Purchases of distressed financial companies are a sign of Chinese firms taking another step forward

Chinese financial firms are targeting purchases of distressed banking assets coming on the market in Europe, creating a new trend of Chinese investment on the continent.

The Chinese financial services company Anbang Insurance reached an agreement on Dec 16 to buy Delta Lloyd Bank Belgium from Dutch financial group Delta Lloyd for 219 million euros ($274 million). That followed the company's acquisition of fellow Belgian insurer Fidea from US private equity firm JC Flowers in October.

The deals form the next stage of China's financial firms' European expansion.

The first Chinese purchase of a European investment bank was announced on Dec 8, with Haitong Securities agreeing to pay 379 million euros for an investment bank in austerity-hit Portugal.

Banco Espirito Santo de Investimento SA is being sold by Novo Banco, the bank carved out of Banco Espirito Santo after it was rescued in August. For China's second-largest brokerage, it is a modest-sized deal, equivalent to just 1.5 percent of Haitong's market value.

Analysts say such deals can help Chinese banks expand their global footprint, gain treasured European banking licenses and expertise, notably in debt markets, that can be transferred back home.

The deals also indicate the likelihood of the strong trend of Chinese investment in Europe continuing in the coming years.

Four years ago, the total stock held through Chinese direct investment in the European Union was just over 6.1 billion euros - less than what was held by India, Iceland or Nigeria.

However, it jumped to an extraordinary level in two years. According to Deutsche Bank research, Chinese investment in European stock had more than quadrupled, to about 27 billion euros by the end of 2012.

While China's investment in Europe declined by more than 10 percent in 2013, analysts and industry insiders expect that investment in Europe will pick up again and increase significantly.

Already invested in a lot of different sectors, from manufacturing and energy to food and retail, Chinese companies in the future are likely most interested in high-end manufacturing, research and development, finance, infrastructure and real estate.

Europe welcomes Chinese investment, especially given that European economic growth is weak, the population is aging and domestic business investment is tepid. Besides providing money for growth, Chinese investors help European companies gain better access to China and other Asian markets.

Chinese companies, including state-owned and private, look abroad for know-how and strong global brands. Investment from China is getting a further boost as the Chinese government encourages domestic companies to go global.

"China is shifting to a more sustainable growth model and thus is looking for technologies and brands as well as high value-added industries. Furthermore, China needs know-how that will help the country's process of urbanization, such as transportation and environmental technologies," says Yun Schuler Zhou, research fellow of German Institute of Global and Area Studies in Hamburg.

Ivana Casaburi, director of China Europe Club at ESADE, the Escuela Superior de Administracion y Direccion de Empresas, a leading Spanish business school in MBA and executive education, says that at the beginning of 2000, most Chinese companies that came into the international market were government-owned. They were looking for natural resources to feed the world's factory, and markets to sell products that had a good balance between quality and price.

"Starting from 2010, there was a change in the economic model and a new stage of internalization started. Companies started showing an interest in higher value-added sectors," says Casaburi.

For example, China's leading telecom equipment manufacturer Huawei opened a new R&D center in southern France in September. It marks a further step in the company's European strategy and brings to 17 the total number of its facilities in Europe, located in eight countries - Britain, Belgium, Finland, France, Germany, Ireland, Italy and Sweden.

Lenovo is a case of development using global brands to help give Chinese brands value when they interact with the global market, Casaburi says.

The biggest maker of personal computers, Lenovo is pushing to overtake Hewlett-Packard for the lead in Europe by 2015, even as it expands in tablets and smartphones. The company sees significant potential to expand in Europe, the Middle East and Africa, according to Gianfranco Lanci, the company's president for those regions. Lanci spoke in 2013.

"Export-facilitating investments are gradually shifting from trade offices to more sophisticated operations. Firms are trying to move closer to the European customer by investing increasingly in modern sales infrastructure, including branding and the provision of after-sales services," Zhou says.

Because the state of development and industrial structures in European countries vary greatly, Chinese companies have located their head offices and R&D operations in Western Europe, while manufacturing has been the priority in Eastern Europe, Zhou says.

In the future, Chinese overseas direct investment in Europe will become more diversified in terms of the type of investors and the type of investments, Zhou says. Besides state-owned enterprises, Chinese sovereign players like the State Administration of Foreign Exchange and China Investment Corp, private equity companies and wealthy individuals will become more active in Europe.

"The investments will not only include genuine foreign direct investment but also portfolio investment and other kinds of investments," Zhou says.

FDI entails significant management influence and a long-term investment relationship. A common threshold for a direct investment is 10 percent of voting shares. A portfolio investment, however, is a passive investment.

Mergers and acquisitions also have been a dominant type of Chinese investment in Europe. Between 2008 and mid-2014, China sealed more than 200 cross-border M&A deals or formed joint ventures in Europe, according to Bloomberg.

Germany attracted the largest number of M&A deals, while the United Kingdom leads in investment amount. Italy, the Netherlands and France saw also several Chinese investment projects.

Deutsche Bank says most M&A projects were in the industrial sector, followed by consumer products and energy. Basic materials, energy and cyclical consumer sectors, which include the automotive sector and consumer electronics, also tended to attract large values.

The high share of consumer industries in M&A deals reflects Chinese buyers' growing appetite for investments catering to consumers back home.

One example is China's Bright Food Group Co, which paid nearly 700 million pounds ($1.12 billion) to acquire a 60 percent stake in British Weetabix in 2012 and also agreed to cover 500 million pounds of Weetabix's debt.

It is pledging to promote and sell the breakfast cereal Weetabix in China and the rest of Asia using its existing distribution channels and experience.

Mergers and acquisitions in Europe are still important because China will target good companies to buy, says Fu Xiaolan, director of technology and management for the Development Center at University of Oxford.

Perhaps when Chinese brands are more capable technologically and management-wise, at a later stage, there may be more original projects that don't require mergers or acquisitions, Fu says.

But for now, major challenges for Chinese firms that have gone global and are investing in Europe include cultural differences and knowing how to manage a large, cross-border production company instead of a domestic-market focused company, Fu says.

A survey by the European Union Chamber of Commerce in China this year found that Chinese companies rated labor laws, human resources costs, immigration rules and cultural differences in management style as the biggest obstacles to operating in the continent.

These are lessons and experiences that Chinese firms need to learn in the next five to 10 years in order to polish their investment capabilities, Fu says.

The EU-China investment agreement currently being negotiated would take the bilateral strategic partnership to the next level. The proposed but long delayed agreement aims to scale down barriers to investment and strengthen the legal framework.

"The EU's economic relations with China have been dominated by trade," Zhou says. "In the future, a mutual investment relationship will play an increasing role.

"The EU-China investment agreement that is currently in negotiation reflects in part the change in economic relations between Europe and China."

A critical question that remains is whether investment protection and market access can be balanced in a way to reconcile interests and allow reciprocity in firms' participation on both sides of the deal, experts say.

Lucia Lorenzo contributed to this story.

zhangchunyan@chinadaily.com.cn

Anbang Insurance's booth at an exhibition in Beijing. Anbang reached a deal to buy Delta Lloyd Bank Belgium from Dutch financial group Delta Lloyd on Dec 16. Provided to China Daily

(China Daily European Weekly 12/19/2014 page9)