Fri, Dec 30, 2011 - Page 9 News List

Chinese investment seems unlikely to swamp EU

The Chinese are cautiously looking to raise their investment profile, but are wary of a backlash and want both IP and expertise

By Alan Wheatley  /  Reuters, VENICE, ITALY

The sign in a boutique selling glass hand-crafted on the Venetian island of Murano betrays an uncertain grasp of English. But the owner is very sure who is to blame for the tough times confronting the 700-year-old local glassmaking industry.

“Everything in this shop is not made in China,” it proclaims.

A few doors away, imported Murano lookalikes sell for much less. To the untrained eye, they appear identical.

With Europe drowning in debt and flirting with recession, China’s influence can only rise further.

Euro zone governments would love Beijing to plough more of its US$3.2 trillion in foreign-exchange reserves into their bonds.

China is also likely to chip in with a loan to the IMF to provide a financing backstop in case Italy and Spain are shut out of the bond markets.

Last week’s US$3.5 billion acquisition by China Three Gorges Corp of the Portuguese government’s stake in utility EDP is also a sign of things to come.

Financiers turn instinctively to fast-growing China as they try to flush out buyers for assets that are going on the block as European governments, banks and companies pay down debt.

But, despite Chinese leaders’ expressing interest in diversifying the country’s overseas asset base away from government paper, analysts do not expect a sea change in China’s traditionally cautious approach to expanding in Western markets. Africa and Asia are likely to remain China’s top targets for now.

“There are going to be opportunities, but we’re not going to see China buying up Europe,” said Thilo Hanemann, research director at the Rhodium Group, an investment advisory and strategic planning firm in New York.

TREADING SOFTLY

There are many reasons for the wariness.

Lengthy delays in obtaining the approval of regulators in Beijing put Chinese companies at a disadvantage in mergers and acquisitions when the seller wants a quick deal. Companies lack the management skills to integrate overseas acquisitions. And, perhaps most importantly, prospects are much brighter at home than they are in Europe.

“If you compare the rates of growth in China and in Europe, are you sensible buying into a brand that’s seen its best years of growth?” said Edward Radcliffe, a partner in Shanghai with Vermillion, an M&A advisory boutique that focuses on cross-border China deals.

Still, he said some larger Chinese groups, both state-owned and private, had started to explore opportunities in Europe and the US.

The 27-member EU is China’s biggest export market. But foreign direct investment (FDI) has badly lagged, totaling US$8 billion by the EU’s reckoning or US$12 billion on China’s count — less than 0.2 percent of total FDI in the EU, according to Rhodium.

The firm has kept its own tally since 2003, but its total of US$15 billion through the middle of this year, though greater than the official data, is still small.

Hanemann said he was sure next year would see deals in Europe in technology and consumer products to enable Chinese firms to climb the value ladder and build their domestic market share.

“Ultimately, Chinese companies have to become true multinationals, like Japanese and [South] Korean firms before them,” he said. “Over the longer term, there’s no reason to believe that China is going to take a different path.”

However, he was skeptical whether most Chinese companies would be able to seize the opportunities that were likely to crop up in the coming year. To do so, they would have to manage public perceptions in Europe and obtain quick regulatory approval at home.

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