in China.
The report says that the first wave of this new era of Chinese capital has already begun and it is increasingly impacting Europe: OFDI by Chinese companies now exceeds $100bn per year and has shifted from natural resources in developing countries to technology, brands, real estate and other assets in advanced economies.
Annual investment by Chinese companies in EU member states soared from virtually zero in the mid-2000s to €14bn in 2014. "For the period 2000 to 2014 we count over 1,000 Chinese greenfield projects and acquisitions in the EU together worth more than €46bn. The sectors that attracted the most Chinese capital are energy, automotive, food and property. State-owned companies play an important role in China’s investments in Europe, but growth in recent years is mostly driven by private companies and financial investors from the most advanced eastern coastal provinces."
More than 50% of cumulative investment from 2000 to 2014 went to the UK, Germany and France. In recent years, Chinese investment in Europe has become more geographically diverse.
Eastern European economies have gradually increased their share of total Chinese inbound FDI, attracting Chinese capital in manufacturing, agriculture and infrastructure. Over the entire period Eastern European economies accounted for 8% of total investment value.
The UK was in the lead in 2000-2014 receiving investment of €12.2bn followed by Germany €6.8bn; France €5.9bn; Portugal €5.1bn; Italy €4.2bn; Netherlands €3bn; Hungary €1.9bn; Sweden €1.5bn; Spain €1.1bn; Belgium €938m; Romania €733m; Poland €453m; Austria €436m; Luxembourg €432m; Greece €405m; Bulgaria €207m; Czech Republic €138m; Denmark €134m; Finland €103m; Ireland €99m; Malta €69m and the rest: the 3 Baltic republics, Cyprus, Slovenia and Croatia at €4m have smaller amounts.
Ireland with a 21st ranking must be a disappointment for IDA Ireland, the Irish inward investment agency, given that China has been a priority for it in recent years. Most of the investment in recent years was likely in property and in 2013 a Chinese family acquired the Fota Island estate in Cork Harbour for €20m.
Germany’s advanced manufacturing capabilities were the biggest attraction for Chinese investors with automotive and industrial equipment accounting for more than 65% of total Chinese investment since 2000.
China has one of the world's most restrictive inward foreign investment regimes while Europe with about 30% of the global FDI stock has the most liberal. Local companies are not allowed to receive state aid when seeking to buy a company while a Chinese company in receipt of state aid can use it to outbid the Europeans.
The authors say that the EU needs to prepare for the China’s unique political and economic system that raise concerns related to foreign investment They say that there are legitimate concerns related to China’s specific nature, which, if unaddressed, could threaten European economic and security interests and undermine public support for investment openness.
"The highest priority is to conclude a robust bilateral investment agreement (BIA) that addresses the existing asymmetries in market access through pre-establishment rights for European companies and a short negative list for sectors restricted to foreign investment. A robust BIA is also important to ensure that the principle of investment openness towards China continues to have the support of EU citizens and parliaments.
Second, European leaders need to grapple with the question of how to react if the structural economic reforms promised by Beijing to address subsidies and other non-market elements that distort global competition happen slower than required by the reality of growing outbound FDI. Existing competition policy instruments including the state aid regime would be the best starting point from which to think about potential options on the European level. Nation states have a range of instruments that could potentially be used to address these problems in the future, including competition policy, mandatory disclosures, government procurement and others. Third, there is an urgent need to initiate a debate about greater coordination of security review processes within Europe to increase the efficiency and coherence of such reviews from a security point of view, but also to increase the confidence of European citizens that there is a functioning solution in place to monitor and mitigate potential security risks."
China-Ireland: Economic relationship on a slow burn