Employees work at the DHL North Asia hub in Shanghai. The $175 million investment project was put into operation on July 12. European investment so far this year has declined by 6.3 percent year-on-year because of China's slowdown and the eurozone debt crisis. Xiao Yang / for China Daily

Foreign direct investment from EU slowing along with economic growth

China's economic slowdown and the sovereign debt crisis have taken a toll on bilateral investment between China and Europe, recent data shows.

Foreign direct investment from the European Union to China declined 6.3 percent year-on-year from January to September to $4.83 billion (3.7 billion euros), according to the Chinese Ministry of Commerce. China's outbound investment to Europe also dropped by 30.3 percent over the period, compared with a 35 percent increase to Russia and 22.2 percent to Japan.

Foreign direct investment fell for the 10th time in 11 months in September, reaching $8.43 billion, down 6.8 percent year-on-year. This year only May bucked the downward trend with a slight gain, according to the ministry. In total, the first nine months saw China's FDI decline 3.8 percent year-on-year to $83.42 billion.

"Decline is the general picture for FDI in China as rising costs have reduced its attraction for foreign investors and investment opportunities have shrunk following rapid rises in FDI over recent decades," says Li Xunlei, deputy general manager and chief economist at Haitong Securities Co Ltd.

According to Xiang Songzuo, chief economist of the Agricultural Bank of China Ltd, slowing economic growth combined with poor global economic conditions have dented the enthusiasm of foreign investors.

"China still needs FDI, but investment is more likely to flow to fields such as the Internet and finance and foreign investment guidelines will be subject to further adjustment," he says.

Xiang adds that slowing FDI inflows will affect China's economic restructuring and shows a lack of optimism among foreign companies about China's economic prospects.

China's GDP growth slowed from 9.7 percent in the first quarter of 2011 to 7.4 percent in the third quarter of this year, dragged down primarily by a decline in investment and exports.

"In the short term, declining FDI will not severely affect China's economic growth. But economic expansion will almost certainly slow in the future," Li says.

"China will maintain relatively fast economic growth and retain a certain attraction in terms of FDI. But the challenges will increase from other emerging economies, such as Vietnam, India and Indonesia."

Ministry data also shows an increase in investment flows from some European countries. This year, investment from Germany has risen 29.1 percent, from the Netherlands it is up 38.9 percent and from Switzerland it has almost doubled.

Investment flows from Europe to China began to decline last year. In 2011, flows from China to the EU rose 94 percent to $4.28 billion, while investment from the 27 European countries to China fell 3.7 percent to $6.35 billion.

Bilateral trade reached $567.2 billion in 2011, up from $100 billion in 2003, with an annual growth rate of 20.8 percent in the past eight years. The two sides are on course to be each others biggest trading partners by 2015. Currently China is both the EU's second-largest trading partner and fastest-growing export market while the EU has been China's biggest trading partner for eight years in a row. China is also Europe's largest source of imports.

Bilateral investment has been rising fast. Companies from the EU have invested more than $80 billion in China in total. China's investment in Europe has also been increasing rapidly. China invested only $100 million in Europe in 2003, compared to $4.3 billion in 2011.

Despite the rapid rise, the value of bilateral investment remains small considering the size of the two economies and the scale of bilateral trade. China represents only 3.5 percent of total foreign direct investment in Europe and Europe spends only 2 percent of its outward investment in China.

Practicalities, including market access, policy transparency and the protection of intellectual property, have stemmed investment flows. Feng Zhongping, an expert on European studies with the China Institute of Contemporary International Relations, says the EU expects more investment from China to help it combat its debt crisis, but there is not yet a good mechanism to regulate that investment.

Policymakers from both sides are working on a better system to facilitate bilateral trade and investment. In February, the two sides agreed to start negotiations this year on a China-EU bilateral investment treaty. State leaders reinforced the importance of a good investment mechanism at the China EU summit in Brussels in September.

During his visit to Europe in September, China's Premier Wen Jiabao said that China and Europe should begin negotiations on the proposed investment treaty as soon as possible. He said the two sides should aim to achieve a trade balance, sustainable development and fully explore market potential. He added that China and the EU can cooperate in areas such as energy, environmental protection and urbanization. In his speech in Brussels, Wen said the two sides should aim to provide legal safeguards that will enhance investor confidence.

Karel de Gucht, Europe's trade commissioner, also called for a more open-minded attitude toward bilateral investment. "There is too much emphasis on fear of China. This is simply misguidance," he said, adding that international trade and investment are the best ways to deliver growth, especially as 90 percent of global economic growth will happen outside of Europe's borders in the future.

Wen's suggestion to conduct investment treaty negotiations is timely as the old mechanism for Sino-EU economic cooperation is outdated, says Zhao Junjie, an expert on European studies at the Chinese Academy of Social Sciences. Many guidelines for economic cooperation between China and the EU date back to the 1980s, Zhao says.

"A new investment agreement to guide future economic cooperation should be reached as soon as possible," he says.

Cooperation between China and Europe has been growing fast in certain areas, including infrastructure development. An increasing number of Chinese companies have become involved in building infrastructure across Europe.

In his address to European policymakers in Brussels, Wen said Chinese construction companies are relatively cheap but reliable and offer quality work. They can play a part in the development of European infrastructure through funds, project bonds and holding shares, he said.

"As the eurozone debt crisis continues to fester and the US economy is slow to recover, Chinese investors are becoming more prudent. But outbound direct investment will grow faster as the current total volume is relatively small," Xiang says.

China's third quarter economic growth eased to 7.4 percent from a year earlier, the seventh straight deceleration. The country's non-financial outbound investment in the first nine months rose 28.9 percent to $52.52 billion, down from 39 percent growth in the first eight months, according to the commerce ministry.

Some experts say that China's overseas investments are not treated fairly compared with China's welcoming approach toward foreign investment.

The US House of Representatives Intelligence Committee issued a report earlier this month alleging that Chinese companies Huawei and ZTE posed a possible threat to US national security.

Meanwhile, Chinese heavy industry giant Sany Group has filed a lawsuit against US President Barack Obama, who issued a presidential order to prevent Ralls Corp, owned by two Sany Group executives, from owning four wind farms in Oregon, citing national security risks.

Contact the writers at diaoying@chinadaily.com.cn and lijiabao@chinadaily.com.cn

(China Daily 10/26/2012 page19)