Feasting On Europe

By Vivienne Walt Monday, Dec. 19, 2011
    • Illustration by Julia Moburg for TIME

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    The buying blowout has already begun. China's direct investment in Europe doubled from 2009 to '10, according to the Ministry of Commerce, and is on track to rise again this year. The figures are still small, but the trend is upward. Just five years ago, China's direct investment in Europe was $1.3 billion, but in the first half of 2011, three of China's deals in Europe each exceeded that amount, according to a European Council on Foreign Relations report co-authored by Parello-Plesner. Although the lines are fuzzy, China's forays into Europe include investments by its government and sovereign wealth funds, deals with rich Chinese private investors, and Chinese corporations buying up European firms.

    Beijing's official splash-outs on euro-zone debt have gained the most attention. Last year, the government purchased $500 million in Spanish debt and pledged to buy more from Italy and Greece as a way to prop up the euro and debt-ridden European consumers, the biggest buyers of Chinese exports. It has also been on a mission to diversify its foreign-exchange reserves away from U.S. dollars. Thanks to a steady stream of euro purchases over the past several years, China now holds an estimated one-quarter of its assets in euros. But as the euro-zone crisis has worsened, Chinese officials have backed away from their euro-buying frenzy. "There's a perception in China on the official level and among companies that there is a big sign flashing over Europe which says RISK, RISK, RISK," says Duncan Freeman, research fellow at the Brussels Institute of Contemporary China Studies. The Chinese government is also facing public pressure to spend more at home on restive workers squeezed by rising inflation and weak social services. When Chinese officials make statements about alleviating Europe's debt problems, the Chinese public asks, "Why should China spend its carefully saved financial resources to bail out much wealthier Europeans who have been irresponsible?" says Steven Tsang, professor of contemporary Chinese studies at Nottingham University.

    As a result, Chinese buyers are homing in not so much on sovereign debt or public assets as on Europe's luxury brands and strategic industries. The car industry is a prime target as Chinese carmakers struggle to break into Western markets and shake their shoddy made-in-China image. In October, Chinese car companies Pang Da and Youngman agreed to buy the struggling Swedish automaker Saab for $140 million, and last year China's Geely Automotive bought Ford Motors' Volvo car unit for $1.5 billion.

    Higher-tech and industrial buys give China a way around Europe's tight grip on tech exports. Wanhua Industrial Group bought a controlling stake in a chemical firm in Hungary for $1.6 billion, and BlueStar bought a silicon company in Norway for $2 billion. And in June, three Chinese solar-panel manufacturers raised $10 billion from two of China's state-owned banks to expand operations in Europe. In the past few months, China Investment Corp., China's sovereign wealth fund, has expressed interest in Italy's national oil company ENI and its largest power company, Enel, which could raise more than $40 billion for Italy's flailing government. "Chinese companies used to think that investing in ailing companies was the right strategy. But more and more, they realize they rather want to invest into the best companies," says André Loesekrug-Pietri, chairman and managing partner of Beijing-based private-equity fund A Capital.

    China also wants a bigger stake in building out Europe's outdated infrastructure. But the offer by its sovereign wealth fund to partake in upgrading European roads, ports and other heavy-duty projects comes with a condition: that China operate the projects as a partner rather than working under European firms as a contractor. Last year, Chinese shipping giant COSCO signed a 35-year lease on the bigger of two piers in Athens' Piraeus port. Under the $5 billion deal, China overhauled the port's shipping facilities — something the cash-strapped Greek government was incapable of doing — so that now, the Chinese-run terminal can handle about 5,000 containers a day.

    Such offers are hardly unattractive to E.U. governments. Despite their wariness, European officials have diligently courted Chinese business. Chinese Premier Wen Jiabao was given royal treatment during his July visit to Britain, Germany and Hungary, and Hungarian officials blocked human-rights groups from demonstrating during his trip, even though Hungary has long provided sanctuary for Tibetan exiles. For many E.U. officials, there are simply more urgent issues than human rights, namely the potential for China's mountain of cash to ease their debt burdens.

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