Updated: 2011-01-21 10:47
By Li Zhongmin (China Daily European Weekly)
Savvy Chinese companies should aim to invest in EU countries, rather than the United States
There are great opportunities for China to invest directly in the European Union. Regulatory approval systems in the EU are fair and transparent, relative to the United States. Chinese companies should increase their investment in Europe.
Europe and the US have taken different bailout policies to address the financial crisis. The US government and its central bank did not only adopt expansionist policies, but also took to quantitative easing to refinance their debts.
In Europe, EU countries seemed to be more prudent about fiscal deficits, and shy away from quantitative easing. When Portugal, Italy, Greece and Spain were trapped in the crisis, the European Central Bank made an effort to loan to these countries, joined by the IMF, but rejected offers to buy their national debts.
As for fiscal deficits, Europe calls for deficit reduction leading to an agreement to cut fiscal deficits among the G20 members.
The economic situation in Europe is expected to continue between 2011 and 2012. As the global financial crisis features economic slowdown and continuing high unemployment, Europe is no exception. Economic growth rates of the euro area in 2009 was -4.1 percent and the unemployment rate last October reached 10.1 percent.
As a result, the economic situation is not likely to turn positive in the short term.
However, the European economy is expected to perform better than the US' in the long run after 2012. It will be more stable due to these countries' prudence about budget deficits and rejection of non-traditional monetary policy. But this positive long-term prospect of the European economy will vary with countries.
Can the European sovereign debt crisis bring new opportunities to Chinese companies? Definitely yes. Any crisis can drag assets prices to the bottom, providing unique opportunities for foreign direct investment. Nevertheless, as the debt crisis has not yet bottomed out, risks still exist.
With the debt crisis taken into consideration, there are opportunities for Chinese investment in Europe.
First, there are suitable investment projects in some EU member countries for Chinese companies. Although China's foreign direct investments have increased sharply in recent years, some foreign direct investment in natural resources, energy, technologies, brand and other core assets with strategic values are not going so well, with some projects not surviving.
Strategic investment plays a very important role in its foreign direct investment for China, a developing country taking a path to catch up with developed countries. Investing in EU countries such as Germany, Italy and Switzerland with highly developed industries and leading design concepts and technologies, China can benefit from their technologies, brands and industrial design knowledge.
Additionally, the scale of their companies is suitable for Chinese companies.
Second, foreign investments are welcome in EU countries. Most EU members have high unemployment and slow growth. Some EU countries will loosen restrictions on foreign direct investment, taking a more open-minded outlook toward such investments.
On the other hand, these European countries have their priorities. They are willing to see China using foreign exchange reserves to buy EU countries' national financial assets.
The form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing operational facilities from the ground up comes next.
Mergers and acquisitions are the last form EU countries will choose. However, it is unwise for China to buy EU countries' financial assets such as national debts at this moment in terms of China's national interests. Setting up a branch there and mergers will be most beneficial to China.
Third, corporate tax rates in some EU member countries are quite low, relative to North America and Australia. Although there are some exceptions, such as France's corporate tax rate of 34.4 percent and Germany's 30.2 percent, which are relatively high, the rate is comparatively low in Poland, Ireland and Greece.
Meanwhile, Chinese enterprises can also start offshore companies in countries such as Switzerland and Luxemburg, with preferential tax rates.
Fourth, some EU countries have great demand for the construction of trade-related infrastructures. China's exports to the EU are just a small proportion of China's total, similar to China's foreign direct investment in the EU. This means there is a huge potential.
Even if the trade scale remains unchanged, the demand for the construction of trade-related infrastructures such as ports and wholesale markets is extremely huge.
Despite the opportunities mentioned above, some risks exist. Some of these risks are especially relative to EU countries, and some are directly related to the global economy, especially to the monetary policies of the US.
First, it takes a long time for the demand from EU countries to pick up. Due to the economic slowdown and high unemployment, the downturn is expected to continue for some time. Germany's economic prospects have been dimmed by its aging population, despite it being hailed as the engine of EU's economy.
Second, assets prices have returned to an appropriate level. The pressure on inflation and assets price has been increased across the world after two rounds of quantitative easing by the US. Comparatively, the pressure in the EU is not so apparent because the European sovereign debt crisis is regional.
Market liquidity, affected by the quantitative easing of the US Federal Reserve, has changed rapidly from being inadequate to being excessive. The assets price thus jumped. The FTSE 100 index at the London stock exchange reached its record low of 3926.1 in March 2009, but rose to 5642.5 last November, quite close to its record high of 6721.6 before the crisis.
In view of the fact that there had already been excess liquidity over the world before the US financial crisis, the index has reached a fairly high level.
As a rule, the real assets price will go up with the rise of the financial assets price, despite the time lag. This means the real assets price is going to go up along with the rise of the FSTE 100 index.
Third, there are big risks with the euro exchange rate. We don't worry about problems within the euro system, but we are concerned about the European Central Bank's capability to help the system out of the trouble. If measures to curb the crisis do work, any change in the euro exchange rate would be very slight. Otherwise, the bank would be forced to launch non-traditional monetary policies. This would pose a high threat on the stability of the euro.
By and large, the tight fiscal and monetary policies taken by EU countries are very helpful to its economic outlook. Europe has a huge potential to develop, relative to US. Chinese companies should take this opportunity to increase the investment to EU.
First, Chinese companies should target small- and medium-sized companies, especially those with core technologies and private brands. Taken into account the advantages of EU's common market, China should see more opportunities in new EU member countries.
Meanwhile, in terms of investment areas, sectors such as aviation, new energy, mechanical manufacturing, material industry, industrial design should be taken into consideration.
Second, investments should be closely tied with China-EU imports and exports. Chinese companies should invest more on wholesale and retail markets, ports and buy local brands to expand business to sales sectors in Europe on the basis of China-EU trade. This way China will add more market value to the Chinese products.
Third, China should invest to increase the competitive edge for Chinese companies. Chinese companies should also focus on Chinese domestic market. If Chinese companies ignore the domestic market for the sake of outbound investments, it is an act of "penny wise and pound foolish".
Chinese companies can set up new research and design centers in Germany and Italy to increase technology levels. They can also acquire some European brands to bring more new designs and technology for Chinese domestic market.
The author is a researcher at the Chinese Academy of Social Sciences in Beijing.
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